Legal “Boilerplate” – The Devil is in the Details

By Randall K. Edwards

           Over the years, I’ve dealt with a number of clients who have gotten themselves into trouble because they didn’t read or understand legal agreements that they signed.  (For purposes of this article, I use the terms “agreement” and “contract” interchangeably).

            “Well,” one frantic client told me, “we pretty much had the deal put together.” [On a dinner napkin over steaks one night, as it turned out].  “The guy I was dealing with told me he’d have his lawyer write it all up and I could sign it a couple of days later.  I never read any of that technical legal stuff because he told me that it was the ‘standard language’.”

            In the end, because he didn’t bother to actually take a look at the “standard language,” the client ended up losing his business and declaring bankruptcy.

            Over and over, I’ve heard clients and others talk about “boilerplate” provisions in “standard” contracts, “legal technicalities,” “fine print” and “lawyer mumbo-jumbo” – paragraphs that the client thinks are either unintelligible, unimportant or simply inconvenient.  Over and over, I’ve seen clients get into trouble because the “boilerplate” came back to bite them where they didn’t want to be bitten.  The old adage “the devil’s in the details” has no better practical application than the “standard boilerplate” language found in the last few pages of a contract.

            The purpose of this article is to advise you as to what some of that language means, and how you ignore it at your peril. 

            Now, I need to give you a couple of disclaimers here at the start.  This article isn’t meant to be comprehensive, nor is it meant to be legal advice.  You shouldn’t rely on it as anything more than my observations after years of working with commercial and other contracts, and you certainly shouldn’t try putting together a contract – or anything else, for that matter – based on what I’ve written here.  That being said, let’s get started.

            You’ll usually find the “boilerplate” in the last few pages of a contract, after the “guts” of the agreement – the prices and product descriptions – is set forth.[1]  Of course, most of the time and effort that has gone into the agreement has centered around the “guts,” and thus the “boilerplate” is hardly ever given a thought.  Nonetheless, nine times out of 10, it’s the “boilerplate” – the “fine print” – that causes heartburn if a deal goes bad.

            Here are a few – but by no means all – of the “standard” contract provisions that cause the most headaches[2]:

The arbitration clause:

            Many contracts provide that in the event of a dispute, the parties to the contract cannot go to court to battle out their differences, but must go to binding arbitration.  This has both good and bad aspects to it.  On the one hand, arbitration is quicker than litigation, generally costs less and is a generally more streamlined process than a lawsuit.  On the other hand, by agreeing to arbitration, a party gives up its right to have its case heard by a judge and jury, to have discovery of its opponent’s position as part of a judicial process, and a judicial appeals process, except in very limited circumstances (such as where it can be shown that an arbitration award was the result of fraud).

            An example of an “arbitration” clause between two U.S. parties would be something like this:

“Any controversy, dispute, or claim arising out of, in connection with, or in relation to the interpretation, performance or breach of this Agreement shall be finally determined at the request of either party, by binding arbitration conducted in Salt Lake County, Utah.  Judgment upon any award rendered by the arbitrator(s) may be entered by any State or Federal Court having jurisdiction thereof.  The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable.”

            In contracts between residents of different countries, the parties may choose to have their arbitration matter heard by an international arbitration forum.  The American Arbitration Association has an entire division that deals with international trade disputes, and has a procedure and special rules that govern those disputes, as does the International Chamber of Commerce and other international dispute resolution tribunals.

                        An arbitration clause between two companies from different countries might be drafted along these lines:

“All disputes arising out of or in connection with the present contract shall be submitted to and finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

            I’ve had clients who had no idea that when they signed a contract with an arbitration clause, they were forever giving up their right to go to court to have their conflict decided.  They thought that arbitration was simply a first step in the dispute resolution process, and that if arbitration didn’t work out, they’d always have recourse to a judge and jury.  Unless the contract specifically provides otherwise, however, arbitration is going to be your first, last and only chance to have your dispute heard and decided by a neutral third party.[3]

The jurisdiction clause:

            Most contracts provide that any dispute must be heard in a certain jurisdiction, whether it is undertaken as part of an arbitration proceeding (as in the above example) or in a lawsuit.  This can be potentially devastating to one party or the other, because it may require that a matter be heard in a forum that is very inconvenient.  I was one of a team of lawyers in a case that went to trial in San Jose, California, for two months.  My client, a Brazilian company, was required to bring witnesses from Brazil to California and to try its case before a San Jose jury because of the jurisdiction clause it had entered into as part of its contract with the other party.  Needless to say, it was extremely expensive and inconvenient for the Brazilian company, which had to try its case in the other party’s home town.

