Business and Corporate Section Monthly Article


Contract Boilerplate – An Overview

In negotiating contracts, the business deal points understandably receive the lion’s share of attention.  However, in the event of a dispute, boilerplate can have an enormous impact on outcomes.  Revisiting one’s general knowledge of boilerplate can help to make sure agreements conform to the client’s intent. 

No Assignment

An anti-assignment provision attempts to prohibit one party from assigning or transferring its interests and obligations in an agreement to a third party without the consent of the other party (or at all).  Assignments can be isolated acts or they can occur by operation of law, for example, in connection with a merger.  Courts favor assignability so these provisions may prevent an isolated assignment, but often will not prevent an assignment by operation of law.  Note that the assigning party generally remains secondarily liable on the contract as compared to a novation, which is a total substitution requiring the express consent of the non-assigning party.

Successors and Assigns

This provision is ubiquitous in contracts, but often misunderstood.  Its purpose is to provide that, in the event of an assignment of the agreement to a third party, the non-assigning party is bound to treat the new party as they would the assigning party, which is the common law rule. Unfortunately, some courts have concluded that the presence of this provision is also evidence of intent that the assignee (i.e. the “new” party) has assumed the contract while other courts have concluded that it is not. If assignment is a sensitive issue, steps should be taken to more expressly address the issue in the agreement.

Choice of Law and Forum Selection

These provisions attempt to dictate the substantive law the parties wish to use in interpreting the contract in the event of a dispute, as well as the venue or geographic location where claims must be brought and litigated.  Generally, as long as there is some nexus between the parties and substance of the agreement and the law and venue chosen, courts will enforce these provisions.

Cumulative Remedies

A cumulative remedies clause simply states that a party may seek all remedies available under the agreement and applicable law and that the availability of one or more remedies does not, in itself, exclude the party from seeking other remedies.  This states the common law rule.  Nevertheless, parties such as lenders often require these provisions because their agreements specify enumerated remedies in the event of default and this provision helps insure that such specificity is not interpreted to mean that the listed remedies are their only remedies.  

Indemnification

Often one sees short, one or two line indemnities in an agreement.  An indemnity is the promise of one party to reimburse the other party for certain claims or losses, usually in relation to a third party.  Indemnity is an entire subject in itself and there are many considerations that arise when one seeks to enforce such a provision.  Think of an indemnity as akin to a type of short insurance policy between the parties.  Brief indemnities might be better than nothing where pushing for a more detailed provision would scuttle the transaction.  However, if you ever need to rely on a briefly stated indemnity, be prepared to have to resolve a host of issues.

Force Majeure

A Force Majeure provision excuses the delay of performance by one or both of the parties where such performance has been rendered commercially impracticable or impossible by some unforeseen event.  Be careful in including such a provision. One may have bargained for another party to foresee certain problems and be prepared to nevertheless perform.  The inclusion of a carelessly worded force majeure provision could undercut the other party’s obligations in this regard.

Amendment

A typical amendment provision dictates the requirements to effectively amend the agreement.  They usually provide that amendments must be in a writing signed by both parties and are generally not the subject of much negotiation.  However, be aware that in most jurisdictions, having such a provision does not necessarily mean that an oral modification of the agreement will not be enforceable.  A court may enforce an oral modification despite a writing requirement, particularly where there is clear evidence that both parties intended to orally modify the agreement and there has been some reliance on the oral amendment such that not enforcing it would be unduly harsh to a party. 

Waiver

Contracting parties, during the course of their relationship, commonly fail to require from each other strict performance in accordance with their agreement.  This might be because they have forgotten about some immaterial obligation or it may be because they are having serious performance issues and are trying to work through them.  The risk is that a court might deem that a party, by failing to require performance as to the provision, has waived or given up their right to enforce that provision.  A no-waiver provision seeks to avoid this result by providing that a failure to enforce in one instance does not constitute a waiver in that instance or future instances and that waivers must be in writing signed by the waiving party.   

Severability

Contracts that are illegal are void and not enforceable.  Sometimes, a contract is legal and enforceable except for a certain provision that is not.  In these instances, courts generally decide whether the agreement without the offending portion would still contain a reasonable exchange or whether the unenforceable provision is so integral to the bargain that the contract fails entirely without it.  Severability provisions are intended to tip a court in favor of ‘severing’ or deleting anything deemed unenforceable and enforcing what remains, although a court may nevertheless still opt to void the entire contract.

Integration or Merger

Usually in contract negotiation there is a trail of rejected terms that do not wind up in the final agreement.  There also can be unspoken assumptions of the parties about the transaction.  In the event of a dispute, a party may seek to introduce such items as part of the final agreement.  An integration clause is a very common provision that seeks to reduce the potential that any such outside terms (so called “parole evidence”) are admissible in resolving a dispute.  Through such a provision, the parties are stating that all discussions leading up to execution were integrated into the final agreement, which supersedes everything not expressly stated in the agreement.

-- Will Marshall, UBM Law Group
wmarshall@ubmlaw.com

**This article is intended for informational purposes only and does not constitute legal advice. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**