Contract Abstraction Explained
Contract abstraction is the process of distilling the important terms and clauses from a lengthy contract into a shorter, more manageable format. A contract abstraction typically consists of a summary in plain language that highlights both general terms as well as specifics on things such as the type of agreement (e.g., purchase and sale, lease, license), the parties involved, the term, and the expiration date, among other things. Depending on the needs and direction of the client, a contract abstraction may also further cull non-standard or material contract provisions.
Contract abstraction is not only important to help clients easily access key contract terms and clauses, but is also a common part of a legal document management process, making it easier for clients to conduct business with company-wide access to important documents . In fact, some of the most common reasons for a legal department to develop a contract abstraction process include:
As part of the contract drafting process, which includes such touch points as client intake, surface-level review of the client’s business, and conducting legal research, a contract abstraction may be created even if not expressly requested by a client or mandated in particular by the client’s internal auditing process. For example, an attorney may create a contract abstraction to help the client understand which forms must be completed when signing a client’s contract, review what potential traps are contained in the contract, and review whether the contract is a one-off or something the client is likely to sign again and again in its business day-to-day operations.
Advantages of Contract Abstraction
Contract abstraction provides a wide array of benefits that impact an organization not only on the legal or compliance side, but spill into many different areas of the business, leading to improved efficiency and reduced risk. The granular detail in contracts is often vital to a lawyer’s work, but that detail is not as useful when contracts need to be generalized for reporting purposes to the Executive Suite, Corporate Directors, or other stakeholders. The above mentioned executive, director, or stakeholder has little concern for the minutiae of a contract — a task best suited for a person with a lawyer’s expertise. However, each executive, director, or stakeholder does want to know about the content of, and potential issues relating to, contracts. That’s exactly what contract abstraction enables.
In the process of assigning the decisions made in contract abstraction to a pre-defined list of clauses and elements using a contract abstraction software application, managers are often able to better prepare for due diligence, build closer relationships with other departments, and make faster decisions. That time savings is the key to yielding significant efficiency improvements and a better bottom line in their departments and organizations when contract abstraction is handled correctly.
For example, an entire team of lawyers will often spend a significant amount of time negotiating the details of a critical contract or agreement. This is usually done on a relatively small number of occasions. Yet the great majority of the work is focused on standard terms and clauses that repeat over and over in hundreds of agreements. That game of "round and round" is most efficiently handled by contract abstraction since rather than reinventing the wheel for every contract — inline abstraction uses a pre-defined list to expedite the abstraction process.
Thus, rather than start from scratch with deal-by-deal explanations of what is critical and why, a standardized list of "pre-authored" descriptions can be used at the multiple levels of abstraction required. Managers can get a quick overview of all the elements of the contract in question based on a combination of computer-generated abstracts and templates that have been rejected by one Manager and turned into custom abstraction templates for others. The end result is a tailor-made set of questions and guides for that Manager’s needs. That Manager can then define individualized sets of questions for their area of concern such as financial, legal, technology, compliance, etc., going down multiple levels, to get highly specific contract information for use in decision-making.
Essential Steps for Contract Abstraction
The process of contract abstraction generally follows a four step system. Initially, both parties to the contract must determine the method they would like to use to abstract the data. Once this is decided, they can then set a deadline for when the abstracted data will be complete. Eventually, the documents to be abstracted are delivered to the contract abstractionist. It is then their responsibility to audit the contracts to verify any additional required data. After this is done, the contract abstractionist will then identify the most relevant data contained in the document for the client. Finally, the contract abstractionist then creates a summary of the information. This will be delivered to the client either as a contract abstract or contract profile.
Contract Abstraction Tools and Software
The advent of several contract lifecycle management (CLM) solutions has provided the tools for creating, identifying and managing obligations within contracts in a more streamlined manner. CLM software has the ability to create a searchable database with transformed contracts and obligations that will allow for reporting and compliance on contract obligations, but tools are also available outside of CLM software that may be adopted if the budget or the contract volume does not support the use of CLM tools.
