Using the Contract Hierarchy in Lextree

Updated: April 1, 2024

A recent article, “Use the Contract Hierarchy for Better Results,” in The Berkman Letter outlined an innovative approach to contract management. The contract hierarchy can improve profitability, collaboration, and risk management. The contract hierarchy unifies the legal concept of a contract, document management, and business analysis. This article explains the hierarchy and then shows how to use Lextree for Contract Management to implement the contract hierarchy.

What is the Contract Hierarchy?

The contract hierarchy starts with the business deal at the top, supported by documents (including the main agreement), with requirements at the base.

The contract hierarchy organizes the network of obligations between the parties.

CONTRACT

A contract is not a document. A contract is a lot more than a document. A contract creates a legal relationship between two parties that, if all goes according to plan, endures over time. Parties reduce agreements to writing which conflates contracts and documents.

In most common law jurisdictions the requirements for a contract between two or more parties (individuals or legal entities) are:

• mutual agreement to be bound,
• express offer and acceptance,
• adequate consideration,
• capacity to contract, and
• legal subject matter.

Those criteria only determine whether there is an enforceable agreement when the parties sign the agreement.¹

From the parties’ perspective, life with the contract is just starting.

The heart of the agreement is the contract for the people who actually operate under the terms of the contract. This notion that there is an overarching deal is a helpful way to think about contracts for contract management.

The contract is the deal in its most basic terms. It is the umbrella for all documents and requirements.

DOCUMENTS

A contract contains documents. The first document is usually, but not always, the main agreement. Ancillary documents follow the main agreement. Common contract documents include:

• Agreements,
• Addenda,
• Amendments,
• Bills of Sale,
• Certificates of Insurance,
• Exhibits or Schedules, and
• Statements of Work (SOWs).

Simple contracts might include just one document: only the main agreement. It can be difficult to identify examples.

Consider the lowly Non-Disclosure Agreement (NDA). There are no ancillary documents for an NDA. However, the NDA is often an ancillary document for a larger contract. Companies do not sign NDAs for the fun of keeping another party’s information confidential. An NDA precedes discussions aimed at consummating a meaningful contract. So even the lowly NDA fits the contract hierarchy, not as a contract but as a document. But of course, you can manage an NDA as an independent contract if you want.

REQUIREMENTS / TAGS

From a management perspective not all terms in a document are created equal. Most people in the organization are not even casually interested in a force majeure clause. However, the provision that allows the other party to increase prices if sales fall below a certain level captures everyone’s attention.

Documents within the contract umbrella have provisions that matter to the organization. The consequential provisions will vary by company, industry, and contract context.

Requirements or obligations flow in two directions. For example, your organization might be obligated to provide quarterly reports from a joint marketing venture. The other party could be obligated to pay commissions from sales.

With contract management software you can capture those requirements. Some requirements have due dates. The due dates might be absolute, like February 2, 2020, or relative, like 20 days before contract expiration.

It is useful to track some provisions, even when they do not pose an immediate obligation. There are two examples that can crop up in one or more contract documents: indemnification and change of control.

An indemnification clause requires that one party compensate the other for certain losses. However, it does not impose an administrative burden on the business during the ordinary course of the business. Lawyers and risk managers want to identify documents with indemnification clauses, but contract managers probably do not need to track them in the same way.

Likewise, a change of control provision is worth knowing about when there is, well, a change in ownership of the other party, but probably not germane to the business of the contract day-in and day-out.

Contract management should flag the presence of these kinds of provisions so that they are readily identifiable when needed. Flagging these provisions also allows contract management to provide reports to legal and risk management, whereas full-text searching does not support reports.

The contract hierarchy places the deal at the top. This is the contract record. The contract consists of one or more documents and each document consists of one or more requirements (or terms or provisions) which should be tracked.

What are the Benefits of the Contract Hierarchy?

There are two important benefits to the contract hierarchy. First, using the contract hierarchy to organize contracts provides a platform for consistent collaboration.

Second, the contract hierarchy is a useful risk management tool.

CONSISTENT COLLABORATION

The contract hierarchy promotes collaboration across your organization in several ways. At the most practical level, there is a common organizational design so no one wastes time looking for contract information.

The hierarchy also frames discussions about contract or performance issues during the course of the contract. Your team can locate the source of the problem at the appropriate place in the hierarchy.

BETTER RISK MANAGEMENT

Calling out requirements and tags across documents and the entire contract portfolio allows insights otherwise not available. Those insights, however, need data collected consistently over time.

