Contract negotiating and reviewing can take a lot of time for legal departments. All parties involved have expectations and needs, and it can be challenging to reach an agreement that makes everyone happy. The right practices, however, can make contract workflows move faster so that deals don’t get stuck along the way.
One process that can create a major bottleneck in the deals process is redlining. This guide will cover what contract redlining is, how to redline a document, and some best practices to follow the next time you draft a redlined contract (so all parties are happy with the speed of the deal, even if they’re not happy with the compromise).
What is contract redlining?
Contract redlining is the process of editing and commenting on a contract document from all parties involved in an agreement. This occurs during negotiations and involves each party marking up the document with changes and comments, either by hand or through a digital system. The contract will often go back and forth many times before everyone agrees to the terms and the relationship—resulting in a clean contract.
The practice is called redlining because, with traditional paper contracts, a law firm would often use red ink to markup documents with edits and suggestions, similar to how your teacher graded papers using a red pen.
Today, contract management software tools have features that digitally track any changes made. This helps organizations and in-house counsel avoid longer wait times associated with sending physical documents back and forth or locating the latest version of the agreement.
Common challenges in redlining a contract
There are some risks and challenges associated with contract redlining. When you have formatting issues or errors in change tracking, the terms and language could be accidentally altered in the process. This could lead to headaches down the road and even risks for the company.
But there are other challenges that could cause issues in the negotiation process, too. Here’s what to keep in mind when working with a redline contract.
Untracked changes
Have you ever found yourself clipping along through a contract review, making changes throughout the lengthy document—only to realize with absolute horror that track changes weren’t on?
It happens to the best of us, but it doesn’t make it any less annoying or problematic. Contract comparison is a key part of contract redlining, and without track changes, your point of reference for comparison is lost.
Version confusion
Often there are many different versions of contracts, all with differing redlines and language. A big challenge is ensuring that the most recent version of the document is being used and referenced so that redlines aren’t lost. Without a proper approach to document naming and sharing or a good contract workflow management system in place, it may be unclear which document is the latest version and which is the original document. Discovering that you’ve been working on an outdated version is not only frustrating, it also further delays negotiations.
Lost or broken formatting
When your redlines are being passed back and forth between negotiating parties, it’s hard to ensure that everyone is addressing track changes and formatting the same way, especially if they’re working via different tech solutions. A lack of alignment on formatting could mean you have to spend more time double-checking for formatting errors.
4 best practices when redlining contracts during negotiation
Incorporating best practices helps you improve the contract redlining process, which, in turn, can improve vendor or customer relationships and productivity. These best practices are great places to start when you’re learning how to redline a contract and create your contract process.
1. Never rush the redlining process
It may be tempting to approach redlining with one goal in mind: to prepare the final document as fast as possible. The business relationship at hand can’t begin until the entire process is over and the contract has been fully executed, so you want the negotiations to move quickly.
But it isn’t wise to rush the process of redlining a document. Your job is to protect the company from risk, after all. Terms must be favorable to you, so take extra time to consult business leaders and other departments to ensure you can meet all of the obligations outlined and that they work for your organization.
Even if negotiations have been ongoing for a while, take the extra time to get the best terms possible.
2. Monitor possible compliance issues
It’s important to closely review contracts for any compliance issues, which is why it’s helpful to be looped in early on. You have to be sure that anything and everything in the contract is both realistic for your company and that you’ll be able to comply with the terms.
Sometimes a compliance issue may not be clear right away. If you can’t confirm terms that are related to another department, bring in the team to redline the contract or provide feedback. For example, you may need to check with the accounting team about invoicing expectations to make sure they’ll be able to comply before you agree to it in the contract.
3. Maintain clean version control
Remember what we said earlier about formatting issues and version confusion? Those will only slow down the negotiation process, which is definitely not the goal when you’re trying to close deals at the end of the quarter.
Contract redlining software helps you address these issues. All versions are maintained and categorized, so there are never version confusion issues. Plus, it’s easy to accept or reject redlines, manage insertions and deletions, and make comments. You can conduct side-by-side document comparisons to get a better overall view of any changes.
4. Avoid redlining at the same time as the counterparty
We might not agree on indemnification scope or liability caps, but hopefully we can all agree cumulative redlines are the worst.
For ease of review, accept the other party's redlines and return a draft that reflects your edits only (with explanatory comments, where necessary, of course). It's not only easier to follow, but can help speed up the negotiation process because each party can quickly identify which items remain open and which still need to be negotiated.
How contract lifecycle management solutions simplify redlining
Contract lifecycle management (CLM) software helps you manage and improve contract reviews, streamlining workflows and opening the door to faster and easier processes. The right CLM solution (like Lexion) will include features like:
- A dashboard that summarizes contract stages and data
- A feature to automatically request approvals from other teams and departments
- Draft management tools to see complete contract history in one place
- Communication features
- Reports to view performance metrics
- Seamless integration with other processes and teams
- Storage solutions for contract and deal history
But wait, there’s more! (I’ve always wanted to say that.) Redlines can still trip people up, especially when it comes to data processing clauses. We recently hosted a webinar—well, a rumble, really—where we held a mock negotiation between a big law attorney and an in-house GC. Check it out below (and if you’re working on limitation of liability clauses instead, here’s a webinar for you too).
Frequently asked questions
What happens if you redline?
Redlining documents is a critical part of the contract negotiation process that helps to ensure involved organizations aren’t at risk for legal consequences. The goal of contract review and redlining is to agree on all terms, creating a clean final document that’s ready to be signed.
A “redline contract” isn’t a type of final agreement—it’s a work-in-progress document that contains redlines and is thus not an executed contract. And this doesn’t just apply to new contracts; a previous agreement may turn into a redline contract if new terms need to be negotiated.
What does a redlined contract look like?
Redlines take the form of insertions or deletions that change the language in the document. This isn’t simply a matter of copyediting, though. The changes are meant to get the contract to a stage where both parties agree on the terms and language being used so all parties can confidently sign off on the completed, collaborative document.
As for how you actually, physically redline a contract? That’s a mostly digital process in today’s business world. A lot of legal teams turn to Microsoft Word for redlining via the word processor’s track changes feature, though contract management systems also offer redline features or integrations with other preferred redlining tools.
