Control and home-field advantage matter in business transactions, especially when drafting contractual agreements. Sadly, legal departments do not draft every contract that their company signs. That means the organization doesn’t have complete control over language, hidden terms, or potential opportunities. What if you could overcome the risks third-party paper poses to your business? In this blog post, we’ll be discussing just that.
Third-party papers or contracts are business agreements drafted by the counterparty. In these cases, the contract language, structure, and template all originate from the other side. In contrast, your legal team manages the contract lifecycle for first-party agreements. For instance, sell-side contracts are initiated within the organization, whereas buy-side contracts are more likely to be a product of a vendor or service provider.
For instance, when opting for a software-as-a-service, the service provider might draft a contract outlining the scope of services, payment terms, deliverables, and other relevant details. The counterparty, such as the client, would review and negotiate the terms before finalizing the agreement. It’s the same case with lease, consulting, and employment agreements, where the counterparty drafts the contractual agreement. They don’t offer much room for negotiation; all you can do is read over and sign on the dotted line.
Naturally, your interests and needs are not the top priority when you do not play a big part in the contract creation process. The counterparty has the upper hand in the third-party contracts, as they’re much more familiar with the template, terms, and language. For instance, when a supplier drafts the MSA, it’s more likely to reflect their requirements than yours. Some other disadvantages of third-party paper include:
Information Asymmetry: In a third-party paper, the drafting party might have a deeper understanding of the subject matter, subtle legal distinctions, or specific words. It can create an imbalance of power and may lead to terms that favor the drafting party.
Potential losses: Your company benefits less from having the counterparty draft your business agreements than initiating the contract yourself. More poor control over the third-party contract throughout the lifecycle can lead to financial, operational, and reputational losses.
Limited flexibility: The counterparty may create a contract with limited flexibility, making it challenging for either party to adapt to changing circumstances. You do not have the option to renegotiate a term or provision to your liking if you do not like it.
Favorable terms: The drafting party may naturally include terms beneficial to their interests, potentially overlooking the other party's concerns or requirements. Third-party papers carry the risk of lacking important provisions or clauses that are standard in such agreements, potentially leaving gaps in legal protection.
Risk allocation: Business agreements come with inherent risks. When you don’t have a say in the drafting process, contract risk allocation ends up primarily one-sided. Thus, the signing party has an uneven burden of risks and responsibilities without clear justification.
Self-serve agreements: First-party agreements empower the sales and procurement teams to self-serve contracts using their terms and templates. In contrast, they must navigate unfamiliar language, structure, and clauses in third-party papers.
Time-consuming review: The review and approval procedure is needlessly long because the legal team must read every word of the third-party paper. Moreover, extracting clauses and data from these contracts can be challenging for businesses dealing with large volumes of agreements.
Third-party papers are quite common among businesses depending on external vendors or service providers. Given their significant reliance on them, organizations must take action to manage third-party contracts responsibly and reduce risks. Digitizing is the fastest solution to contract risk management. That is why, when businesses are looking for a contract management solution, they must opt for one that supports third-party papers. Here’s how that can help:
The majority of business agreements are intricate, lengthy, and time-consuming. Most businesses with sizable contract portfolios don’t have the luxury or resources to review each legal document thoroughly. In such cases, capturing and managing contract data is crucial for mitigating risks associated with third-party papers. It provides quick and effortless visibility into the terms, conditions, and obligations.
Transparency ensures that all stakeholders have a clear understanding of the contractual commitments, reducing the risk of misunderstandings or disputes. Capturing and organizing contract data enables organizations to conduct thorough risk assessments to identify potential legal, financial, or operational risks. This informed approach helps in developing risk mitigation strategies.
A thorough contract review process is integral to ensure the beneficiality of third-party papers. However, manually reviewing each business agreement to pin down potential opportunities and losses can be time-consuming and challenging. As a result, organizations often end up signing up for unfavorable contracts. Businesses can avoid this pitfall by opting for automated contract workflows for the review and approval processes.
The automated process guarantees that the third-party paper routes through necessary stakeholders without many hiccups. Thus, organizations can ensure that all parties involved, including legal, compliance, and business teams, are part of the review process. It mitigates risks by reducing the possibility of missed deadlines, breaches, or missed opportunities for negotiation. It also minimizes the risk of inconsistencies or oversights in the review of third-party contracts.
The risks associated with third-party papers don’t end with signing on the dotted line. Throughout the contract lifecycle, organizations must take steps to mitigate the bottlenecks, from obligation management to renewals. A "single source of truth" or centralized contract repository can go a long way in mitigating contract risks. When dealing with third-party papers, inaccuracies or discrepancies in contract terms can lead to misunderstandings, disputes, or compliance issues.
Having a centralized repository helps eliminate data discrepancies, providing accurate information to all stakeholders. It helps organizations maintain version control and reduce the risk of working with outdated information. When stakeholders need to review or analyze third-party contracts, a centralized repository allows for easy search and retrieval of relevant information. This efficiency minimizes the risk of delays and ensures that parties can access necessary details promptly.
Negotiation is crucial in mitigating contract risks, especially when dealing with contracts drafted by third parties. It helps to ensure that both parties have a clear understanding of the terms and conditions of the contract. It reduces the risk of misunderstandings and misinterpretations that can lead to disputes in the future. Through negotiation, parties can identify and address potential risks and ambiguities in the contract language.
Negotiation provides an opportunity to discuss and agree on a balanced allocation of risks between the parties. It helps to establish that neither party bears an unfair burden and that risk allocation aligns with each party's capabilities and responsibilities. Effective negotiation enables the exploration of alternate solutions or the choice to withdraw from the agreement before it becomes binding if there are terms that a party finds unacceptable or incompatible with its goals.
Clause extraction is identifying and extracting specific clauses or sections from a contract by leveraging AI and NLP. Organizations can identify potential risks and issues that may need attention or negotiation by isolating and examining clauses related to critical terms, obligations, and liabilities,
Automated tools for clause extraction speed up the contract review process. Faster review processes enable legal teams to quickly identify and address potential risks in third-party contracts. This efficiency is especially crucial when dealing with a large volume of contracts. It helps to sort out non-standard or unusual terms in contracts. Insights from clause extraction, organizations can negotiate more effectively with third parties.
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