            Here’s an example of a “jurisdiction clause” where any disputes between the parties would not go to arbitration, but must be submitted to a court in a specific jurisdiction:

“All disputes, disagreements or claims between the parties shall be submitted to the exclusive jurisdiction of the state and federal courts of the State of Nevada, with venue in the County of Washoe.  The parties hereto waive any defense of lack of personal jurisdiction in said court(s).”

             The jurisdiction clause is important in a contract not only because it can be to one side’s financial advantage to have a case decided in a court just down the street.   There’s also the “home court advantage” to consider.  Different jurisdictions see cases differently.  A Las Vegas judge or jury may have an entirely different view of a business dispute involving a casino, for example, than a conservative Salt Lake City judge or jury would.  Agreeing to use the courts of a jurisdiction that will be friendlier to your side can make all the difference in deciding whether to go to trial, settle a case, or even forego any action in the first place.

The applicable law clause:

            In contracts that provide for jurisdiction in a specific court (such as the preceding example), it is generally provided that the law of that jurisdiction should apply.  In contracts that provide for arbitration, the parties usually mutually agree on which law  should be applied.[4]

            This language is extremely important, because the laws of one jurisdiction may give far more advantage to a particular party than would the laws of another jurisdiction.  Where international contracts are involved, it is important that the contract be clear as to whether any claims may be brought under the laws of the residence of both, or either, party.  For example, in the San Jose, California case I referenced above, there existed a long-running dispute about whether an American court could or should try to apply Brazilian law to a case involving a contract between a Brazilian company and an American company being tried in an American court.  That issue may have easily been disposed of by a well-drafted “applicable law” clause.

            An example of a simple “applicable law” clause in a U.S.-based agreement could be framed thus:

“This Agreement shall be construed in accordance with and be governed by the laws of the State of Arizona.”

For an international contract, the “applicable law” clause may be a bit more complex:

“All disputes between the parties arising from this Agreement shall be governed by and construed under laws of the state of Arizona, without regard to conflict of laws principles, except those claims that arise solely under the laws of the country of Brazil.  As to any claims that arise solely under the laws of the country of Brazil, the parties agree that said claims may be submitted only to those tribunals in the country of Brazil that have jurisdiction over such claims, and shall be determined in accordance with the applicable law(s) of the country of Brazil.”

             As a lawyer who has tried cases in all four states where I am licensed to practice law (Utah, California, Arizona and Nevada), I know that the state law that applies to any particular case can make a huge difference in how a case proceeds and how it turns out.  In negotiating the “applicable law” clause, each party needs to determine whether it will be helped or hurt by the law that governs their agreement.  The best way to figure this out is by counseling with a seasoned lawyer familiar with the laws of the state being proposed as the applicable law jurisdiction.

The attorney’s fees clause:

            Many contracts provide that in the event that a lawsuit or an arbitration is instituted, the loser must pay the winner’s attorney’s fees.  This certainly gives pause to any party wishing to start a legal action, because if they lose, they not only won’t get what they set out to gain, but could end up paying a substantial amount for the other side’s lawyers.  Many courts and arbitrators will find that unless there exists an attorney’s fees clause in a contract, it was intended that each party would pay its own attorney’s fees and no award for the other side’s lawyer’s fees should be granted.  Thus, if the parties intend that the winner of a dispute should not have to pay their attorneys for the privilege of winning, it is important that the parties include an attorney’s fees clause in the contract.

            Here are a couple of sample attorney’s fees clauses:

“In the event either party hereto finds it necessary to employ legal counsel or to bring an action at law or other proceedings against any other party hereto to enforce any of the terms, covenants and conditions hereof, the prevailing party in any such action or any other proceedings shall pay all reasonable attorneys' fees to the other party.  In the event the judgment is secured by the prevailing party, all reasonable attorneys' fees shall be included as party of such judgment.” 

“In the event suit is brought to enforce or interpret this Agreement (or any part hereof) or the rights or obligations of any party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees and litigation costs as fixed by the court.”

