Every contract is different and has unique clauses that need special attention. For instance, a manufacturing contract might prioritize quality control and inspection contingencies, while a software contract might focus on usage rights. The contract conditions also vary based on industry. For example, healthcare industries specifically focus on the confidentiality of patient data, and construction industries prioritize material quality conditions. It's important to understand the type of contract to do a thorough contract review. In this post, we will cover the 15 most common types of contracts and what to review in them.
Why is contract review important?
Contract reviews are essential for the following reasons:
1. Reduces risks
Firstly, the contract review process highlights any clauses that could lead to business, legal, or financial risks. By identifying such issues early on, you get time to negotiate the contract terms to reduce risks. You can also identify potential issues and add required clauses to prevent conflicts.
2. Ensures compliance
A review ensures the contract complies with all local laws and regulations set by government authorities. In some cases where involved parties come from multiple jurisdictions, a comprehensive contract review phase creates a checkpoint to verify if all jurisdiction-specific laws and conditions are addressed.
3. Protects the company’s interests
Reviewing the contract allows you to identify loose ends and negotiate more favorable terms, such as payment schedules, warranties, and indemnities, that protect the best interest of your business.
4. Improves clarity and communication
A thorough contract review also ensures that all terms and conditions are clear, not leaving any room for ambiguity. Also, a negotiation phase comes with a review, and that opens doors for communication. All parties involved can discuss the terms and conditions in the final contract to ensure they are favorable across the board.
How to review a contract?
While contract review heavily depends on the type of contract, here's a general breakdown of the entire process:
1. Check the type of contract
Understand the contract's purpose first. Who are the parties involved in the contract, and what do they expect from the contract?
2. Identify the key clauses and terms for the contract type
Based on contract type, identify the key clauses and terms to verify. For instance, a crucial clause in service agreements is intellectual property rights. On the other hand, in sales contracts, delivery terms are critical.
Tip: Your legal team can create general guidelines for your employees on what clauses to review in which contract. You can also involve external legal professionals or a contract review lawyer for guidance if required. The good news is we have already done the heavy lifting for you. As you move on in the post, you will get a list of key clauses to verify in different types of contracts.
3. Verify the key clauses and terms
After you have identified the key causes and to verify, you can check if any of those is missing in the contract or if it doesn't align with the terms you typically set for such contracts.
4. Verify the general language and law compliance
Apart from key clauses, you can also check the general language and details. Verify the names, dates, or any other important details of parties involved that could lead to ambiguity in the future or hold the contract invalid in case you need to act upon it. Also, check if the contract is compliant with laws and regulations as per the jurisdiction of all parties.
How to review different contracts | Key terms that need attention
Highlighting the key elements for the most common contract types below:
1. Leasing contract
A leasing contract, often called a lease agreement, is a legal document outlining the terms and conditions of a lease, ensuring that both parties are protected. It mainly covers property or equipment information, payment details, and the responsibilities of all parties during the lease period.
Key elements to review in the leasing contract:
- Name and contact information of involved parties
- Description of property or equipment to be leased
- Lease duration
- Security deposit
- Rent and payment terms
- Late payment penalties
- Maintenance and repair responsibilities of both parties
- Permitted use of leased property or equipment
- Dispute resolution mechanisms.
2. Maintenance contracts
A maintenance and support contract is a business agreement between a provider and a customer on the terms and conditions for maintenance and support services. These agreements typically include the type and level of service, expected response times, costs, payment terms, and other details related to maintenance expectations.
Key elements to verify in the maintenance agreement
- Name and contact information of involved parties
- Service scope and level of service
- Expected response time
- Availability and accessibility
- Pricing and payment terms
- Contract duration
- Intellectual property rights
- Termination and renewal terms
- Liability and warranty
- Dispute resolution.
3. Manufacturing contracts
A manufacturing contract is an agreement between a manufacturer and a company that outsources its manufacturing to the manufacturer or purchases particular products from them. It usually covers product specifications, quantity, and any other important product information.
Key elements to verify in the manufacturing agreement:
- Name and contact information of involved parties
- Product specifications
- Expected product quality and quantity
- Pricing and payment terms
- Terms and conditions for transporting the product
- Transportation conditions
- Intellectual property rights
- Product testing
- Warranties and guarantees
- Quality control and inspection
- Risk allocation and liabilities
- Termination conditions.
