A Term Sheet for Every Contract — Expediting Contract Review

Originally posted in The Legal Executive Institute, July 21, 2015

Across the board, technology is entering a phase of rapid innovation fueled by financial pressures and the rising capabilities of software. While some may assert that we have all the technology needed for transactional practice — in the form of document assembly — innovative corporations are pushing for automation that can help them “do more, with less.”

To this end, some of our most innovative clients are re-thinking the contract review process in a holistic manner. They seek ways to automate not just the first draft, but the entire contract lifecycle. As an example, we are developing refined workflows, as illustrated in the diagram below:

One of the keys to automated review, is the ability to identify, and focus on, the material terms of an agreement. In other words, to construct a term sheet for every contract. It is a contract abstract that has great value and also can be used:

• by technologists as a source of information to automatically assemble a first draft;
• by experienced lawyers to speed the process of contract negotiation;
• by less experienced lawyers as a means to quickly learn areas of transactional practice; and
• by organizations to automate due diligence review.

The Challenge

The problem is that a term sheet is constructed only at the start of negotiations and only for a relatively small number of agreements. It is not available for most executed agreements or even agreements that have progressed through the negotiation process.

Once the material terms are settled, lawyers draft the full agreement, containing the key business terms and all the legal obligations, protections, assurances and risk allocations. Often, the term sheet drafted in a few pages becomes a 50- to 100-page dense, legalese document. This means that once the first drafts have been produced, the process of contract review is completely in the hands of skilled lawyers, who have the experience to understand the complex language. While lawyers can take advantage of document comparison tools to track changes between draft, such tools cannot compare the agreement to a benchmark (or playbook) standard.

The Benefits

The benefits of term sheets are as equally clear as the challenges. But, understanding what are the material terms of a contract is knowledge that requires years of experience to master. The learning process is typically by rote and has changed little over the decades. In private practice, the task of contract review is typically assigned by partners to associates with minimal guidance. Associates build experience slowly over time by reading and reviewing one agreement after another.

Automatically Generating Term Sheets

Technology can also “learn” the material terms, the standard provisions, and the full range of deal-specific variations in a manner similar to the way lawyers learn. The technology “reads” a large corpus of agreements, and it identifies what terms are found in the agreements. It analyzes the frequency of each provision and consistency of the language. Algorithms can then identify what clauses frequently appear, but are revised in each agreement. These are the highly negotiated terms. Next, within such clauses, the software can identify names, places, dates, amounts (in other word the parties, the consideration, the notice periods, and governing law, etc.) that represent the key business terms. The resulting computer-generated term sheet can then be quickly reviewed by subject matter experts to confirm or adjust the material terms based on their practice experience.

Expedited Contract Review

In addition to designing the technology — a significant challenge in itself — we must also define a new approach to contract review. Current due diligence procedures, performed by contract attorneys and legal process outsourcing (LPO) firms have refined methods to quickly mark the key terms in an agreement and produce an abstract. At the other end of the continuum, contract review as performed by lawyers in the negotiation process is detailed examination of contract terms and, where needed, a word-by-word markup of contract language.

In order to manage costs, reduce turn-around time, and maintain quality, expedited contract review flags the material terms and provides access to playbook guidance, together with standard and fall-back language.

In many way, expedited contract review is an automated playbook or document assembly system that can be applied to all contracts, not just the first draft. It is a tool that can significantly reduce the cost, and turn-around time for contract negotiations, while maintaining quality and performance of the overall contract portfolio.