Contract Redlining Best Practices

Louis Balla
Louis Balla
Louis is the Co-Founder of Anapact and partner at Nuage, a top rated ERP consulting firm based in Venice Beach, California.
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Contract redlining best practices: How to Prepare Your Company in 2022

Contract redlining is a vital part of your contract management process and you shouldn’t leave it to chance. Yet, many companies are using tools from last century to manage document redlining and negotiation, which are wasting time and resources, causing mistakes, and damaging relationships at their most fragile stage. Your grandpa called and he wants his redlining process back.

Know the Basics of Contract Redlining

What does it mean to redline a contract?

Redlining a contract is the process of editing the draft of a contract before it’s agreed upon by all parties. The draft might have been provided by the opposing party, yourself, or it could be based on an old contract template. 

Generally, the contract redlining process happens at the same time as the negotiation. A contract is reviewed, usually by multiple parties like representatives from legal, financial, and fulfillment. Each makes suggested revisions on the contract to show the clauses they would like to remove, change, or add. 

This used to be handled using red pens to draw lines through text on paper documents, but now it’s most often done digitally. Modern-day redlining is done whilst looking at two versions of the same contract. The original, and the edited, redlined version.

The practice of contract redlining requires that you communicate back and forth with the other party to iron out the particulars of your agreement.  

However, redlining involves more than just editing. It is a collaborative activity in which all parties engaged in the contract work together to draw up a contract that meets everyone’s needs. 

In short, party X will present a contract to party Y, who will edit the document. The revised version will be passed back to party X, who will make their own edits and approve or reject party Y’s edits before returning the contract. 

Once redlined, the party that issued the contract must often negotiate with its internal teams to accommodate or push back on changes. Often, there are multiple rounds of negotiating and redlining before the parties either reach an agreement or abandon the process.

What’s the difference between blacklining and redlining a contract?

Blacklining and redlining essentially mean the same thing. The difference between the two terms is whether the document is the original document with the red marks, or the copied version with black marks, hence the term “blackline.”

Previously, people referred to a redlined document as blacklined, but the advent of technology enabled people to send digital copies of documents, eventually rendering the phrase blacklined obsolete. Those who redlined contracts before contract management systems became the norm now use the term blacklining.

When should you redline a contract?

Contract redlining is required when:

  • When two or more parties are discussing or reviewing a legal document. One party is revising a contract and the other party wants to see the changes made.
  • Documents are edited for internal use, such as when one department makes modifications so that another department can see what has to be changed or where problems exist.

How do you redline a contract?

Supposing you’re on the receiving end during the redlining process, here are a few steps to follow to make sure your contract redlining doesn’t result in an end to your business relationship with the other side:

  • Determine what you want to change:

Some changes are unavoidable. If you’re working from a template, for example, you’ll want to change business information like the names of the parties, pricing, deadlines, and so on. When reviewing all other terms, however, you should proceed with caution. Changes to entire sections of the contract should be avoided. This may anger the opposing party, which is not what you want. Instead, highlight the section and explain to them why you want it to be changed.

  • Ensure you’re making reasonable alterations

You should have worked out the major conditions of your contract orally. However, you may discover that you never agreed on some critical points, such as your right to a refund or the right to extend a deadline.

Unfortunately, after a document is signed, mistakes that go unnoticed but remain legal can be sustained.

  • Anticipate the other party’s reaction

A good redline will only alter what is absolutely essential. You don’t want to make too many changes and ruin the contract. For these reasons, think about how the opposing side may react to your adjustments.

  • Review the other party’s edits

After sending the redlined document back to the other party, they’ll either accept the new terms or send back another redlined version of the contract. 

Don’t have a defensive reaction in which you reject any change made by the opposing party. Instead, pause for a moment of reflection.  Is the change completely irrational? Is it something you can live with, or is it something you can’t let slide?

Avoid debating over minor changes. You can lose the deal at any point during the redlining process, so be adaptable.

You should, however, clarify anything that is unclear. You don’t want to sign a contract that you don’t understand.

Contract Redlining Best Practices

Focus on the deal

Always consider your options carefully before making changes. When redlining a document, some people lose sight of the fact that they are drafting a document to make money, and the entire deal is called off. 

This is especially true if you are afraid of taking a risk, or if you are dealing with an attorney who may be too tough. You may lose your job if you blow a deal. To avoid this, you may need to be cautious and create a document that has the ultimate goal of generating revenue for your business.

Only redline the most crucial parts

Some people make contract changes on all of the conditions at first glance, even though not all of them need to be improved. In most circumstances, you will find poorly worded contracts; unfortunately, a redline cannot be used to help with this. This has the potential to slow down the process. 

