Contract negotiation can be a complex and stringent process. During negotiation, a contract is sent between parties multiple times to negotiate better terms and conditions before being finalised. This process is known as contract redlining, and it is a crucial stage to ensure contractual success.
Contract redlining involves editing a contract and flagging specific clauses during the negotiation stage of the contract lifecycle, condensing the requirements into a document that satisfies all parties.
The term redlining comes from the traditional method of editing a contract. In the past, draft contracts were printed, and one party would mark up amends in a red pen. The contract would then be passed to the other parties so that they could make their changes. Today, however, contracts are often negotiated in Microsoft Word using the tracked changes tool.
The nature of marking edits in red made it easy for the next party to see the changes. Once the involved parties have agreed on the edits, a clean agreement is produced.
Contract redlining should be used when parties require amends during the early phases of the contract lifecycle, usually to negotiate better terms and conditions. However, the process will also be used in other scenarios, including when parties create a new contract or edit previous versions.
Contract redlining requires close attention to detail, and the contract may undergo multiple edits before reaching a final version.
Contract redlining is a collaborative process between parties rather than a simple editing process. Parties must work collaboratively to produce a final agreement that fulfils their requirements.
Typically, contract redlining is now carried out electronically. Party A will present a contract to party B, who will proceed to make edits. This version is then returned to party A, who will make their changes and either approve or reject the edits. This process continues until all the parties are happy with the contract.
Contracts are documents that span different departments across a business and often involve multiple decision-makers. Although it will differ from business to business, in most cases, the teams and individuals involved in the contact redlining process are:
• Key stakeholders
• Contract drafters or managers
As with any contractual process, redlining is incredibly important, but it also presents challenges. Some challenges include:
• Difficulties with interpretation – As the parties increase the number of changes to the contract, it will become increasingly hard to read with the amends, and mistakes can be made in the interpretation of clauses.
• Formatting issues – When multiple contractual changes are made, it may result in broken formatting, resulting in unnecessary time spent reformatting the document. This additional admin then slows negotiation cycles.
• Software compatibility – Companies may use different software to conduct the contract redlining process, resulting in incompatible file types when working collaboratively. Incompatible file types can break the formatting of the contract or even corrupt the file entirely.
• Untracked changes – When changes are made to the contract digitally, they must be tracked within the document. If any changes are made and not tracked, it can slow down the process and cause costly errors.
Contract redlining often involves multiple parties and revisions of an agreement before it is finalised. It is the responsibility of the legal team to review the redlining stage and to work with each party to minimise business risk and maximise their opportunities. The following risks should be considered to ensure an effective process:
• Track changes – Tracking every change made within the agreement is essential, as even small changes can have drastic consequences for one party.
• Compliance – Contracts are legally binding documents, so the language, terms and positions used must be legally compliant.
• Version control – Contract redlining can become complex with significant changes. Teams must provide multiple versions to facilitate the reader during the process, including the redlined and original versions.
Utilising the correct tools to facilitate and enhance the redlining process will reduce the number of errors and time spent on redlining. For example, Summize’s contract lifecycle management software enables efficient redlining and encourages collaboration with shareable links and activity tracking.
Contract redlining is a crucial component of the contract lifecycle to execute a successful contract. However, like many traditional contractual processes, it can be manual, costly, and prone to mistakes and oversight.
Summize’s integrated CLM platform uses AI, allowing legal teams and commercial users to review and analyse contracts quickly and efficiently. The Contract Analysis Engine works alongside the legal team’s experience to instantly identify and extract crucial information from contracts and automatically redline areas of concern. Summize allows legal teams to reduce legal risk in minutes from their pre and post-signature contracts.