Glossary > Contract Abstraction

Contract Abstraction

Reviewed By Eyal Orgil Published November 30, 2023

What is Contract Abstraction?

Contract abstraction is the process of extracting, summarizing, and highlighting key data and information from business and legal contracts. It involves reviewing the contract documents to identify and outline essential terms, conditions, obligations, rights, timelines, and essential clauses.

The abstract is a highly simplified version of the contract. It summarizes the essential information in an easy-to-understand and reference format.

The purpose of a contract abstract is to allow business professionals and legal teams to quickly understand the significant aspects of a contract without reading through an entire document, which could be hundreds of pages long. It is particularly useful for managing large volumes of contracts, ensuring compliance, and in the due diligence process during M&A transactions.

Legal professionals can carry out the abstraction process manually, but they usually do so with the help of software tools. AI and machine learning automate the process while increasing accuracy, efficiency, and consistency.

Synonyms

Contract abstraction process
Contract metadata extraction
Legal contract abstraction

Importance of Legal Contract Abstraction

Contract abstraction helps in risk management, contract administration, and simplifying contract-related decision-making.

Here’s a closer look at why contract abstraction is so vital:

Summarizes Complex Legal Documents

Although they do the same thing (create a more digestible version of a contract), abstraction and summarization are two different things. While summarization suits short contracts with few terms, multifaceted agreements that typify B2B interactions require a more in-depth approach.

There are several reasons you’d want to simplify a legal document:

It makes it easier for non-lawyers to understand the key points of a contract
A summary allows you to quickly get the gist of a contract without reading through the entire document
Highlighting contractual obligations, liabilities, and key dates ensures both parties don’t miss or forget anything
Condensed versions facilitate faster decision-making
A well-summarized contract makes identifying relevant clauses and terms easier when handling disputes
Contract management becomes smoother when dates, renewal terms, and obligations are simple and readable

While this process used to be manual, technology has made it easier and faster to abstract contract information. Contract managers and members of your legal team should still oversee it, but software minimizes errors and speeds things up.

Improves Contract Compliance

Whether it’s from a regulatory standpoint or the specific contents of your contract, each concerned party has certain obligations to fulfill. For instance, a business might agree to deliver services or products within specific timelines in exchange for payment from the other party.

Finding this information in a long, text-heavy contract is like looking for a needle in a haystack, which is why so many companies have a hard time with contract compliance. By abstracting contracts, you can pin down obligations and track their fulfillment.

Contract abstracts also ensure adherence to regulatory guidelines in highly regulated industries like healthcare and finance.

Aids in Contract Understanding

The people who write a contract and those whom it concerns are rarely one and the same. Most of the stakeholders involved in a contract aren’t lawyers. Since contracts generally contain lengthy wording and legal terminology, it’s a challenge for the average person to understand.

By breaking down a contract and highlighting the relevant provisions, you get to the heart of what specific clauses mean. Moreover, abstraction compels attorneys to make the language in contracts more straightforward for non-legal team members.

Helps Manage Risks

Often, the detailed and complex language in contracts can lead to misunderstandings or oversight of significant legal obligations and liabilities. These oversights can result in legal disputes, penalties, or breach of contract, posing serious legal risks to a company.

By highlighting crucial terms, conditions, and obligations, contract managers prevent misinterpretation, which reduces their legal risk and exposure.

Abstraction can also underscore potential red flags in a contract, such as unfavorable terms or high-risk obligations, which companies can proactively address.

Enables Contract Categorization and Retrieval

Simplifying the most important elements of contractual documents makes it easier to recall them in your contract repository. Since abstracts contain keywords and clauses, it becomes easier to classify contracts into categories based on the summarized information. This feature simplifies contract discovery, saving companies time and enabling increased focus on contract analysis.

Steps in Creating a Contract Abstract

1. Review the whole contract.

Before you can create an abstract, you have to understand the entire contract. Have someone from your legal team (ideally, someone who contributed to creating the contract) go through the document to verify its purpose, scope, and terms and conditions.

2. Create a unique format.

You have to establish a format before you can populate it with information from your contract. Some companies do this in an Excel sheet or Word document, but it’s better to use contract lifecycle management (CLM) software, which handles templating, highlighting, summarization, and document storage.

The structure will vary depending on the type of contract you’re abstracting. You’ll need a different template for all the different types of contracts your business uses — NDAs, SOWs, reseller agreements, service agreements, purchase agreements, etc.

3. Pull metadata.

Metadata is what helps your document management system understand the contents of your contract. It makes it easy to search for and sort through documents in your contract repository. Since you’ll search based on key information, it’s just as important for abstraction as it is in the contract management process.

