Contents of Contract Review Policies and Procedures

This week I am continuing the discussion of contract review policies and procedures that I began last week.  Policies and procedures for review and execution of contracts are generally prepared and administered by and through the legal department, although it is not strictly necessary that lawyers always be involved in contract administration, and there is always a possibility that the attorneys involved will forget that the concept of a “contract” is not all that well known to the parties subject to the policies and procedures—the officers, managers and other employees of the company.  Accordingly, the policy itself, as well as training sessions presented to introduce the policy and educate everyone how it should be used, must include a description of what a “contract” is and how it can be created. A short primer on capacity to contract, consideration and lawful subject matter can be presented; however, the most important thing to emphasize to non-lawyers is that representatives of the company that have “apparent authority” in the eyes of outsiders can bind the company to legally enforceable duties and obligations even though they have not complied with the internal procedures for review and approval of a contractual obligation.  For example, if a senior sales manager with the title of “branch manager” or “regional vice president” signs and delivers a document to a customer that describes the terms upon which certain goods will be sold and delivered to the customer the recipient of the document would be entitled as a matter of law to assume that it is in possession of a legally binding contract even if the sales manager failed to comply with the company’s own internal contract review and signature authority procedures.  The bottom line is that officers, managers and other employees need to exercise extreme caution not to take any action that might create a reasonable expectation in the mind of another party that the company is willing to be legally bound to perform specified obligations.

When preparing the policy it is important to identify the contractual obligations commonly encountered in the course of the regular business activities of the company and consider what specific steps should be taken to review and approve those types of contracts.  This generally means thinking about the best way to deal with all or most of the following general categories of contracts:

  • Agreements for the purchase or sale of goods;
  • Agreements to provide or obtain services;
  • Nondisclosure agreements;
  • Leases of personal property, including equipment, furniture and vehicles;
  • Leases, deeds, and other conveyances affecting interests in real property;
  • Promissory notes and other instruments relating to the payment of money, including security agreements and guarantees;
  • Liability waivers and releases;
  • Settlements of disputes;
  • Software licenses;
  • Maintenance agreements;
  • Memoranda or letters of understanding or cooperation;
  • Contracts with facilities that require a written agreement; and
  • Employment contracts.

As companies get larger and the scope of possible contracts expands they opt for a fairly comprehensive form of contract review and signature authority policy.  Such a policy might cover the following areas:

  • Overview of the contracting procedures;
  • Responsibilities of parties initiating contracts;
  • Requirements regarding formal bidding procedures (i.e., requests for proposals);
  • Subject matter and funding approvals;
  • Legal department approval;
  • Risk management issues including use of insurance and indemnification provisions;
  • Time frames for review and approval process;
  • Contracting authority;
  • Board of directors’ actions and documents evidencing board actions;
  • Processing of funding requirements for contracts;
  • Retention of contracts and recordkeeping requirements; and
  • Contract administration and performance review.

Companies and non-profit organizations may choose from a variety of other alternatives when creating and implementing policies and procedures relating to contract review.  For example, a university or hospital may emphasize the use of standardized contracts and create escalating approval requirements based on the dollar amount of the commitment created by a particular contract.  While standardized contracts prepared by the university or hospital legal and business affairs departments are strongly recommended, non-standardized contracts (i.e., contracts prepared and submitted by potential vendors and other business partners) may be used if they are amended to include certain “required” contract provisions and have been thoroughly reviewed and analyzed using a detailed contract review checklist. 

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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