KEY POINTS:
- Hidden redlines present a risk to deal-making that can potentially jeopardize the entire deal.
- Those on the receiving end of hidden redlines have the greater negotiation power.
- While over-diligence is our way of mitigating the risk, it would be more efficient to tackle the problem at its root.
The process of creating a final agreement involves multiple parties exchanging markups (aka redlines) that reflect their position to persuade the other side to agree to their version. Drafts are exchanged back and forth until both parties agree to the terms.
Therefore, the contracting process naturally requires some level of cooperation between the parties because the parties are essentially co-drafting the agreement together. Making the parties interdependent on one another to move through the review and negotiation process.[1] If one party refuses to cooperate, the entire contract is frozen. When one party makes a change to the language, the other party has to respond to that change. If one party hides a markup, the other party is at risk.
But just because the parties are forced to cooperate, doesn’t mean they trust each other. And in fact, they usually don’t. And this is a problem.
The Transparency Problem
To make up for the lack of trust between them, each party works overtime to independently review and validate contract drafts. Locking documents or using PDFs to block the other party from making changes of their own. Running their own redlines each time they receive a new contract draft. Skeptically combing through the final version on the hunt for a hidden change.
While this over-diligence may be appropriate given the current circumstances, it is not the most efficient use of our time and energy. Especially for those who manage a high volume of contracts against tight deadlines.
This is what I refer to as “The Transparency Problem.” In this article, I will provide some insight as to why this is such a problem and what we can do to better manage this issue until a larger, industry-wide solution is presented.
Real-Life Example of Hidden Redlines
While some people purposefully hide or obfuscate changes in bad faith, many do it by accident; simple human error or user error. They forgot to turn Track Changes on before making a change. Or they misused their company’s contract management technology. But regardless of intent or cause, the cost of hidden redlines can be astronomical to the contract negotiation at hand.
A lack of transparency in the contracting process can lead to parties signing contracts with terms they were unaware of, parties feeling tricked or slighted, damaged relationships, and broken trust.
As an example, I will share a recent encounter with hidden redlines. I was negotiating an order form for a three-year renewal of a platform that my client had been using for over 15 years. The annual fee was $100,000 so the total contract value was $300,000. I reviewed the order form and provided minor redlines. The vendor said they had accepted all changes and attached a version labeled “final, clean version ready for signature.”
Upon closer review, I noticed that the vendor had added this clause without Track Changes or other visible markups: “which shall be non-cancelable for any reason.” Per the master agreement, my client had a right to terminate the order form for convenience. This modification materially impacted my client’s rights and risk level. It should have been raised during commercial negotiations (not in the final hour) and reflected in the markups (not hidden).
I immediately connected with my client and explained the circumstances. My client felt uneasy about the hidden redline, so we decided to address it head-on. We set up a call with the vendor and the vendor’s legal counsel. On the call, I let them know that we found an unexpected edit during our final review of the clean version they sent over. “Can you help us understand?”, I asked. The vendor snapped back with anger and defensiveness, claiming that all of their order forms had the non-cancelable language in them. They did not take any accountability or otherwise acknowledge that the hidden redline was inappropriate. They even threatened to terminate my client’s access if we didn’t sign the order form as-is.
After using some master negotiation techniques, I was able to turn the tables around and diffuse the situation. By the end of the call, the vendor was more inclined to work with us and I knew they were going to agree to remove the disputed clause. But it was too late for my client. He was not happy with the way the vendor handled the situation and was no longer interested in a long-term partnership with a vendor who tried to force redlines on us. In the end, my client decided to renew for just one year instead of three, resulting in a $200,000 loss to the vendor. All because of one hidden redline.
This situation is a perfect representation of the extent to which hidden redlines and improper redlining etiquette can negatively impact a deal. In this example alone, it caused damage to the business relationship and broken trust, tarnished the vendor’s negotiation leverage, reduced the value of the deal at hand, and slowed down the negotiation process. So what can we do to avoid sending hidden redlines or to respond to hidden redlines if we are on the receiving end? Here are my recommendations.
How to Avoid Hidden Redlines
The best way to solve The Transparency Problem is to avoid it altogether. Here are some tips to reducing the risk that you will inadvertently send the other party a document with hidden redlines.
1. Keep Track Changes ON at all times.
This is the cardinal rule of redlining contracts. Some contracts professionals like to toggle Track Changes ON and OFF based on what they believe to be relevant markups. The problem with this method is that the changes you don’t think are important might be important to the other party. Another issue with this is that you might forget to turn it back ON, resulting in accidental hidden redlines. Instead of turning Track Changes off to hide a change, consider altering the view instead.
