In today’s high-tech marketplace, compliance standards are always changing. Competition is tough. Your success isn’t resting on just one element. An interconnected web of contracts and agreements influences your business. Proper management of your contracts and their lifecycles calls for comprehensive tools, such as contract lifecycle management (CLM) software.
Each business has its own set of differences. Understanding the lifecycle of contracts and how best to manage them for your specific business is vital for effectively managing risk – not to mention building and cultivating solid working relationships, both within your company, with its stakeholders, and with companies you do business with. Having a purpose built CLM solution helps in a multitude of ways from improving compliance and reducing exposure to liabilities, to having a readily accessible contract clause library at your fingertips.
What is a Contract Clause?
Contract clauses are specific provisions or sections of a contract that address certain aspects of the contract in relation to the overall agreement’s subject matter. Contracts aren’t one-size-fits-all – clauses help define the detailed duties, rights, and/or privileges of each party to the contract. There’s no specific place where a clause must be, but they are usually placed near the end of the contract.
There are several types of clauses covering virtually every aspect of a business or its commercial interests. One of the most common clauses is the non-disclosure agreement (NDA) in which a new employee (or freelancer in some cases) agrees to not disclose any information of a confidential nature that they may come across during their employment. Contracts and all clauses therein are enforceable and binding according to state and federal law.
Common types of contract clauses
Some of the most common types of contract clauses address terms such as:
- Time frame of contract
- Performance of duties
- Service Level Agreements
- Interpretation of contract
- Rights of parties
- Remedies or damages in the event one or more parties fails to perform
What is a Contract Clause Library in a Contract Management System?
A contract clause library is simply a library in the application where you store the clauses you use to build contracts. Within this library, you may find:
- Types of clauses – definitions of each type of clause with a correlation to the type of contract to which it might belong.
- Actual clauses – the repository for the above defined clauses that you’ll use when generating contracts.
- Clause bundles – clauses grouped by common types of contracts they’re normally added to.
- Modified clauses – Clauses that are in use by a specific document. If these clauses need updates during the course of negotiations, you can update the language without affecting the master clause within the library.
- Alternative clauses – these are clauses that have been tagged as pre-approved alternatives for current clauses. This allows anyone working on the contract to swap out current clauses for alternatives when the occasion calls for it.
- Sub-clauses – these are separate, but related objects of the master clauses. Think of the master clause as the parent, and sub-clauses as the children. All master clauses can have several sub-clauses or none at all – but the contract clause library allows you to match and manage all sub-clauses.
As you negotiate your contracts and their clauses, a Contract Management Software package allows you to revise clauses as necessary and tie them to specific documents. This helps identify risk when its introduced, which contracts are experiencing frequent negotiations, and how each contract’s language has evolved over its lifetime.
Why a Contract Clause Library Increases Efficiency
Contract clause libraries have several benefits, including increased department efficiency. Even the employees who have no legal knowledge can quickly create accurate contracts that are legally compliant and conform to your company standards. This is also useful if your organization has several types of contracts that are in frequent use. It helps manage the application of business rules to various clauses and the timing. Many CLM systems also allow variations to the specific language used throughout negotiations and other creation processes.
Some other benefits of a contract clause library within your CLM solution include:
- Strong legal knowledge is unnecessary
- Puts the control of clause, template, rule, and logic creation in a central location
- Creates a document in correct sequence, properly formatted
- Populates each contract with the data that’s already within the system
- Can automatically input any edits to clauses across all templates that include that clause if desired
- Allows only those employees with security access to view, create, or alter documents
Risk-Reducing Benefits of a Contract Clause Library
It’s inevitable – contract creation introduces risk. Having transparency within your contracts is crucial. Little to no visibility causes miscommunications, loss of revenue, and increased costs. And, if you’re unable to see clearly into your contract portfolio, you can’t perform proper reviews which can cause your organization to meet with financial burden and worse – an inability to follow through with promised, contracted goods and/or services.
Transfer of risk is one of the most important strategies in contract creation and management. By assigning financial or other responsibility to another party, you can alleviate risk to your organization. Common types of clauses included in these situations are:
- Limitation of liability
- Subrogation waivers
Benefits apply across the board when it comes to using a contract clause library in your CLM system. Other benefits of using a library reduce other potential risks, such as Data Security and Regulatory Compliance.Let’s examine these more closely:
Data security is one of the most important aspects of contract lifecycle management. Moving on from the days of storing hard copy documents in file cabinets, purpose-built contract management applications typical support role based security, allow very granular control over what users can see or do. Warning systems and audit logs provide additional levels of security to prevent or manage a breach.
Managing your organization’s regulatory compliance is also important. Such government mandates as Sarbanes Oxley and HIPPA requirements are normally included within a contractual document. When organizations have to manage large numbers of contracts, they must ensure that each document includes the right clauses and that compliance is met – both internally and externally. Attempting to manage compliance without a CLM system puts your organization at tremendous risk. It's the equivalent of trying to mentally keep track of every marathon runner in the race and their finish times - it's impossible.
CLM software continuously audits your current contracts digitally. This helps ensure proper clauses are included relating to privacy of data, confidentiality, and other regulations affecting your business. If you’ve been monitoring these items manually, the CLM will help identify where you have gaps in compliance, allowing you to update your contracts with the right language and inform other signors. You can program the system to look for any type of compliance issues, and advanced CLM systems are able to trigger the automation of certain business processes to avoid compliance problems going forward.
Simplifying your contract creation process allows easier drafting. You’re able to look back, addressing the original causes of perceived risk – usually, it’s because the agreement lacked transparency or the contracting parties had difficulty collaborating. But at the very core of contracts are the relationships they represent. Just as the contracting parties are living, breathing people, so too is the contract a living document itself. By minimizing risk and increasing transparency, you can help build better communication and avoid misunderstandings.
The easiest way to do this is through the automation of the contract lifecycle with a good contract management system. All processes and contractual documents are in one central location, which helps streamline your workflows and increase collaboration efforts. With technology on your side, you’ll not only mitigate risks but you’ll build better relationships with your vendors, clients, and customers.