Folders work more like tags than like a file system: the same document can be in several folders at once, for example under the relevant client and under the department responsible for it. So when you add it to a subfolder, that folder is added, while the folders it was already in remain.
“All Contracts” always lists all documents, regardless of which folders they are in. It is the “overall view”, not a folder.
The parent folder: the documents are now in both folders. If you only want them in the subfolder, open the parent folder, select the documents and choose “Remove from folder”. Or do it in one step in a document’s “Folders …” dialog: check the subfolder and uncheck the parent folder.