4. Software contracts
A software contract is a legal agreement between a software developer and a client for the development, use, or provisioning of software. It typically includes software development, usage rights, intellectual property rights, payment terms, and more.
Key elements to verify in a software contract:
- Identification information of involved parties
- Services and deliverables with timelines
- Usage rights
- Pricing and payment terms
- Intellectual property rights
- Confidentiality
- Warranties and liabilities
- Support and maintenance with response times
- Software update and upgrade policy
- Termination and renewal terms
- Dispute resolution
- Data encryption.
5. Employment contracts
Employment contracts are legal agreements between an employer and an employee to set the terms and conditions of employment tenure. It typically includes role details, job responsibilities, probation causes, compensation, benefits, work schedule, and termination procedures.
Key elements to verify in the employment contract
- Identification of the parties involved
- Job title and description
- Probation clauses (if any)
- Non-compete conditions
- Confidentiality
- Intellectual property rights
- Compensation
- Benefits and perks
- Work schedule
- Termination clauses
- Dispute resolution.
6. Escrow agreements
An escrow agreement is a legal contract that outlines the terms and conditions of a transaction that will take place only when a condition is met. Escrow agreements are common in real estate, mergers and acquisitions, and the software industry. It brings trust that the transaction takes place only when conditions are fulfilled, and till then, funds or assets are held in escrow.
Key elements to verify in the escrow agreement:
- Identification of the buyer, seller, and escrow agent
- Escrow purpose
- Terms and conditions for disbursement
- Disbursement instructions
- Liability
- Fees and Expenses
- Dispute Resolution
- Termination conditions.
7. Settlement agreements
Settlement agreements are contracts that outline the terms and conditions agreed upon by the parties to resolve disputes and legal claims. It saves businesses from spending hours on potential lawsuits and solving them outside of court by reaching a compromise.
Key elements to verify in a settlement agreement:
- Identification of the parties involved
- Dispute information
- Settlement amount
- Payment terms
- Confidentiality requirements
- Tax implications
- Continuing obligations post-settlement (if any)
- Terms regarding the enforceability of the agreement
- Termination conditions.
8. Service-level agreements
A service level agreement (SLA) is a contract between a service provider and a customer outlining the type and level of service the customer expects from the service provider. SLA sets clear conditions for an effective working relationship and improves customer experience.
Key elements to verify in a settlement agreement:
- Identification of the parties involved
- Service description
- Key performance indicators
- Escalation process
- Payment terms
- Penalties
- Monitoring and reporting
- Service availability
- Confidentiality and security
- Dispute resolution
- Termination and renewal terms.
9. Business-partnership agreements
A business partnership agreement is a legally binding document that outlines the terms and conditions of a business partnership between two or more people or entities. This agreement summarizes the expectations and the responsibilities of the involved parties for a smooth partnership.
Key elements to verify in a business partnership agreement:
- Identification of the parties involved
- Roles and responsibilities of each partner
- Decision-making mechanisms
- Partnership structure
- Capital contributions
- Profit and loss distribution methods
- Duration
- Dispute resolution
- Non-compete, confidentiality, or non-solicitation clauses
- Amendments conditions
- Procedures for handling withdrawal, death, or incapacity of a partner
- Buyout terms and succession planning
- Exit strategies and procedures.
10. Confidentiality agreements
Confidentiality agreements are contracts created to protect sensitive information shared between parties. These agreements outline the type of sensitive information and the action that will be taken if there is any disclosure.
Key elements to verify in confidentiality agreements:
- Identification of the parties involved
- Definition of confidential information
- Duration
- Consequences for breaching the agreement
- Permitted disclosure (if any)
- Return of information
- Dispute resolution
- Binding effect and assignability if the information is also passed to third parties.
11. Data processing agreements
Data processing agreements are legally binding agreements outlining the expectations from data controllers and processors, as per data protection laws and regulations. Data controllers collect personal information and pass it on to data processors to process it. Both are obligated by law to safeguard the data. Data processing agreements specify the terms and conditions for data protection.
