Contract Generation

What is Contract Generation?

Contract generation is the process of creating legally binding agreements between two or more parties. From start to finish, generating a contract involves processing a request, drafting the terms, negotiating and redlining the agreement, and finally executing and storing the signed document.

When you’re forming a business agreement, your deal desk and team members from the appropriate departments will assist with:

• Document generation
• Formatting
• Data entry
• Collaboration
• Delivery to the partner or client
• Storage and retrieval
• Access control

Once you’ve finished a contract and gotten everyone to sign, you’ll save it in a secure repository for future reference. In the past, this was a predominantly manual process. But manual contract generation leaves tons of room for errors, vulnerabilities, compliance issues, and lost data. Nowadays, companies use contract management software to generate legal agreements.

Synonyms

• Contract automation
• Contract creation
• Contract authoring
• Contracting process

Key Concepts in Contract Generation

Contract: Definition and Types

A contract is a legally binding agreement between two or more parties, who agree to do business together. We can categorize them in several different ways, based on criteria like their formation, execution, and enforceability.

• Sales contracts facilitate the purchase and sale of goods and services. They include product/service details, pricing, delivery terms, warranties, and other relevant sale conditions.
• Employment contracts outline the terms of employment between an employer and an employee — job responsibilities, compensation, benefits, confidentiality obligations, and termination conditions.
• Lease agreements are contracts in which one party (the lessor) allows another party (the lessee) to use an asset (such as property, vehicles, or equipment) for a specified period in exchange for payment.
• Service contacts are between clients and service providers. They detail the services to be provided, levels of service, terms of service delivery, payment, and other conditions.
• Loan agreements define the terms under which one party lends money to another. This includes the repayment schedule, interest rates, and the consequences of default.
• Partnership agreements establish the terms of a business partnership, including the roles and contributions of each partner, profit and loss distribution, and governance.
• Non-disclosure agreements (NDAs) involve two or more parties, which agree to keep certain information confidential and not disclose it to parties outside the contract.
• Licensing agreements let one party use another’s intellectual property (think: patents, trademarks, and copyrights) under specified conditions.

Depending on the nature of your business, there may be others. For instance, in healthcare, you’ll find patient consent forms. In the real estate sector, there are property management agreements. If you work with 1099 contractors, you’ll have special agreements for them. And manufacturers use special pricing agreements when working with their closest and highest-value customers.

Generation: Process and Methods

Broadly speaking, there are two ways you can approach the contract process: manual and automated.

• Manual contract generation is exactly what it sounds like: you draft, redline, and execute contracts by hand.
• Automated contract generation involves the use of contract management software to streamline the process.

Automated contracting still requires a person to input and approve the information, but it eliminates much of the manual labor.

Regardless of the software you use and the specifics of an agreement, each stage requires your attention:

1. Data capture. Before generating a contract, you must have the right data. Your contract will include things like names, dates, addresses, payment terms, and predetermined clauses that vary based on data inputs.
2. Template selection. You’ll need an active template library to create contracts quickly and consistently.
3. Data entry. A contract generator will support this process by pulling information from relevant sources. Then, it’ll let you review and approve the data before it goes into the contract.
4. Drafting. Legal teams work with your sales team (or other relevant department) to construct the first version of your proposed deal.
5. Contract negotiation. After the other party receives your draft, your team and theirs discuss each section of the contract. The goal is to get closer to a mutually beneficial agreement.
6. Contract redlining. Your team goes back to the contract and updates the contents to reflect changes you decided upon in the negotiation process.
7. Execution. You have an executed contract when every party signs off on the redlined terms. From that point on, the document becomes legally binding.
8. Storage. You’ll keep every important document in a secure, cloud-based contract repository.

Templates: Pre-Defined Structures

Aside from saving loads of time, using a template is the easy way to ensure you include all the necessary contract elements in every deal. It also helps you maintain a consistent format throughout your documents.