For example, to see which contracts require the counterparty to carry insurance, you need to add a requirement or tag to each contract. That data will allow you to understand your risk exposure across the entire contract portfolio.

How to Implement the Contract Hierarchy in Lextree?

Lextree for Contract Management is already designed with the contract hierarchy method in mind. To use the contract hierarchy approach in Lextree, following these steps:

• Add a new contract linked to an existing party or add a new party,
• Add the first document,
• Add more documents over the life of the contract,
• Add requirements from the contract documents, and
• Run contract and document reports.

You can get all the benefits of the contract hierarchy approach simply by using these Lextree features.

STEP 1. ADD A NEW CONTRACT LINKED TO AN EXISTING PARTY OR ADD A NEW ONE

When you add a contract Lextree will prompt you to select the party. The Parties field is required, which is critical to enforcing the contract hierarchy approach. Standardizing counterparty names will allow us to link contracts with each counterparty over time so that the entire contract history is readily accessible.

You do not need to worry about enforcing the consistent use of a party’s name. Tap or click in the field to reveal a search field and dropdown list of all your organization’s counterparties.

If the counterparty is brand new, then select + Add a new option to add the party. You only need to do this once. Lextree will remember the party. Future users will see the party in the dropdown list.

Lextree will prompt you for additional metadata about the contract record, such as the contract type, the effective date, and the expiration date. This data applies to the contract overall. You will have opportunity shortly to add documents and requirements.

Select to Submit to save the contract record. Lextree will then prompt you add the first document.

STEP 2. ADD THE FIRST DOCUMENT

The first document is often the main agreement, but it can be any document related to the contract. Since Lextree is already designed to support the contract hierarchy method, the document and the contract record are linked automatically.

You can also add tags to the contract document that flag important provisions like indemnification clauses and change of control provisions.

STEP 3. ADD MORE DOCUMENTS OVER THE LIFE OF THE CONTRACT

The initial contract might include more than one document, in which case you should add all of those documents to the contract record. Let’s tree allows you to add additional documents by navigating to the contract record and then selecting the + Add button on the documents tab.

As the contract involves overtime, you will want to add additional documents. Lextree automatically associates documents added through the contract record with that contract.

There are many kinds of documents that are added over the course of the contract. You might add certificates of insurance which cover different periods of time. Statements of Work (SOWs) provide the terms for units of work or deliverables over the duration. You might add: purchase orders, price schedules, product descriptions, or any ancillary document that relates to the contract.

Each time you add a document of any type, Lextree preserves the contract hierarchy by creating an association with the contract record automatically.

STEP 4. ADD REQUIREMENTS FROM THE CONTRACT DOCUMENTS

Lextree makes contract requirements easy to manage. In the contract hierarchy context, a contract requirement is an obligation or a provision of the contract from one or more of the documents.

Requirements usually come in two flavors in contract management. First, there are terms of a contract that you want to track their presence. These can be conditional provisions that only matter under circumstances. They also might be terms that are inconsistent with your legal drafting guidelines, such as an unusual choice of law provision.

Second, provisions that require a party to take action by a certain date are common during the timeline of the contract. For example, you might have to file a report or communicate sales results.

Lextree allows you to manage requirements within a contract record. Simply select the Requirements tab to see a list of the requirements for a contract. o add a new requirement, select the + Add button. Lextree will display the Add Requirement screen which will give you options to add requirements. The Requirement Types are managed in Settings by Admin users.

If the requirement is not date sensitive, select No in the Requirement Date? field. Otherwise you can set an absolute date for the requirement. Lextree allows you to set relative due dates that are tied to the contract record or a document within the contract.

STEP 5. RUN CONTRACT AND DOCUMENT REPORTS

The contract hierarchy approach enables powerful and detailed analysis of the entire contract repository. You can now analyze contracts from many perspectives that are not accessible when contracts are simply filed as part of a document management system.

Lextree comes preconfigured with reports consistent with the contract hierarchy. Since your contract repository is already structured as a collection of documents and requirements within a contract record, reports can deliver the results you need.

Details about using reports are available in the documentation. Watch the video about running reports.

Lextree provides a comprehensive approach to contract management that uses the contract hierarchy by design. Use the core features of Lextree. It will create and maintain the hierarchy for you.

Conclusion

Organizing and analyzing your contract portfolio in terms of the contract hierarchy can improve profitability, collaboration, and risk management for your organization. This technique promotes consistency across the organization, transforming contracts from a pile of documents into a collection of information about the organization’s obligations and opportunities.