2. Adopt smarter redlining techniques.
Redlining is more than just markups. It is a powerful negotiation tool. In my book, Contract Redlining Etiquette, I share ten best practices for a more efficient and enjoyable redlining process. For example, I recommend using a uniform file naming convention to help with version control, validating the contract before finalizing it, and using technology to assist with the review.
3. Master Microsoft Word features.
According to a recent poll, 91% of contracts professionals use Microsoft Word Track Changes to redline contracts. Yet how many of us have taken a course on it or spent time diving into the less common features? In my column, Read Between the Redlines, I discuss tips, tricks, and workarounds for redlining contracts using Word.
4. Align With Your Counterparties on the Process.
Before you even begin redlining the contract, make sure you and your counterparties are aligned on the redlining process. Whose template are you going to use? Should the format be in Word or something else? Do you need to remind the other party to keep Track Changes turned on?
Here is an example email you can share with your counterparty:
Attached please find our Non-Disclosure Agreement template. Kindly review and provide all markups using Track Changes in Microsoft Word. We would really appreciate it if you included explanatory comments with your substantive redlines because it will help speed up our internal review of your proposed changes. Thank you!
How to Respond to Hidden Redlines
If you receive a contract draft with hidden redlines from a counterparty, don’t assume the worst right away but you also shouldn’t ignore it. Here are some ways you can respond when you receive a contract draft with hidden redlines.
1. Determine whether the hidden redline is material or minor.
A change that impacts pricing, responsibilities, or liabilities would probably be considered material and worth addressing. If the hidden change is not material (such as formatting or grammatical corrections), then proceed forward.
2. If not material, consider sending a friendly reminder.
Maybe the party who sent over the hidden changes has no idea of their mistake or hasn’t been trained on how to properly track changes. If the circumstances allow for it, consider sending a “friendly reminder” to the other party to keep Track Changes on at all times.
Here is an example reminder you can share with your counterparty:
We reviewed the final clean draft and noticed a few changes that were not reflected earlier in Track Changes. I’m sure this was inadvertent, but we wanted to bring it to your attention so that you’re aware for the next time. We have sent the final draft out for signatures. Thank you!
3. If material, notify your internal client.
If the hidden change is material or feels inappropriate under the circumstances, notify your internal business client before addressing the matter on your own. Instances like this should be handled with sensitivity as they can impact the overall business relationship and put the deal at risk. Discuss the implications of addressing versus not addressing the matter with your client and come up with a plan together.
4. Address on the phone, not email.
I find that bringing these things up via email can dampen the relationship and potentially negatively impact the negotiation because tone can be lost and the other party can feel attacked or blamed.
5. Negotiate to your advantage.
Just like a player who scores a point by breaking the rules, a hidden redline should be voided. The party who sent the hidden redline has two choices: 1) insist on keeping the redline and damage the relationship, or 2) withdraw the redline as a show of good faith and salvage the relationship. The party who received the hidden redline now has the leverage and can negotiate the remainder of the contract with this in mind.
6. Always keep it professional.
Always keep the conversation professional without any blame or finger-pointing. People and systems make mistakes. Stick to the facts: the rule is to markup all changes and they did not markup the change. If you sense that the hidden redline was more than just an innocent mistake, or the other party is unwilling to take accountability, then you should discuss the ramifications with your business client. Do they want to do business with a company like that? Often the business relations during a contract negotiation serve as a pretty good indicator of what the future business relationship will be like.
If you are the party who made the mistake, then the best thing you can do to salvage the relationship is to take responsibility and drop the point that was mistakenly or unfairly hidden. Insisting on it after the fact will only risk worsening the relationship.
The Need for Industry-Wide Change
Hidden redlines present a risk to deal-making that we can try to avoid or address with some of the best practices offered in this article. But there’s more to it than the tips mentioned above.
We need big, industry-wide change. Whether that is going to be through ethical rules requiring all changes to a contract to be visible, updates to Microsoft Word’s Track Changes features (aka the Reject button), or early training on redlining skills in law schools and business schools. Change is necessary from the top down and from the bottom up.
My hope is that we are starting to have the right conversations here, in the middle, to ignite greater transformations soon.
Because solving The Transparency Problem in the contracting space will lead to:
- Smoother, faster, and more efficient contract negotiations
- More bargaining power in negotiations
- Less confusion, clutter, and human errors
- Trust between you and your counterparties
- Higher job satisfaction and enjoyment of the redlining process
[1] This is very different from the litigation process where each of the parties is on a different side of the table and they each independently submit documents to the court reflecting their side of the story.
