What Is Contract Management? Managing Renewals, Terminations and Performance of Obligations That Are Easily Overlooked after Signing

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Many companies spend a great deal of time on contract review but have not adequately organized contract management after signing. A contract is a document to be managed continuously after signing, from the performance of obligations during the term through to the post-termination wrap-up. If the deadline for a renewal or termination notice passes, or if the contracts needed for legal due diligence (legal DD) in an M&A deal cannot be found, decisions to revisit a transaction and the submission of materials to outside parties can be significantly delayed.

Contract Management in Practice and the Basic Items in the Register

When people think of contract management, they tend to picture signed contract files saved in a folder. Of course, being able to find a contract when needed is the first foothold. But simply keeping documents is not enough to count as contract management.

Proper contract management includes, in addition to storing signed contracts, creating a contract register; managing contract terms, automatic renewals and termination notice deadlines; tracking payment and invoicing terms; managing deliverables, delivery and acceptance; managing continuing obligations such as confidentiality and protection of personal information; linking amendment agreements and memoranda; and managing the return of materials, deletion of data and handover at the end of the contract. A contract is evidence recording the terms of a transaction and, at the same time, a management document showing what needs to be done next. If files are saved but no one is watching the deadlines and obligations, contract management cannot be said to be functioning.

When putting a management framework in place, there is no need to introduce a highly functional dedicated system from the outset. Simply creating a contract register and organizing at least the following items will give you a way to check deadlines and obligations.

• Contract name
• Trade name of the counterparty
• Contract type
• Date of execution, start date and end date
• Whether there is automatic renewal
• Deadline for a termination notice
• Contract amount and payment terms
• Responsible department
• Where the original contract and electronic data are stored
• Whether there are related schedules or memoranda
• Whether personal information or confidential information is handled
• Practical notes on important clauses

Three items where oversights should particularly be prevented are the contract end date, whether there is automatic renewal, and the termination notice deadline. Some contracts include a clause under which the contract is automatically renewed unless a termination notice is given a certain number of months before expiry. If this notice deadline is missed, the company may keep paying fees for a service it no longer needs, or continue a transaction on unfavorable terms. Whether the contract can be terminated mid-term after renewal should be checked separately in light of the contract and applicable law. Contract management is not work that the legal department can complete alone; it is important to coordinate with related departments such as business units and accounting and decide who tracks which deadlines.

Linking Related Memoranda and Understanding Obligations at Termination

What tends to fall through the cracks in contract management practice is amendment agreements and memoranda exchanged after signing. If the main contract file is saved but memoranda signed later are scattered in other folders, an agreement to change the price exists only in emails between the people in charge, or a memorandum extending the contract term is buried on someone's personal computer, the company cannot accurately grasp the currently effective terms of the contract.

In practice, in addition to the main contract, related documents such as amendment agreements, memoranda, purchase orders and order acknowledgments are linked and managed in one place. It is not unusual for important practical terms to be set out in schedules or later-dated memoranda rather than in the provisions of the main contract. At the contract review stage, of course, and also at the post-signing management stage, it is appropriate to treat the main contract and related documents as a single whole.

In contract management, it is also important to look not only at the contract term but also at obligations arising upon termination. Even after the contractual relationship ends, confidentiality obligations, obligations to return or delete personal information, non-compete obligations, obligations concerning the handling of intellectual property rights, liability for damages and the like may continue as survival clauses. Rather than judging from the formal wording alone, also check the substantive content and legal validity of the obligations, and the scope of materials that must be retained under law. For example, a service agreement may provide for the return of lent materials, destruction of confidential information, erasure of personal data, and delivery of deliverables and source code at termination. In a SaaS subscription agreement, the items to check include the data export period after cancellation, the procedure for account suspension, the log retention period and obtaining a data deletion certificate.

If obligations at termination are left out of management, legal obligations and liabilities may be left unattended even though the company thinks the transaction has ended. It is effective to record in the contract register, in advance, notes on the items to check at the end of the contract.

Priorities for Organizing Contracts and Phased Operation

When trying to overhaul contract management, people tend to think they must perfectly organize every past contract in the company from the start. In practice, however, this approach makes the workload enormous and the effort is likely to stall partway through. Start with priority contracts such as important contracts currently in progress, contracts with major business partners, contracts with a large impact on revenue or expenses, contracts that handle personal information or confidential data, and contracts with automatic renewal clauses whose termination deadlines are approaching, and decide on a practice of registering every newly signed contract in the register without exception.

By organizing past contracts and managing new ones in parallel, the accuracy of the register can be improved step by step. If operation is postponed until all past contracts have been organized, new contracts signed in the meantime may end up scattered again. Contract management is not a one-off inventory exercise but the design of an ongoing operation to keep future contracts from becoming disorganized.

When checking the state of contract management, the issues become clear if you check in order whether contract storage is centralized, whether contract end dates and automatic renewal are managed in the register, and whether the obligations to return, delete and hand over materials at termination are fully understood. The more steadily a company builds up routine register management, the more quickly it can review contracts and respond to terminations.

Organizing the Source Data That Supports AI Use

Introducing generative AI or a contract management system can make summarizing contracts and extracting deadlines more efficient. However, for AI tools to function effectively, the prerequisites are that contract files are properly classified, related documents are linked, and basic information is in order.

If contracts are stored in scattered folders, file naming conventions are not unified, and it is impossible to tell which is the final version, it will be difficult to derive accurate information even if the files are loaded into AI.

If AI is given an old version of a file, it will output the old terms, and if related memoranda are not linked, it cannot grasp the latest contract term or revised price. If a PDF remains image data and character recognition is inaccurate, important clauses may be missed. When bringing AI into contract management, first align the contract files, memoranda and contract register with one another, and then use AI as an aid for summarizing and extracting deadlines. AI supports the work, but it does not allow you to skip checking against the original contract or confirming accurate deadline calculations. By first unifying storage locations, establishing file naming rules and creating the contract register, and then moving on to AI summaries, deadline notifications and risk extraction, the accuracy of management can be improved without strain.

Preparing in Ordinary Times with Legal DD and Fundraising in View

The quality of everyday contract management sometimes becomes apparent in situations such as M&A or fundraising. In legal DD, it is customary to have to submit a wide range of contract documents in a short period, from contracts with major business partners to loan agreements with financial institutions and the SaaS contracts in use. If there are deficiencies, such as the original contract cannot be found, the exact contract term after automatic renewal is unknown, or the company is unaware that an important contract contains a change of control clause, responding to DD will take extra days.

At early-stage startups, the number of contracts on hand is small, so managing them tends to be put off. However, going back to organize past contracts after the business has grown and the number of contracts has increased takes considerable effort. Putting at least a minimal management register in place at an early stage is preparation for smoothly carrying out future fundraising or M&A.

In DD, the company will be closely questioned on whether it can promptly present a list of important contracts and whether other members of the legal or administrative department can take over even if the person in charge is absent. Keeping the register and originals in order on a routine basis makes it easier to locate contracts and explain transaction terms during DD.