Depending on the volume of legal work to be performed by a law firm or an in-house legal department, most will find that they need not only a contract repository, but a tool that will assist with the transformation of contracts into extracted data fields that will be managed according to the obligations within them. Once the obligations and rights are identified by the firm or the in-house group, they must then be assigned owners and tracked closely to ensure the obligations are met as required. There are contract management tools specifically designed for this purpose . The key features of these tools include:
A secondary level of tools are those that may be used to obtain baseline information from a contract. These tools can assist with extracting information from contracts using the following features:
The third level of tools are those that are used to "scrape" a contract for key terms (key clauses, amendments, disclosure schedules and the like). This process is known as contract analytics. Contract analytics tools typically extract content from contracts relating to clauses (defined above) and then categorize the contracts according to various properties (i.e., secret agreements, use restrictions, confidentiality, information rights, warranties, indemnities, term, termination and renewal terms).
The tools listed above are only a small sample of the tools currently available to contracting parties on the market. However, they do assist with the concept of contract abstraction by making the process for filtered searches and contract management through extraction and analytics much easier.
Navigating Challenges in Contract Abstraction
One of the greatest challenges in contract abstraction is coming up with a single unified method that works for all different types of contracts. Every organization uses a different set of languages and jargon during the contract lifecycle, which makes it very important to enforce consistency across the board while abstracting documents.
The key to meeting that goal is involving stakeholders from outside departments when developing an abstracting system to ensure that the system created meets the needs of everyone. In terms of stakeholders, you want to have involvement from everyone who is involved at any stage of the contract lifecycle. In most cases, that will include members of departments such as risk management, operations, finance, law and compliance. The more stakeholders you involve, the more confidence you can have that the abstracting system you build suits your organizational needs.
During the development of the abstracting system, organization is quite important. You should make sure all involved parties agree on where every piece of information should go, so that the contract abstraction process is as quick and easy as possible. Targeted trainings for all members of your team can help prepare them for using the new system.
Although it might require a good bit of upfront work to develop an effective contract abstraction system, once this initial process is out of the way, it should save your business time and money throughout the rest of the contract lifecycle.
Practical Uses of Contract Abstraction
Contract abstraction is a straightforward and highly effective tool that helps businesses create, organize, and simplify their contracts more easily. Let’s take a look at a few real-world applications of contract abstraction:
Regulatory Compliance
A significant portion of contracts in industries such as banking, finance, and healthcare must overcome strict compliance requirements. Contract abstraction is a key tool for addressing compliance and regulatory challenges for any industry. Perhaps the most common use is for improving compliance obligations, recognizing that many contracts with data protection requirements are subject to certain compliance requirements. Contract abstraction makes it easy to determine whether vendor contracts are covered by GDPR or CCPA, and similar compliance requirements.
Manufacturing
Contract abstraction is also a common tool in manufacturing. Manufacturing agreements typically include complex terms and conditions that require significant attention and detail. Contract abstraction enables companies to create standardized clause libraries for contracts and agreements. For example, manufacturers can quickly identify whether an agreement contains appropriate force majeure terms for systemic protections in the event of unforeseen or pre-defined circumstances.
Purchasing
Contract abstraction helps companies with purchasing agreements too . Companies tend to purchase products or work from a relatively limited number of suppliers. This works well to help gain purchasing efficiencies and scale. However, companies can also create contract abstraction libraries for very specific clauses. For example, if a company that uses Agency Terms has a standard set of terms for particular contracts, contract abstraction makes review and comparison of terms easy for those contracts which happen to fall outside of the company’s typical experience.
Software Licensing
Nearly all software licensing agreements contain unique terms. Vendors that rely upon software licensing often have a standard set of terms. License agreements also help highlight many significant lawyerly terms. Software licensing companies benefit from entering terms and clauses into a contract abstraction tool to save time and get deals done quickly.
Real Estate
Like software licensing companies, real estate companies find it helpful to streamline review processes and to ensure consistency. Many real estate companies spend a lot of time negotiating boilerplate terms and conditions, but those terms rarely change significantly. Contract abstraction tools help cut through the underlying issues and highlight creative and important terms to help real estate companies get deals done.