After you’ve created a contract that works for your business, it’s easy to save it as a template. You can then use this template when creating similar agreements in the future.

With every deal, avoid sending the template as-is. You still want to review the information before sending it for signatures (you’ll probably have to add/remove things anyways). It’s best to integrate your contract creation process with your approval processes and workflow — requiring signoffs at every stage of the generation process.

Artificial Intelligence: Automated Drafting and Review

With contract AI, you can automate the generation process even further. It is essentially an AI-based contract creation software that uses generative AI and natural language processing (NLP) to draft entire agreements form scratch based on context and data inputs. While you’ll still need legal oversight, this takes your drafting process to the next level.

You can also use AI to review contracts for issues and inconsistencies. The system reads through your documents and flags anything that doesn’t match up with your predetermined rules and guidelines, or poses a potential risk.

The beauty of artificial intelligence is it always gets smarter. As you use the software, it learns from your feedback and gets more accurate with time.

Terms Used in Generating Contracts

Clause

A clause is a contract section that outlines the terms and conditions each party agrees to. They’re there to protect both parties by ensuring mutual understanding and defining the rights and obligations of each side. In the event of a dispute, the court will use the clauses to determine how to settle it.

The most common clauses define terms for:

• Payment
• Termination
• Ownership and intellectual property
• Usage restrictions
• Indemnity
• Limitation of liability
• Confidentiality (NDAs)
• Non-compete agreements
• Copyrights and patents
• Warranties and disclaimers
• Dispute resolution

Depending on the nature of the contract, you’ll also have a few clauses specific to what you’re agreeing to. For instance, a channel sales partner agreement will have clauses outlining how the parties are to work together on sales and marketing activities, how they’ll price your products/services, and how you’ll handle channel conflict.

Boilerplate Language

Boilerplate language provides a foundational framework for contracts that ensures you include commonly understood legal provisions in every agreement. It’s crucial for articulating the general practices and policies governing the parties’ relationship.

Boilerplate terms may include:

• Governing law
• Entire agreement
• Severability
• Waiver
• Notice address

During the creation of contracts, boilerplate clauses typically require minimal, if any, modification (they’re often non-negotiable). This makes your contracting process more efficient.

Contract Redlining

Redlining is the process of marking changes in a document, traditionally by using red ink (hence the term “redlining”). In modern times, the process happens electronically.

In contract creation, redlines show changes made to an original draft during negotiation. The person making changes will use tracking tools (built into your software) to highlight the additions to and deletions from specific document provisions. You’ll also save copies of the original and updated versions for your records — a process called contract versioning.

Once you finish redlining, you’ll go through the same contract review process as with the first draft. You’ll send the revised document back and forth until both parties come to an agreement.

Electronic Signature

An electronic signature is a digital version of the traditional written signature used to indicate agreement to a legal document. It is legally binding, and you can authenticate it by clicking the button next to the signature that certifies you consent to use the electronic representation as your legally binding signature.

Electronic signatures make it easier to sign contracts remotely. Nobody has to print, scan, and physically mail them back and forth. They also provide a secure way to track and store your contracts. Rather than send tons of emails with sensitive documents back and forth, you can keep everything in one place on the cloud.

Technologies in Contract Generation

Contract Lifecycle Management Systems (CLM)

Contract lifecycle management (CLM) software handles the entire contract management process from start to finish.

You’ll use it to:

• Create clauses, templates, and boilerplate language
• Draft, review, and redline agreements
• Collaborate with other team members
• Track revisions and versions
• Store and manage legal documents
• Control access to contracts
• Receive alerts for renewal dates and milestones

In addition to handling all your contract workflows, you’ll be able to send your partners, clients, and customers an easy-to-read PDF document for electronic signature directly from your CLM system.

Artificial Intelligence (AI) in Contract Generation

Most modern CLM systems come with AI-powered functionality to generate contracts and conduct contract reviews. They use generative AI to automatically populate contracts using data from your CLM, as well as outside sources like CRM and CPQ.

