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CONTRACTS

How to Red-Line a Contract

How to keep a level head and a steady hand when editing a business contract.
It is critically important to approach the editing, or red-lining (think red ink like that used by your teachers growing up), of contracts in an intelligent manner.

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It is critically important to approach the editing, or red-lining (think red ink like that used by your teachers growing up), of contracts in an intelligent manner.

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Imagine the following scenario: Your business lands a dream customer, one that will put your growth on the fast track. All that stands in the way is for you and your potential new customer to hammer out the details of your contract. While this last step might seem like an inconsequential one, it can actually be a tipping point where your dream turns into a nightmare. A disagreement over just a few words or phrases might be all it takes to create a nasty back and forth that can get emotional and expensive, especially when lawyers get involved. Worse yet, it might actually poison the deal altogether. That's why it's critically important to approach the editing, or red-lining (think red ink like that used by your teachers growing up), of contracts in an intelligent manner. Here are some tips about how to make your next contractual negotiation a winner.


How To Red-Line a Contract: Do Your Homework

Before beginning the process of changing a contract, spend time making sure the things you are asking for are commonplace for your industry. "Start by researching all aspects of the changes you propose, so what you propose has a basis in fact and practice," says Sandra Lamb, a career and lifestyle expert, who writes about how to negotiate a contract in her book, How to Write It.

One way to do this is to ask other business owners you know if they have any contracts you could look at and what is the "norm" for a contract in your industry, says Michelle Dunn, author of Starting a Collection Agency. "Another thing you can do is go online and search for contracts similar to the one you are looking it, she says. Contract templates are readily available for free online and can be tweaked to suit your specific needs.

Dig Deeper: How to Negotiate a Contract With a Big Client


How To Red-Line a Contract: Make it Conversational

Once you commence the process of negotiating a contract, you'll want to engage the other party as much as possible in as open and positive a manner as a way to demonstrate how much you actually want to work together, says Diane Pardes of Lexington, Massachusetts-based Pardes Communications. To do that, Pardes says that you should discuss the contract issues by phone, explain your point of view and truly listen to theirs. "I firmly believe that if the work is a good fit that you can come to a positive resolution and make it a win-win for both sides," she says. "During the discussion, it is important to point out all the areas where you do agree before turning to your differences. This creates a cooperative atmosphere, and makes it easier to iron out any issues that may arise."

Lamb says that it is fine to note the items that need changing only slightly. But if there are points which are more significant, "call the creator of the contract to talk about it first," she says. "Start on a positive note, maybe, 'Hi Joe, I've received the contract, and it looks great. There's only one thing I need to change to clearly reflect our agreement."

Tonya Fitzpatrick, who is both an attorney and entrepreneur as the executive producer of World Footprints Radio in Silver Spring, Maryland, says that taking a diplomatic approach to the conversation rather than relying on "legalese" to resolve conflicts in the contract is also essential. "During the course of conversations I take copious notes and I save every single e-mail communication between myself and the party concerned," she says. If she takes the meeting in person, she will then send a follow-up e-mail recapping points of the conversation, including any personal stories or jokes that were shared at the time. Then, if, upon receiving a contract that doesn't reflect the correct terms, she can then forward the prior e-mails to the drafting party with a note saying something along the lines of, "per our previous discussions, these terms, which we previously agreed upon were not included. Please clarify."

Dig Deeper: How to Build Business Alliances


How To Red-Line a Contract: Track Changes

Unlike the days of old, most contracts are passed back and forth electronically these days. So when the subject of "red-lining" comes up, you might want to bone up on Microsoft Word's "Track Changes" function as a way for both parties to make suggested changes. "I usually request contracts to be sent to me in a .doc format if I need to make changes," says Nickie Robinson, who heads up New York City-based Good Girl PR. "Then I use the track change function in Microsoft Word. This tool is great because you can make changes, and they are shown in the right margin of document. Moreover, you can add comments and politely explain why you are making those changes."

Nickolas Ekonomides, who is both CEO of Clearwater-Florida-based TG Web Media and an attorney in the state of Florida, says that even when you do track changes, never make wholesale deletions to the contract. "Instead of changing entire contract sections, add comments in the redline Word document," he says. "Surgical changes are a must if you want to minimize the other side taking it personally."

Robinson, who also holds a law degree, notes that after she edits the document, she sends a "Marked Up Version" that reflects her comments and changes as well as a "Clean Version" where the changes are all in place. She then sets up a call to go over the changes and negotiate where necessary. "This process creates a clear, open dialogue and makes all parties feel comfortable because you are illustrating your changes, giving explanations, and negotiating, which is the essence of every contract," says Robinson.

Dig Deeper: Modification Agreement of Contract


How To Red-Line a Contract: Call in Reinforcements

When it comes to editing a contract, it's also essential to know when you might need the assistance of an attorney, says Edward J. Sullivan, president and founder of Aria Systems in Philadelphia. Sullivan says that there are basically two types of terms in an agreement, business terms and legal terms. Business terms include pricing, length of contract, termination rights and product/service details while legal terms address venue (which laws will be used to interpret the agreement), liability, warranty and assignment. He says that he has found that when it comes to negotiating legal terms, especially with a big company, he always has an attorney review those terms before you agree to any changes.

Lawyers can also serve an additional role: the "bad cop," says Ken Halkin, a business consultant in Amesbury, Massachusetts. He says the conversation then goes something like: "I've reviewed your standard agreement and it seems reasonable, but my attorney has raised just a couple of points that he/she would like to discuss."

That said, James C. Roberts III of the Global Capital Law Group, which has offices in Los Angeles, Boulder and Milan, says that you should keep the lawyers out of the negotiations as long a possible. He suggests not using the agreement itself as the basis for negotiations where a lawyer makes changes and circulates it, then the other side's lawyer responds with his or her changes and circulates it and so on and so forth. "That gets time consuming and expensive and really aggravates the business people," says Roberts. "You can use them for advice to you but not in the negotiations until the very end. Once they are involved, give them a roadmap for the changes.

Dig Deeper: How to Hire Legal Counsel


How To Red-Line a Contract: Be Ready to Walk Away

There may be times when the negotiations hit a standstill where you and the other party simply can't come to common ground, you might be better off looking elsewhere. "The big picture though dictates you remain calm even though it is the dream customer," says Ekonomides of TG Web Media. "If you will do anything to have them, they have unequal bargaining power in their favor. The dream has a much higher probability of becoming a nightmare. If, on the other hand, you are comfortable walking away from the table, you gain the upper hand."

Dig Deeper: Contract Termination Worksheet

Last updated: Sep 15, 2010

DARREN DAHL

Darren Dahl is a contributing editor at Inc. magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina.




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