When you start the contract data extraction process, there are a few critical data points you can’t miss:

Total contract value (TCV) — Your company’s revenue from each contract
Key dates — Contract start date, end date, and key milestones throughout its duration
Named parties — All the people and/or businesses legally bound by the contract
Contract type — The specific type of contract it is (e.g., purchase agreement, lease agreement, etc.)
Renewal terms — Details on automatic renewal or the possibility for renegotiation

4. Summarize key clauses.

The abstract should contain a summary of all the essential clauses in a contract. This includes:

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 indemnifications — 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

5. Highlight important terms.

This step is especially important in highly regulated industries like healthcare and finance, where compliance is critical. Drawing attention to specific governing laws and regulatory requirements within the contract helps ensure legal compliance. You should also highlight any clauses that may affect a company’s bottom line or have significant operational implications.

6. Review and approve the abstract.

Once you have completed the contract abstraction process, it’s crucial to have a legal team member review and approve it for accuracy. This step helps you prevent errors and omissions that could otherwise lead to misunderstandings or legal risks.

Elements of a Successful Contract Abstraction Process

Well-Defined Objectives and Scope

The objectives of the contract abstraction process are manifold. Roughly, here’s what you’re looking to achieve:

Distill the most critical information from a contract, presenting it in a clear and concise format for easy understanding. An excellent abstract simplifies complex legal terminology and helps in understanding the core elements of the contract.
Mitigate risk. By emphasizing key obligations, liabilities, and conditions, an abstract minimizes the chances of legal disputes and penalties resulting from misinterpretations and oversights.
Enable contract categorization and retrieval. With the crucial elements of contracts simplified, it becomes easier to categorize them and recall them when needed.
Assist in compliance monitoring by highlighting essential terms and obligations that need special attention to ensure regulatory requirements are met.
Save time by streamlining the contract review process, making it faster and more efficient.

Gather Contracts

To commence the abstraction process, collecting all relevant contracts that fall within the defined scope is essential. These contracts could range from vendor agreements to employment contracts. The collection process can greatly benefit from using a reliable contract management system capable of centralizing all of your company’s contracts.

Review and Familiarization

When creating an abstract, you need to thoroughly review it to understand the agreement’s context and purpose and identify the most important provisions. Grasping these elements lays a solid foundation for the summarization phase of the abstraction process.

It’s also crucial to familiarize yourself with the contract’s terminology and legal language. Each industry has its own jargon, and comprehending these terms is key to correctly interpreting the contract. This is even more critical when dealing with highly technical or industry-specific contracts, as misinterpreting terms can lead to significant legal and financial consequences.

Create a Template

With contract management software, this process is easy. All you have to do is use its document generation feature to create a template containing the essential fields you want your team to extract from future contracts. You can also use existing contract templates as a starting point and customize them according to your needs.

Automate Data Extraction

Manual data extraction is time-consuming, tedious, and prone to errors. Contract management software can automate this process using advanced AI and machine learning algorithms. Based on the template, these tools can identify and systematically extract your data in seconds.

Data Validation

Data validation requires you to verify the accuracy of the extracted data by cross-referencing it with the original contracts. You need to ensure there are no discrepancies or omissions because any inaccuracies can cause misunderstandings and potential legal issues.

Coding and Categorization

To streamline categorization and retrieval, you should code the abstracted information meticulously. Implement standardized codes and tags to classify different types of clauses and contract elements so you can easily search for them at any time.

This method involves assigning unique identifiers or keywords to indemnity, confidentiality, and termination sections, allowing for quick sorting and access. Make sure you apply these codes consistently across all your similar contracts to maintain an organized system.

Quality Control

You need some kind of quality control process to make sure the abstracted contract data is accurate and reflects the actual contents of your contract. Most businesses do this by having a legal team review the abstract for accuracy. If you don’t have the internal infrastructure for a dedicated team, you can outsource abstraction to vetted legal professionals.

Document and Repository Management

Whether it’s in a standalone contract management platform or part of your CPQ software, you need a robust and secure contract repository to store your abstracts in an organized manner. You should label and tag each document for easy identification, and make sure the system is backed up regularly.

Reporting

To convey the key information from abstracted contracts effectively, you should generate summary reports.

Start by identifying the core details that stakeholders need to see — these could include the contract’s scope, duration, financial obligations, and key terms. Then, actively customize these reports to meet the specific requirements of various stakeholders.

For legal teams, focus on compliance and risk-related aspects
For finance, highlight payment terms and penalties
For management, summarize obligations and benefits that impact strategic decisions

By tailoring each report, you ensure every department receives the precise information it needs for its functions.

Update and Maintenance

Whenever you make a contract modification, remember to update the abstract or create a new version. Routine maintenance is also crucial to ensure your repository stays organized and up-to-date. Schedule regular audits of your contract repository to identify any missing or incorrectly coded abstracts.