You should also avoid dwelling on the other party’s adjustments if you have had a chance to review them and determined that they are not as significant. Your attention should be drawn to the terms that are clearly undesirable or confusing.

Be considerate of the other party

When it comes to contracts, you should constantly consider how people will respond when they see your contract redline. For example, if you erase substantial portions of the agreement without providing an explanation, you may end up upsetting the other party. Before deleting any section, you should contact the other party and explain why you’re doing so. 

Take a second look, you should go over the contract again since some missed aspects could be critical. It is consequently your responsibility to understand which details are critical and which are not.

Presenting a redlined document that lacks key critical components may make you appear incompetent or shady to the opposing party. A second look at a later stage may provide you with new and startling information. It may also be beneficial if you can ask the help of a coworker to review the document.

Contract Redlining: The Dark Ages to Today

While contracts are now almost all electronic, businesses are often stuck in the dark ages when it comes to their document redlining process.

Here’s an all-too-common scenario:

A kettle corn manufacturer has drawn up a contract with the vendor that will supply its popcorn kernels. It stipulates how many pounds will be delivered, price, delivery schedule, and more. The contract is in a Microsoft Word document and was attached to an email from the kettle corn company’s representative to one at the kernel vendor.

The kernels vendor, in turn, sent an email to multiple people at their company and asked them to send feedback directly to the kettle corn rep.

The kernels marketing department returned the email to the kettle corn rep that afternoon with an adjustment in the body of the email to the clause that governed how the company’s logo would be used on the partners’ page of the kettle corn company’s website. The kettle corn rep saved a PDF of their email to the intranet and archived it in their inbox.

The finance department took six more days, and two reminder emails, before someone sent it back to the rep with a counter-offer. It wanted to change the clause that stipulated that if more than 5% of its kernels failed to pop, the buyer would pay only 60% of the price for that batch. They highlighted the clause in the document and offered that if 8% failed, the buyer would pay 75%, and sent the redlined contract back via email.

Under time pressure, the kettle corn representative sat down in Microsoft Word to make the changes, starting with the document they just received from the kernel vendor’s finance department. Rewriting the redlined clauses, they saved the contract and sent it once more to the kernel vendor rep. They were happy with this version and signed it.

It was not until months later that the kernel vendor’s marketing department discovered its logo was not on the kettle corn website, and its clause adjustment had never made it to the final contract. The Director of Marketing estimated it had lost tens of thousands of dollars in marketing.

Now the kettle corn’s primary vendor had bad blood and the president of the company was involved. The paper trail – split between the intranet and individual people’s email – was a nightmare to unravel, causing more delays and convincing the kernel vendor that their partner was disorganized as well as untrustworthy. The entire relationship was in jeopardy because of one forgotten email.

The problems in this scenario – poor version control, long delays, and opaque storage – are common to organizations struggling to manage contracts using a workflow cobbled together from legacy systems. 

But it’s 2022 and there is a better way.

Contract Lifecycle Management Tools and Document Redlining

The capacity to integrate document redlining into contract management is one of the primary benefits of contract management software. Forrester identified contract redlining tracking capacity as one of the six key sources of business value for a CLM.

Here is how a modern tool can speed and ease the contract redlining process:

  1. In a modern CLM, there is only one contract and a single source of truth – there is no chance of human error creating version control issues.
  2. Multiple members of the same organization are able to review the contract at the same time and see each other’s comments, which means they’re less likely to step on each other’s toes or contradict one another.
  3. With role management, only the right people are able to make changes to the sections relevant to them.
  4. When it’s ready to be sent to the other party, there’s a button for each relevant person to say they are done reviewing.
  5. Integration with eSignature tools means the signing process is simple and there is no loss of momentum at the end.
  6. And integration with other tools means fulfillment can start immediately and audits are a breeze.

To sum it up, the kettle corn company would have had all the kernel supplier’s feedback in one place and been able to edit the single contract inside the tool, which would have made it much more difficult to make that mistake. Its commitments would have been easy to recognize and the paper trail visible. Its streamlined and automated processes would also have reduced the “soft costs” of wrangling multiple versions, tracking down documents, and following up with people.

Here’s just a sneak peek of how easy your contract redlining process can be with Anapact:

Are your outdated contract redlining tools letting you down? Find out more about how contract management software can help you mitigate risk and speed time to sign! Get a demo today.

Contract Redlining Best Practices

- About the Author

Louis Balla
Louis Balla
Louis is the Co-Founder of Anapact and partner at Nuage, a top rated ERP consulting firm based in Venice Beach, California.