Why do you track “Term” from your contracts?
If your organization has hundreds and thousands of contracts flooded around you, I am sure you would miss tracking at least one key obligation out of 100 contracts. This can be due to a lack of reporting abilities in your in-house contract repository system or you never extracted the key elements from your legacy and active contracts. It is very important to monitor and follow up on key legal provisions regularly without missing a single agreement. One of such most important data elements (i.e., metadata/attributes) is CONTRACT TERM.
As the number of contracts accumulates every day, it is an increasingly onerous task to maintain and track them regularly. To track every term clause from all of your agreements efficiently, first, you need to determine what are all the elements associated with the term clause. Once you get the list of elements, set the guidelines on how to extract them and store them in your contract database system so that you can set the alerts and track them efficiently. Concerning extraction guidelines, you need to put a certain sequence of questions, like does the contract has a fixed term or a perpetual term? Does your contract have an initial term? If so, what is the duration? It is not done yet. Further required to dissect the term clause whether the contractual term is an evergreen type or not. To determine the evergreen type, you must also track the renewal option and auto-renewal option along with the notice period.
Here is the standard flow of information of which most of the agreements would consist:
- Effective Date – MM/DD/YYYY
- Is the Initial Term present? – Yes/No
- If Yes, Initial Term (Year/s) – Number
- Initial Term End Date – MM/DD/YYYY
- Renewal Option – Yes/No
- If Renewal Option is Yes, Auto Renew – Yes/No
- If Auto Renew is Yes, notice period to terminate the contract if required
- If Renewal Option is No, notice period to intend to renew if required
- Evergreen – Yes/No (Yes, if both Initial term and Auto-Renew are Yes)
- Perpetual – (No Initial term and no renewal option)
- Expiration Date – MM/DD/YYYY – if there is a fixed term and/or an end date
However, the importance of the above elements may vary depending on certain types of contracts. For example, a software development company would have many license agreements, where the parties usually prefer to renew after the initial term, hence auto-renew provision is ideal for such license agreements. Whereas, a lease agreement usually has a fixed long-term where you do not require a renewal clause. The most complicated part of any contract is to determine the evergreen term. The standard understanding of an evergreen clause is:
- If a contract has an initial term and it renews automatically after the initial term, it is considered an “evergreen”
- If the initial term is present, but the contract does not automatically renew, (i.e., there is a notice required to renew the contract), it is not an evergreen contract.
Typically, any legal expert would distinguish a perpetual contract from an evergreen contract and advise to include the evergreen provision in the contract based on the type of contract. A perpetual contract always has a risk involved as commercial obligations remain viable for several years, sometimes decades depending on the type of contract. Moreover, perpetual contracts are not enforceable in court in most cases.
We at Brightleaf have reviewed and extracted several of such variations from different agreements across different industries. With Brightleaf, you can get this information extracted up to six sigma accuracy from your legacy contracts and active contracts.