            An attorney’s fees clause can be crucial in determining whether it’s worth it to start or to go forward with a lawsuit or arbitration, and can often be the catalyst for settling a dispute before it turns into a full-blown disaster.  In at least one contract dispute trial I was involved in, I’m certain that each side’s attorneys racked up fees in excess of $1 million.  Had there been an attorney’s fees clause in force in the contract between the parties, I believe that the case would have taken a far different course than it did, and may not have ever gone all the way through long and protracted litigation.

The definition clause:

            In many contracts, the first few pages are taken up with a list of definitions, so that there is no question as to what the parties are agreeing to, since many terms are either highly technical or may be “terms of art,” which have a certain meaning in a particular industry but which may not have the same meaning in everyday conversation.

            A definition clause provides that if a term is undefined, it should be given the definition generally understood in common English in a manner that will not favor one party over the other.

            Here’s an example of a definition clause:

“This Agreement shall be interpreted according to the fair and common meaning of its terms and shall not be construed in favor of, or against, either of the parties hereto by reason of the extent to which this Agreement or any such provision hereof (i) is inconsistent with any prior draft hereof or (ii) was drafted by one party or the other to this Agreement.”

The headings clause:

            In connection with the above concept, a common, although usually minor, contractual clause known as the headings clause provides that a one- or two-word heading at the beginning of a contract provision is there simply for convenience, and does not stand as a part of the terms of the agreement, which are set out in the body of the contract.

            A typical headings clause reads thus: 

“The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.”

 The prevailing language clause:

             Contracts between parties from different countries – for example, Brazil and the U.S. – often involve the need for translations of contract terms.  As anyone who speaks more than one language knows, a literal translation of any phrase is often difficult, if not impossible, and sometimes the best one can do in communicating to a speaker (or reader) of another language is to attempt a close approximation of what is meant.  This fact can lead to problems in contracts, where every word or phrase is important.

            A prevailing language clause is used in international contracts to clear up this issue.  It will provide that if an agreement is rendered in more than one language, one of the contracts will be the “official” language for purposes of interpreting the contract.

            Here’s a sample prevailing language provision:

“This Agreement has been written in English and translated into Portuguese for the convenience of the parties hereto.  In the event of any ambiguity of interpretation thereof, and for all official purposes, the provisions set forth herein in English shall prevail.”

             There may be some twists to this clause, since some documents, in order to be officially recognized in the country where one of the parties resides, must be drafted in the official language of that country.  For example, in Brazil, official documents – including some contracts – must be in Portuguese.  Thus, it is important that the parties to a contract that is to be recognized and carried out in Brazil make clear in that document whether all or part of its provisions in Portuguese will take precedence over the corresponding provisions in English.  It may be necessary for the parties to agree that in the event of a substantial disagreement regarding contract terms, based on language differences, that a qualified neutral third-party interpreter, such as a state-certified interpreter/translator, will be appointed, whose interpretation will be accepted by both parties.

The entire agreement, or “merger” clause:

            Contracts are signed in order to put into place the parties’ understanding of what they have agreed to.  For the most part, unless the contract states otherwise, there aren’t  – or at least shouldn’t be – any  side deals, oral agreements that contradict the words of a written contract, and no secret agenda that is not made clear in the contract.  Thus, the parties usually incorporate an “entire agreement” or “merger” clause, stating that the words of the contract are intended to be final and binding, and that all of the discussions between the parties before the agreement was signed are incorporated, or “merged,” into the contract.

            Here are a couple of examples of “entire agreement” clauses from contracts I’ve dealt with:

“This Agreement sets forth the entire agreement between the Parties hereto relating to the subject matters herein, and fully supersedes any and all prior agreements or understanding between the Parties hereto, if any, pertaining to the subject matter hereof.” 

“This Agreement represents the entire agreement between the parties and is entered into freely and voluntarily with full knowledge and understanding of the contents thereof. Further, the signers of this Agreement, and each of them, (a) represent that they have had the opportunity to consult with counsel of their own choosing prior to execution of this Agreement, (b) the contents of this document have been explained to them; and (c) that they sign the Agreement with the intent to be fully bound thereby.” 

