What Is Contract Review? How to Conduct Contract Reviews and Key Checkpoints in the Age of AI
Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.
The term "contract review" is used every day, but people understand its specific scope of work differently. Some think of it as "finding dangerous provisions," while others see it as "preparing revised wording to send to the counterparty." Business departments tend to lump it together as a "legal check," and even within legal teams, multiple tasks such as "review," "redlining," "writing comments," and "organizing risks" tend to be handled as a mix.
If what the work involves remains unclear, the legal team ends up reading every provision excessively deeply, and the business department does not know what it is waiting for. At the time a request is received, share how far the review will go and in what format the results will be returned.
The Scope of Contract Review and Understanding the Transaction Background
Contract review is the work of scrutinizing the content of a contract and judging whether its terms are acceptable to your company. You grasp the contract type, your company's position, and the background of the transaction, and read the body together with the exhibits, specifications, SOW, and quotation. You then evaluate the validity and risks of the provisions, prepare proposed revisions and comments for internal and external audiences, and consider a negotiation strategy.
Even if the text looks like general boilerplate, it can become a major risk depending on the premises of the transaction. For example, a provision capping damages at "one month's usage fee" may be acceptable for low-cost SaaS use, but may not be commensurate with the scale of potential loss in the construction of a core system or in an outsourcing arrangement that handles large amounts of personal information. Whether such a cap is acceptable depends on the circumstances of the individual transaction, and there is no uniform legal standard. In practice, it is important to evaluate the meaning of a provision by linking it to the actual reality of the transaction.
Therefore, when reading a contract, rather than mechanically reading from Article 1, it is important first to confirm the contract type and your company's position. In a non-disclosure agreement, how the scope of confidential information, use for other purposes, and disclosure to third parties should be provided changes depending on whether you are the disclosing or receiving party; in a service agreement, how deliverables, acceptance, and ownership of intellectual property rights are viewed changes depending on whether you are the client or the contractor. Even with the terms of service of a web service, the perspective for checking provisions on service suspension, data use, and changes to the terms differs greatly depending on whether you are the provider or the user.
The Many Facets of Risk and Distinguishing Internal and External Comments
It is not realistic to review every contract to the same depth. Because corporate legal resources are limited, it is reasonable to vary the intensity of review for each matter, taking into account factors such as the contract amount, the contract term, the difficulty of early termination, the availability of alternative transactions, whether personal or confidential information is involved, the importance of intellectual property rights, the business impact if a loss occurs, the counterparty's creditworthiness and track record, and regulatory requirements. Even for a small one-off engagement, provisions relating to information leaks or business suspension may warrant time-consuming review. The magnitude of risk is not determined by the amount alone.
In contract review, it is also important to clearly separate the audiences for comments. In internal comments, you candidly describe the degree of risk, matters requiring business judgment, conditions the company cannot concede, and operational points to note if the risk is accepted. In comments for the counterparty, on the other hand, you need to choose polite expressions that encourage smooth negotiations.
For example, if the liability cap is too low in a service agreement involving the handling of personal information, you would tell the internal audience, "Considering the scale of loss in the event of a personal information leak, accepting the proposed cap as is should be judged carefully." In contrast, for the counterparty you would write, "Since this work involves the handling of personal information, would you consider excluding losses arising from information leaks and similar incidents from the application of the liability cap?" Even for the same issue, the purpose of communication differs between the internal audience and the counterparty, so choosing words suited to each audience increases the effectiveness of contract review.
Work Assistance from Generative AI and Attorneys' Responsibility for Judgment
Generative AI can be used for preparatory work such as summarizing contracts, extracting provisions, identifying general risks, checking against checklists, and preparing first drafts of comments and revised provisions.
However, the responsibility for confirming that the AI's output contains no errors or omissions, and for judging whether to accept it in light of the company's risk tolerance, remains with humans. Organizing conditions the business department absolutely cannot concede, adjusting the strength of comments in light of the balance of power with the counterparty, examining legal issues on which interpretations differ, accepting risks that involve management judgment, and ensuring consistency with past transaction history all require human judgment.
Use the AI's output as a draft list of items to check, and have a person verify it against the original text for errors and omissions. If you return a revision prepared by AI to the counterparty as is, there is a concern that your negotiating stance will become too rigid or, conversely, that vague expressions will lead to unexpected disadvantages. By having a professional with corporate legal expertise make the final judgment on the basis of the materials prepared by AI, you can prepare a response that takes the business circumstances into account.
A 10-Step Review Procedure in Practice and Preventing Oversights
To stabilize the contract review procedure, it is effective to avoid ad hoc responses and standardize the sequence of steps. Use the following 10 steps as the basis and proceed according to the scope of the request.
- Confirm the intake information
- Identify the contract type and your company's position
- Review the body of the contract and its exhibits and attachments
- Read the key provisions in depth
- Separate out matters requiring internal judgment
- Prepare draft revised provisions
- Prepare internal comments explaining the risks
- Prepare comments for the counterparty explaining the reasons for revisions
- Align negotiation strategy with the business department
- Re-review the revised version from the counterparty
Following this practical procedure reduces variation in advice among staff members. A point that is easily overlooked is the review of operational provisions, such as the procedure for changing notice addresses or contact persons, and the method of communicating acceptance. You must also avoid looking only at the body of the contract and overlooking the exhibits, SOW, or quotation. Even if the body appears standard, an exhibit may contain heavy warranty obligations, or conversely, a broad obligation in the body may be limited by the scope of work in the SOW, so the body and surrounding documents need to be checked as a whole.
Preparing a playbook that summarizes key provisions to check and standard revision policies for frequently encountered contract types not only accumulates staff members' decision criteria but also serves as prompts and review criteria for instructing AI. After checking the body and exhibits as a whole, decide which provisions to spend time on according to the transaction. Use the playbook as well after confirming that it fits the transaction at hand.
Consultations on Outsourcing Contract Review
Through our legal outsourcing services, we assist with everything from setting up the contract review process and building decision criteria for each contract type to handling day-to-day reviews on your behalf. For details, please see the following page.
Services connected to this topic