Try as they might, legal teams don’t draft every agreement their organization signs. Sometimes, you have to sign someone else's contract, otherwise known as third-party paper. It isn't a problem when third-party paper is managed responsibly, but too many businesses don't have a handle on the liabilities hidden in their external agreements.
Based on our survey data, 85% of respondents reported that [as many as half] of their contracts are on 3rd-party paper. In this two part blog series, we'll outline the steps to track down all of your third-party paper and any risks they may carry.
The Problem with Third-Party Paper
There are also times when contracts aren’t run by the legal team. For example, your CIO adopts Amazon Web Services without letting the corporate counsel know it's in use. In these cases, the contracts are not reviewed, and they’re invisible to your contract management solution.
The risks from third-party paper, especially ones that you haven't reviewed, are one-sided terms. This happens a lot with SaaS vendors, but almost anyone can sneak problematic language into their agreements.
For example: Are you required to use the vendor's chosen arbitrator to settle disputes, rather than seek relief in court? Are you limited to relief in the form of service credits, with no possibility of cash restitution? Even if you are able to pursue civil charges in court, are you bound to a specific (and remote) jurisdiction of the vendor's choosing?
These are just some of the risks of invisible third-party paper.
How Do You Find All of Your Company’s Third-Party Paper?
The easiest way to track third-party paper is to make sure no one can execute a contract without running it through your contract lifecycle management (CLM) solution. Before your CIO turns on a new SaaS vendor, they need to download the contract PDF or Terms of Service and send it to the legal team for analysis and inclusion in your contract repository. And when those same vendors email the CIO with those "our terms of service have been updated" messages, make sure those updates get forwarded to legal, too.
Now for the third-party contracts that were executed before you put this policy in place. First, ask everyone to come clean with the agreements they signed "under the radar." A one-time amnesty will usually flush out most of the third-party paper that the legal team doesn't know about. For the rest, your accounting team can help. Make sure that every invoice that comes in has a contract that goes with it. If there are unassociated invoices, it’s likely that there's a contract someone forgot they signed (or forgot to tell legal about).
Once you've got all your third-party paper in hand, it's time to identify the risks it poses.
How Do I Track Third-Party Contract Risk?
The first step in quantifying third-party contract risk is quantifying the number of third-party contracts in your repository. "In-house" vs. "third-party" should be top-level categories in your regular contract analysis reporting, so you can tell how often you're signing someone else's paper, and you can get a handle on the kinds of risks these external agreements pose as compared to the contracts your own legal team drafts.
After that, it's a simple matter of identifying "problem clauses" and liabilities in all of your legal agreements -- internal and external alike -- so you can understand how often you're bound to arbitration, for example, bound to an inconvenient governing law, subject to force majeure exemptions (which can be invoked during a pandemic, natural disaster, or even political unrest), or any other uncomfortable arrangement your legal team wants to know about in advance.
To keep this regular risk analysis practical, consistent and accurate, you're probably going to need some cutting-edge software.
How Can Software Help Mitigate Third-Party Contract Risks?
Modern contract analysis software can use artificial intelligence to "read" your contracts and identify the general clauses and specific key terms described in each. From there, it's a simple matter to generate structured reports around all the agreements in your contract repository -- provided you build the right reports with these analysis tools.
As we've explained above, determining what percentage of your repository is made up of third-party paper should be one of the first uses of your AI contract analysis tool. The second should be creating a regular report on how many of your contracts include key terms and clauses and, for all those clauses, which ones are problematic.
Build a software-driven report once and you can update it at any time. So, every month, every week, or every day, you can make sure your third-party paper is never invisible -- and all your risks are accounted for.
LinkSquares Can Help
LinkSquares can help you tackle third-party paper in two ways. First, with LinkSquares Finalize, you can track the drafting and execution of all your legal agreements, including those contracts that come from third-parties. Second, LinkSquares Analyze can parse and categorize every agreement in your contract repository, extracting the key terms and identifying the critical clauses that define your legal liabilities and risks.
If you want to build a process to account for all the risks of third-party paper -- and adopt the AI software suite that makes contract management as effective as possible -- then contact LinkSquares today.
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