Embedded Comments: Underestimated Instrument of Contract Negotiation

Technology has changed the processes by which commercial contracts are negotiated, formed and interpreted.

If lawyers and business negotiators fail to understand the changes, they can be blindsided and placed at a disadvantage.

Many New Channels of Communication

One of the changes is that technology has opened many new channels of written, recorded communication between contracting parties.  In the old days, virtually the only channel of recorded communication was the physical exchange of paper.  Now there are email, text messages, instant messages, terms of service posted on web pages . . . and even comments embedded in word processing documents.

Embedded comments could slip past old-school negotiators.  Veteran negotiators might be surprised how much emphasis a court will place on comments embedded
Watch Out for Comments
in a Microsoft Word document as it is exchanged back and forth via email in the course of negotiation.

Embedded Comment Aids Interpretation

But for a court that is struggling to understand a complex deal, an embedded comment might be very enlightening. (See Footnote One below.)  Even if the final, signed contract says that it excludes prior communications, a court may be eager to read comments embedded in long-forgotten preliminary drafts of the contract.  An embedded comment may help the court resolve ambiguity that appears in the final, signed contract text.

Reference to Embedded Comments in International Contract Dispute

Thus, in a major, ongoing international dispute, one of the parties is referencing comments embedded in draft, Microsoft Word versions of the contract in dispute.  The dispute concerns a contract for investment in electricity infrastructure in the Republic of Guatemala.  The dispute is being adjudicated by the International Centre for Settlement of Investment Disputes (the Tribunal).

According to investors, the embedded comments, which were inserted and then removed over the course of negotiation, constituted evidence that the parties discussed and reached explicit agreement on certain topics – topics that now are contested in the dispute.  (See Footnote Two below.)

This dispute is not yet resolved.  The Tribunal is still assessing it.  Teco Guatemala Holdings, LLC v. The Republic of Guatemala, ICSID Case No. ARB/10/23 - Claimant’s Memorial, 23 September 2011.

But it is logical that the Tribunal (or any court or arbitrator) would in fact rely upon embedded comments to understand what parties to a contract discussed and agreed.

Hunt Around for Terms and Comments

The lesson is this: In modern, electronic communications, contract negotiators need to hunt for terms and comments that might appear in unconventional places.  Terms communicated in chat sessions or embedded comments might eventually influence a court.

If a negotiator sees terms that are wrong, s/he is wise immediately to inform the other party – in recorded writing – that the terms are wrong.  Otherwise, the record may make a court believe the terms were accepted.

Nailing the Deal Down

Conversely, comments in chat or embedded in a word processing document can help a party to confirm, memorialize and interpret what the party believes was agreed.

For example, suppose a software developer negotiates an agreement with a client in a multi-media, collaborative environment (like Microsoft Office 365) that enables exchange of word processing documents, as well as text, audio or video annotations.  The developer might, as the negotiation comes to a close, post a congratulatory video that says, "I am so glad we have reached agreement.  For me, it is very helpful that we have looked to a reliable standard for security in this project, namely the Application Security Procurement Language published at sans.org by Will Pelgrin and Jim Routh.  That standard helps me and my developers understand what is expected of us."

Even though the final, signed contract does not explicitly refer to said Procurement Language, a court might be inclined to look at it to understand the security terms written into the actual words of the contract.

Footnote One: Legal Scholar Thomas H. White makes a similar argument:

A comment on a final document discussing the meaning of a term
or paragraph may directly state the intent and understanding of the
parties.  ... A formula in an Excel spreadsheet attached and integrated
into a contract may conflict with the formula described in the
contract, thus creating a real ambiguity in the contract that should be
resolved. In short, metadata is a real part of the integrated
agreement that can show details about the final, integrated agreement
of the parties and that a court should be willing to look to as evidence
of that agreement. page 263


Footnote Two:  For example, the investors say to the Tribunal:  As the embedded comment to rule 8 reflects, EEGSA thus proposed that the Expert Commission also would base its decision on “the documentation exchanged in the process,” and that “[a]ny additional information must be agreed to by the three arbitrators.” The next rule in dispute provided that the Expert Commission would “address each of the discrepancies posed in Resolution CNEE-96-2008.” As the embedded comment to rule 9 reflects, EEGSA agreed that the Expert Commission could address each of those discrepancies, including those that were not raised at the proper time, provided that the Expert Commission also addressed EEGSA’s and Bates White’s replies thereto, which EEGSA had delivered earlier that day. [emphasis added; references removed]

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