By Matthew A. S. Esworthy and William A. McComas, for The Daily Record

Business managers and attorneys beware: the advent of a new era in contract law is upon us. In the digital age, contracts, long thought of as two-dimensional “words on a page,” are gradually becoming three-dimensional documents including electronically stored information that is invisible to the naked eye and on printed documents.

Lawyers often speak of the “four corners” of a contract, referencing the four corners of the paper that bears final signatures. But now technology is stretching the bounds of traditional contract law analysis, forcing attorneys to pay close attention to electronic data outside those four corners.

In our postmodern world, “redlined” versions of contracts fly back and forth between attorneys and their clients over e-mail. As contracts are drafted, negotiated and renegotiated electronically, the understanding of what constitutes a contract has in some cases grown to include digital information that may not be visible when the document is printed.

This new concept will become increasingly significant as contracts are agreed upon without a written signature but in a digital format, such as over e-mail. Lawyers, in turn, will look to the documents in their electronic format rather than on paper. Until business managers and attorneys become familiar with the hazards of digital contracts, this shift will lead to costly disputes.

Most commercial contracts contain an integration clause that precludes the parties and courts from looking beyond the four corners of a document to understand the nature of the agreement. A typical integration clause states:

This Agreement constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements or representations by or among the Parties, written or oral, to the extent they relate in any way to the matters set forth in this document.

The question arises, though, whether electronically stored information (ESI) should be included under the phrase “the entire agreement” or the term “document.”

One form of ESI of concern is document metadata, which is hidden or embedded data contained within the document. In the contract world, metadata emerges from features in Word programs such as Tracked Changes, Properties Information, comments, or the use of time, date and other fields, as well as other more sophisticated ways of identifying changes. Metadata can also disclose information not intended to be disclosed by the author of the document and other parties may be able to access this information.

How does this play out in contract law? Let’s suppose you are in the midst of a real estate transaction that has a bonus tied to a contractor timeline. This bonus has been agreed to in negotiations and is inserted into the contract. At the last minute, you decide that you no longer want to include the bonus; so, prior to sending the draft to your contractor, you strike it using Word’s Track Changes tool. Due to the configuration of the contractor’s software, however, he is unable to view the change. On his screen, the bonus language is still visible. He electronically agrees to the contract based on what he sees, without explicitly accepting your edit.

The contractor meets the agreed timeline and asks you for the bonus. You argue that the bonus language was removed. In turn, the contractor argues that, appearances notwithstanding, the bonus language remained in the contract and that it was always your intent to provide a bonus. He claims that the ESI in the final document supports his contention and that the integration claim does not explicitly exclude such information.

You end up in litigation over what is within the terms of contract. Who is correct? Determining the answer could be costly.

Preventing misunderstandings

Ultimately it falls to business attorneys — and their clients — to take steps to mitigate the risk of this type of litigation. Here are a few precautionary measures:

  • Clearly define the terms “entire agreement” or “document” within the integration clause in order to avoid ambiguity.
  • Accept or delete all changes in a “redlined” version of a contract, and convert the final version to a static image file (pdf or tiff preferably); then make sure all parties check the document properties and understand the settings used to create the final documents.
  • Educate yourself on ESI and keep abreast of new policies and recommendations.
  • Do not preclude ESI from the discovery process, if you are a litigator.

Questions still remain about electronically stored information and its role in business and litigation. Attorneys and the courts must continue to evaluate what constitutes a contract in the digital age, but for now, all parties to an agreement must ensure that those involved are referencing the same document when agreeing to terms.

Matthew A. S. Esworthy is a partner in the litigation department of Shapiro Sher Guinot & Sandler. William A. McComas, a partner at the firm, practices technology law. They can be reached, respectively, at mase@shapirosher.com and wam@shapirosher.com.