What is contract abstraction?
Contract abstraction is taking essential data and information from business and law contracts and putting it in a nutshell. It includes reviewing the contract documents and listing the essential terms, conditions, obligations, rights, deadlines, and clauses.
The abstract is a significantly shortened form of the contract. It gathers the essential details in a simple, understandable way and is valuable for future reference.
A contract abstract is meant to help business people and law teams quickly understand the essential parts of a contract without reading the whole thing, which could be hundreds of pages long. It works well for keeping track of many contracts, ensuring they are followed, and doing due diligence for mergers and acquisitions.
The process of abstraction can be done by lawyers by hand, but most of the time, they use software tools to do it. AI and machine learning make the process easier, more accurate, efficient, and consistent.
Synonyms
- Contract abstraction process
- Contract metadata extraction
- Legal contract abstraction
Why legal contract abstraction is important
Abstracting a contract can help with managing risks, managing contracts, and making decisions about contracts that are easier to make.
Let’s take a better look at why contract abstraction is so essential:
Summarizes lengthy legal documents
Abstraction and summarization are two things that do the same thing: to make a contract easier to understand. A more in-depth method is needed for complex agreements like those in business-to-business transactions, while summarization works well for short contracts with few terms.
There are a few reasons why you might want to make a legal paper more straightforward to understand:
- It helps people who aren’t lawyers understand the main points of a contract
- A summary lets you quickly get the main points of a contract without reading the whole thing
- Highlighting obligations, liabilities, and important contract dates ensures that both parties don’t miss or forget anything.
- Condensed versions help people make decisions more quickly
- A well-summarized contract makes it easier to find relevant clauses and terms when handling disputes
Technology has made it easier and faster to pull out information from contracts. In the past, this had to be done by hand. Contract managers and lawyers on your team should monitor it, but software reduces mistakes and speeds things up.
Increases compliance with contracts
Each person involved has responsibilities they need to meet, whether related to the law or the terms of your contract. One example is a business that agrees to deliver goods or services by a specific date in exchange for money from another party.
A long, text-heavy contract makes it hard to find this information. That’s why so many companies have trouble following the terms of their contracts. You can keep track of responsibilities and make sure abstracting contracts meet them.
Contract abstracts also ensure that rules are followed in businesses with many rules, like healthcare and finance.
Helps with Understanding the Contract
People who write contracts and the people they cover rarely work together. A deal involves a lot of people who aren’t lawyers. Most contracts are complicated for an average person to understand because they use many legal terms and long sentences.
You can understand what specific terms mean by breaking down a contract and highlighting the essential parts. Also, abstraction forces lawyers to write contracts in a way that is more accessible for people on the team who aren’t lawyers to understand.
Helps Take Care of Risks
Often, the complicated and detailed language in contracts makes it easy to misunderstand or miss critical legal duties and responsibilities. These mistakes can lead to lawsuits, fines, or loss of contract, which puts a company at serious legal risk.
Contract managers avoid misunderstandings by drawing attention to important terms, conditions, and responsibilities. This lowers their legal risk and exposure.
Abstraction can also bring to light possible red flags in a contract, like bad terms or high-risk obligations that companies can take action to fix.
Sets Setting up and retrieving contract categories
It’s easier to find the most critical parts of contracts in your contract collection if you make them simpler. Based on the summed-up information, it’s easy to put contracts into groups because abstracts include keywords and clauses. This tool makes finding contracts easier, saving time and letting companies focus more on contract analysis.
How to Write a Contract Abstract
Read the lease in its entirety.
You need to understand the whole deal before you can write an abstract. Have a member of your law team, preferably someone who helped write the contract, look it over to ensure they understand its purpose, scope, and terms and conditions.
Come up with your style.
You need to set up a style before you can add information from your contract to it. Some businesses do this in an Excel or Word file, but contract lifecycle management (CLM) software is better because it stores documents, customizes them, highlights essential parts, and summarizes them.
The arrangement will differ for each type of contract you’re taking out. Your business will use various contract types, such as NDAs, SOWs, reseller agreements, service agreements, and buy agreements. Each type of contract will need its template.
Get the information.
The metadata in your contract tells your document management system what the contract is about. That makes finding files and arranging them in your contract folder simple. It’s just as crucial for abstraction as contract management because you’ll look based on crucial information.
There are a few critical pieces of data that you can’t miss when you start the contract data extraction process:
- Total contract value (TCV): How much money your company made from each contract;
- Key dates: When the contract began, when it ended, and important dates during its life;
- Named parties: All the people and businesses legally bound by the contract;
- Contract type: What kind of contract it is (purchase agreement, lease agreement, etc.);
- Renewal terms: information on whether the contract will be renewed automatically or if it can be renegotiated
Describe the main ideas.