Key elements to verify in data processing agreements:
- Identification of the parties involved
- The purpose and duration of the agreement
- The scope of the processing activities
- Rights and obligations of both parties
- Data retention and deletion policies
- Security measures and breach notification protocols
- Subcontracting conditions and binding effect
- Audit and inspection rights
- Data transfer conditions
- Termination and data return/deletion conditions.
12. End-user license agreements
End-user license agreements are legal contracts between a software developer/publisher and the end user. It provides usage rights and outlines terms and conditions for software usage and data protection.
Key elements to verify in end-user license agreements:
- Identification of the parties involved
- License information
- Permitted usage and restrictions
- Intellectual property rights
- Warranties and disclaimers
- User’s obligations and acceptable conduct
- Software update and upgrade policy
- Termination
- Privacy and data usage.
13. Marketing service agreements
Marketing service agreements are legally binding agreements that outline the terms and conditions between a company and a marketing agency or professional. It establishes clear expectations on the scope of work, payment terms, and more.
Key elements to verify in marketing service agreements:
- Name and contact details of both parties involved
- Contract duration
- Scope of services
- Payment terms and conditions
- Performance metrics and reporting
- Intellectual property rights
- Confidentiality clauses
- Non-compete clauses, if required
- Termination and renewal terms.
14. Purchase orders and supply agreements
A purchase order is a legal document issued by a buyer to a supplier, specifying the goods or services, quantities, delivery dates, pricing, and payment terms. On the other hand, a supplier agreement is a long-term agreement between buyer and seller for procurement of goods and services. It also specifies the goods or services, quantities, delivery dates, pricing, and payment terms for a smooth, ongoing relationship.
Key elements to verify in purchase orders and supply agreements:
- Identification of the parties involved
- Goods or services details and quantity
- Pricing and payment terms
- Delivery and shipping instructions
- Intellectual property rights
- Quality standards and inspection
- Warranty and defects
- Liability
- Terms for canceling or modifying orders
- Confidentiality
- Termination clauses
- Dispute resolution mechanisms.
15. Vendor/Supplier contracts
Vendor/supplier contracts are legally binding documents that outline the terms of a business relationship between a vendor/supplier and a customer. It defines clear expectations on goods or services, delivery schedules, pricing, and payment terms for smooth business relationships.
Key elements to verify in vendor/supplier contracts:
- Identification of parties involved
- Description of goods or services
- Pricing and payment terms
- Delivery instructions
- Intellectual property rights
- Warranties
- Confidentiality and indemnity provisions
- Termination and dispute resolution
- Return policy.
10-step contract review checklist
Following the below contract review checklist in the reviewing process will ensure you are not missing any necessary details:
- Confirm if you are checking the correct version of the contract.
- Check the contract purpose, parties involved, and important timelines.
- Verify the scope of work and payment terms (if any).
- Look for any terms that are specific to the contract type.
- Check intellectual property rights and confidentiality clauses (if required).
- Verify risk allocation and liability.
- Check if contract terms are compliant with laws and regulations.
- Verify termination and renewal terms.
- Check contract language in general, leaving room for ambiguity.
- Do a final review before approving.
Also read: Contract Audit Checklist for Periodic Reviews
Setup automated contract review workflow with SpotDraft
There is growing use of artificial intelligence within in-house legal departments. One hotspot is using AI to review contract drafts and tell you what sections of the contract are acceptable and where negotiation is needed. A contract playbook is an important part of setting up such a tool. The tool's AI uses your playbook to learn your standard clauses and positions and then can "review" contracts, e.g., redlines to your standard contracts or the customer's standard paper, and give you a redline of proposed edits you should make. While a contract playbook will save you valuable hours during the contract negotiation process, using artificial intelligence to do the first pass of contract review is, in my opinion, a game changer for legal departments. ~ Sterling Miller, CEO and Senior Counsel for Hilgers Graben PLLC
Ten Things: Creating a Good Contract Playbook
With advanced AI contract review software like SpotDraft, you can create your own custom review playbooks. Team members can easily run AI contract validation for first-cut reviews rather than reaching legal teams for everything. SpotDraft contract review automation highlights issues and also suggests potential solutions.
Bonus: You can also VerifAI Microsoft plugin to review contracts without even having to leave the document.
SpotDraft reduces contract review and extraction time in half| User review on G2
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