Understanding What’s in the Contract Boilerplate by Samuel B. Burke
In the age of the word processor, most contracts are assembled from forms or using a contract one of the parties has used before. Very often at the end of these previous agreements or forms, some boilerplate provisions are included. Sometimes these provisions are a good fit for the new agreement and other times they are not. If you understand the purpose behind the most used boilerplate provisions, you will be in a better position to make an informed decision about whether they should be included in the contracts you are using or are considering entering into. Below are brief explanations of some of the most-used and important boilerplate provisions.
Governing Law or Choice of Law
Governing Law or Choice of Law provisions determine what law will be used to resolve a contract dispute. This could be relevant to you if the particular contract’s subject matter would be treated more favorably under one state’s laws over another state’s laws. Generally, the state referenced in this term relates to where the contract will be performed or to the location of the parties to the contract. If the state referenced is not the state where you reside, find out why that state has been chosen. If you don’t get a clear answer that satisfies you, request that governing law be changed to the State of Texas. If the contract is to be performed in Texas, having the law of a different state apply to a dispute can add unnecessary cost and uncertainty to resolving the dispute.
Venue / Forum Selection
Venue or Forum Selection clauses deal with where a suit to resolve a contract dispute may be filed. For example, many contracts drafted for Denton County businesses set the venue in Denton County, where the businesses are located. Although venue provisions are not always enforceable, generally this means that anyone who files a claim based on the contract must file it in Denton County. Venue clauses can impact you negatively when they require you to litigate in a county or state where your business is not located. Locating and retaining attorneys may be more difficult, and travel to and from the selected forum can greatly increase the costs of the litigation.
Arbitration
Arbitration clauses take contract disputes out of court and into an arbitration. Arbitration clauses waive your right to a jury or bench trial. Arbitration can be faster and less expensive than filing a claim in state or federal court, but this is often not the case. Arbitration decisions remain private, and arbitration clauses may place limits on traditional aspects of litigation, such as discovery. Unless your contract involves highly technical, industry specific terms and expertise, generally the benefits of arbitration are not outweighed by the negatives including increased costs and a very limited ability to appeal a bad decision.
Costs/Attorney’s Fees
Costs and Attorney’s Fees clauses are a way to shift fees to one party to the contract or both parties to the contract. Costs can add up during a dispute, so it’s important to know by whom the fees will be paid if they are incurred. In some cases, the party who claims breach of an agreement can be awarded attorney’s fees, and generally the party defending against the alleged breach of the agreement cannot recover its fees. However, this can be changed by contract. Most contract provisions dealing with attorney’s fees allow the prevailing party to recover its attorney’s fees. For this reason, generally a prevailing party provision puts the party defending the suit in a better position than they would be in otherwise.
Assignment
An Assignment clause can either allow you to, or prevent you from, assigning your rights under the contract to another party. This could come into play in a contractor / subcontractor situation. Let’s say you contract with a commercial business to install new flooring, but wish to subcontract that work out to one of your crews. If an Assignment clause in the contract prevents you from assigning the work, you may breach the contract if you give the work to your subcontractor. If you have plans to assign your rights and responsibilities under the contract to another entity, be sure this clause allows for it.
Entire Agreement/Merger Clause
An Entire Agreement or Merger clause states that the contract is the complete agreement between the parties. The clause is intended to prevent either side from arguing there are any oral or other written agreements that modify or amend the contract. This clause is important to a contract because without it, a party may claim that a conversation modified the terms of the agreement, and in case of a dispute, each party would be able to present evidence of that conversation. In practice, such a provision only limits evidence of conversations before the written agreement was entered into. For this reason, if there are any promises that were made orally before the written agreement is made, be sure they are included in the written agreement. Otherwise, those promises may end up being unenforceable.
Force Majeure
A Force Majeure clause indicates the events that will excuse performance under a contract. Standard force majeure events may include labor strikes, acts of war, and extreme weather events. Such events should be extremely unlikely to occur. These clauses can be tricky, because parties may insert events that aren’t really force majeure events as a preventative measure against events they can and should reasonably anticipate could impede or prevent the party’s performance. If you see a force majeure clause, carefully read any provisions that define the term. It may be more or less expansive than you really intend.
Severability
A Severability clause allows parts of an agreement to be enforced even when some of the agreement terms are found to be unenforceable. While the intent of these provisions is to prevent the contract from being unenforceable for “technical” reasons (i.e. being found enforceable because some minor part of the agreement is unenforceable), these provisions rarely come into play, and can lead to unintended consequences. For example, they can operate to make an agreement enforceable even when an important promise that benefits you is found unenforceable.
Time is of the Essence Clause
Generally, when a contract calls for a specific time for performance, the performance due will still be considered timely if performance occurs reasonably soon after the specified time. Many contracts deal with time sensitive matters. When a contract specifies “time is of the essence,” the general rule is changed. Therefore, if time is specified for performance, failure to comply exactly will be a breach of contract. Construction contracts, where missed deadlines can have severe repercussions, often include time is of the essence provisions.
Indemnification Clause
An indemnification clause deserves your careful attention. Indemnification clauses are used to protect one party from the actions or negligence of another party or make one party responsible for the other parties’ actions. Indemnification clauses typically provide that the first party will pay any attorney’s fees and damages a second party may have to pay as a result of the first party’s actions, but they can also be used to make the first party responsible for attorney’s fees and costs resulting from the second party’s actions. Because you cannot control others’ actions, it is important to include this clause when you are performing work jointly with other businesses. Indemnification clauses are very common in service contracts, especially when there are contractors and subcontractors performing the work together. Indemnification clauses often contain arcane wording and are written in run-on sentences. Read and re-read them until you are sure you understand whose actions you will and will not be responsible for.
Conclusion
Lastly and, perhaps most importantly, keep these two things in mind. First “boilerplate” is as enforceable as the rest of the contract. Thus, “boilerplate” should not be understood to mean unimportant. Second, there isn’t really any such thing as boilerplate any more. Historically, the term boilerplate came from the similarity in appearance between curved metal plates used on water boilers and the curved metal pieces that were circulated to printing presses to allow ads and other repetitive material to be printed over and over. Once these plates were produced, they were fixed. Word processors don’t function this way. What we call boilerplate can be and often is modified when it is re-used. This means that, for example, the “Attorney’s Fees” section in the contract you see today may not say the same as a similar provision you read last year. For both these reasons, give the boilerplate in the contracts you see the attention it deserves. Read it and try to understand it. If you can’t understand it, ask questions or change it. Contracts are intended to reflect the contracting parties’ intentions. If you don’t understand any part of a contract, it is not likely to reflect your intentions.
Sam Burke is board certified in Civil Trial Law by the Texas Board of Legal Specialization and can be reached at [email protected] or www.dentonlaw.com.