The outline should list all the essential parts of the contract. Among these are:
- Scope and purpose: A brief description of the contract’s objective and what both parties hope to achieve
- Obligations: A summary of each party’s responsibilities and any specific actions required from either or both sides
- Payment terms: The amount, frequency, and method of payments both parties agree upon
- Warranties and indemnification: Any guarantees made by a party regarding their products or services and any promises to compensate the other party for losses incurred
- Confidentiality provisions: Clauses that outline how both parties must handle sensitive information
Underline important words.
This step is crucial in fields with many rules, like healthcare and banking, where following the rules is very important. Attention to specific laws and rules in the contract is one way to ensure it is legally binding. Also, it would be best to draw attention to any terms that could hurt the company’s bottom line or affect how it runs.
Look over the sketch and sign off on it.
Once you’re done with the contract modeling process, it’s essential to have a legal team member look it over and ensure it’s correct. This step keeps you from making mistakes and leaving things out that could cause confusion or legal issues.
What Makes a Contract Abstraction Process Work
Well-defined goals and a scope
There are many goals for the contract modeling process. In general, this is what you want to do:
- Pick out the most essential parts of a contract and write them down in a way that is clear and easy to understand. A good outline breaks down hard-to-understand legal terms and helps you understand what the contract is really about.
- Lower the risk. By focusing on essential duties, responsibilities, and conditions, an abstract lowers the likelihood of legal disputes and fines resulting from misunderstandings and missed details.
- Allow the sorting and recovery of contracts. Simplifying the most critical parts of contracts makes it easier to organize them and find them again when needed.
- Help track compliance by drawing attention to essential terms and duties that need extra care to meet regulatory requirements.
- Streamlining the process of reviewing contracts will save you time by making it faster and more effective.
Get Contracts
To start the abstraction process, gathering all the essential contracts that fit within the defined scope is necessary. These contracts could be anything from deals with vendors to work contracts. A reliable contract management system that can centralize your company’s contracts can make the recovery process go much more smoothly.
Review and get to know.
When writing an abstract, you must read the deal carefully to understand its context and purpose and pick out the most essential parts. Understanding these parts makes the abstraction process’s next step, the summary, much more manageable.
Learning the legal and contractual language used in the deal is also important. Every business has its slang, and understanding these terms is essential for reading the contract correctly. This is even more important when dealing with very technical contracts specific to a particular business since misinterpreting the terms can have significant legal and financial effects.
Set up a Template
This is easy to do with tools for managing contracts. You only need to use its document generation feature to make a template with the critical parts from future contracts that you want your team to be able to extract. You could also start with an existing contract form and change it to fit your needs.
Automate getting data
Data retrieval by hand takes a long time, is boring, and can go wrong. Advanced AI and machine learning algorithms in contract management tools can make this process automatic. Based on the template, these tools can quickly find and retrieve your data in a structured way.
Validation of Data
For data validation, you must compare the extracted data with the source contracts to ensure it is correct. It would be best to make sure there weren’t any mistakes or things that weren’t included because they could lead to misunderstandings and even legal problems.
Using codes and groups
Carefully coding the generalized information will make sorting and finding things more accessible. Use standard codes and tags to group different kinds of terms and contract parts so that you can quickly find them whenever necessary.
This method gives the indemnity, confidentiality, and termination parts unique identifiers or keywords that make them easy to find and sort. To keep things organized, use these codes the same way in your similar contracts.
Checking for Quality
It would be best to have some quality control to ensure that the data taken from the contract is correct and matches what it says. Most companies do this by having a law team check the abstract to ensure it is correct. You can hire vetted legal professionals to do abstraction for you if you don’t have the resources to have your committed team.
Taking care of documents and archives
It would be best to have a strong and safe contract repository to keep your abstracts in order, whether in a separate tool for managing contracts or as part of your CPQ software. Each document should have a name or tag on it so that it is easy to find, and the system should be backed up regularly.
The Report
Making summary reports is the best way to get critical information from simplified contracts.
Start by writing down the most essential information everyone involved needs to see. This could include the contract’s main points, length, financial responsibilities, and essential terms. Then, make changes to these reports to ensure they meet the needs of all parties.
- Legal teams should focus on things that have to do with risk and compliance.
- For money matters, draw attention to due dates and fees
- For management, list the duties and benefits that affect strategic choices.
You can ensure that each area gets the exact information it needs to do its job by customizing each report.
Checking and fixing things
Don’t forget to update the outline or make a new version when you change something about the contract. To keep your repository tidy and up to date, it’s also essential to do regular maintenance. Plan regular checks of your contract repository to find any missing or wrongly coded abstracts.