They also use NLP and OCR (optical character recognition) to read through contracts and identify contract risks and compliance issues. And you can use them to create abstracts of contracts for easier reading, communication, and analysis.

Benefits of Contract Generation Software

Time wasted on document creation, template downloads, information retrieval, and manual data entry delays the entire quote-to-cash process. And that’s where contract generation software comes in.

Using software to help you generate contracts gives you the following benefits:

• Time savings at every step of the contracting process
• Simplified contract workflows, particularly for new team members
• Fewer errors, risks, and contract compliance issues
• Better security and data protection for sensitive documents
• Scalability, flexibility, and customization capabilities
• Alerts for contract views, edits, approvals, and action item completion
• Analytics for informed decision-making

It’s worth mentioning the challenges associated with contract generation amplify as your organization scales. The legal and financial burden of a contract error might not be so great when you’re a small business, but it’s not uncommon for larger companies to spend millions of dollars in litigation to resolve a dispute.

All in all, companies lose 9% of their total revenue to poor contract management practices. You might not think you’re losing any money now, but you are 100% guaranteed to in the future if you don’t use contract generation software to handle document creation, contract reviews, and redlining/versioning.

Best Practices in Contract Generation

Standardization and Consistency

Standardizing contract templates significantly makes your legal processes considerably more efficient and consistent, while also ensuring your contracts are fair, comprehensive, and aligned with your brand’s identity.

To standardize agreements effectively, start with the following tips:

• Optimize every template for your business. Take inventory of the common provisions you use in most contracts. Ask your legal counsel or a trusted third party to review those provisions and make suggestions.
• Make contracts user-friendly by embracing legal design principles. This involves clear organization, visuals, and simplified language to improve comprehension and user experience. The goal is to make contracts less daunting and more engaging, leading to faster signings.
• Add your brand’s visual elements. That makes them more engaging and reinforces your brand identity. Logos, brand colors, and font styles belong in your contracts, just like they do on your website.
• Codify deviations with conditional logic. Use conditional logic in contract templates to accommodate deviations or fallback positions. This allows for personalization and flexibility without constant legal oversight.
• Highlight the non-negotiables. That way it’s obvious to your customer, client, or partner what they should expect from working with you from the first time they see the draft. It also saves you months of wasted time if they disagree with one of your critical terms.
• Add personal touches to contracts. This applies especially to agreements like employee agreements, which can enhance the recipient’s experience and foster a positive start to the relationship​​.

Collaboration and Version Control

Version control might not sound like a big deal, but it is. A few features that give your team peace of mind include:

• A single source of truth where every user in your company can access the same files at once.
• Version control and tracking capabilities, so you don’t have to manually manage multiple versions of a document.
• Notifications for edits and final drafts so everyone stays up to date on changes.
• Audit trails, which provide a complete history of the document and every change made.

When it comes to collaboration, you should be able to:

• Assign role-based permissions to restrict access and editing capabilities based on who’s involved in the contract process.
• Add comments and annotations for easier communication and clarification.
• Integrate with other tools so your team can work seamlessly across platforms.

This will absolutely save you if you end up in a contract dispute or need to settle any contract compliance issues down the line.

Future Trends in Contract Generation

Blockchain Technology

Blockchain tech enhances contract generation and management through smart contracts, which are self-executing contracts with terms written in code. They offer security, transparency & cost reduction in banking, healthcare & identity management.

For example, healthcare can use smart contracting to securely manage patient records. Banking institutions can automate transactions and compliance processes through smart contracts. And cryptocurrency transactions can occur without human intervention.

Predictive Analytics

In contracting, predictive analytics software analyzes historical data to make logical inferences about future outcomes, trends, and behaviors. It helps organizations predict success and understand the risks associated with specific contract terms.  This data can inform decisions on what terms to include in your contracts and how you negotiate and price them.

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