As you can see, there’s not a lot of “wiggle room” under such a provision, and for good reason.  The point of any contract is to carry out the intention of the parties.  The law presumes that the written contract does exactly that.  This doesn’t mean that the parties to a contract can never try to explain what they meant or understood when they signed an agreement, but unless the language of a contract is confusing or ambiguous, courts will give contract language the meaning that would generally be understood by a reasonable person.[5] 

The amendment clause:

             Closely related to the “entire agreement” clause is the provision that all amendments to the contract must be in writing.  Neither party wants to face a situation in which the other side claims that the contract was amended by something someone said, but for which there is no written memorandum.  Thus, the “amendments clause” provides that the contract can only be changed if both parties agree, write it down and sign it, just as they did the original contract.

            Here are a couple of examples of “amendment clauses.”  They’re pretty self-explanatory:

“This Agreement may not be amended or terminated except by an instrument in writing signed by all of the parties hereto.  No provision of this Agreement and no right or obligation under this Agreement may be waived except by an instrument in writing signed by the party waiving the provision, right or obligation in question.” 

“No term or provision of this Agreement may be changed, waived, discharged or terminated orally, by telephone or by any other means except by an agreement in writing signed by a party against whom enforcement of the change, waiver, discharge or termination is sought.”

The enforceability and severability clause: 

             The enforcement and severability clause of a contract provides that if one part of the contract turns out to be illegal or unenforceable, that fact doesn’t sink the whole agreement.  After all, the parties intended to be bound by the agreement and, unless chopping out the part of an agreement that is unenforceable from the contract makes the intent of the parties impossible to carry out, the rest of the agreement should be kept.

            Here’s a sample enforceability and severability clause:

“In the event that any portion of any provision, covenant or restriction set forth in this Agreement is deemed invalid or unenforceable by a court of competent jurisdiction, the remainder of such provision, covenant or restriction shall be applicable and enforceable for such lesser period of time, within such more limited geographic area and for such lesser activity as such court may then or thereafter determine to be reasonable and proper under the circumstances. 

“In the event that any provision, covenant or restriction set forth in this Agreement is deemed invalid or unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected thereby and all other provisions, covenants and restrictions contained herein shall be valid and enforced to the fullest extent permitted by law.”

 The non-waiver clause:

             A party may decide for some reason not to strictly enforce the provisions of the contract on some occasion or under certain circumstances.  It might, for example, accept late payments without insisting on an agreed-upon penalty, or allow the other party to send goods of a different quality on occasion.  The non-waiver clause provides that a party doesn’t waive its rights to insist on strict compliance with the contract terms in the future simply because it has allowed the other party to have deviated from the contractual terms on one occasion or another.  In other words, neither side gets to junk a contract – or try to rewrite its terms without a formal amendment process – simply because one party may have given the other party a break.

             A non-waiver clause may look something like this:

“Failure by either party to strictly enforce any term or provision of this Agreement shall not constitute waiver of such term or provision.”

The counterparts clause:

            For the convenience of all the parties, contracts provide that the agreement can be signed separately by the signers, instead of forcing them to all get into the same room and sign the contract with the same pen.  The counterparts clause, which is generally non-controversial, allows the parties to sign and fax, scan and email, or otherwise sign the contract in an enforceable manner.  Some agreements – though by no means not even a majority – provide that an electronic signature may take the place of a “pen on paper” signature.

            Here’s a typical counterparts clauses:

“This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.”

The notice provision clause:

            Many contracts automatically renew for a period of time unless notice of non-renewal is given by one party to the other party.  Other notice requirements might also attend an agreement – such as whether certain goods are available at certain dates. The notice provision clause simply sets out the proper means by which notice may be given, in order that there will be no confusion.  While it is not uncommon for parties to communicate with each other through fax, email and telephone, the notice provision clause usually provides that only written notice, delivered in a specific way and to a specific address, acts as formal notice.

            Here are a couple of notice provision clauses:

“All notices required in connection with this Agreement shall be in writing and shall be deemed to have been duly given if (i) delivered personally, (ii) sent by receipted overnight courier or (iii) mailed, postage prepaid, registered or certified mail, to the following addresses or at such other addresses as the parties may designate from time to time in writing.”

“All notices shall be in writing and shall be deemed to have been given for all purposes when sent by registered or certified mail, postage prepaid, or personally delivered to the parties at their respective addresses set forth above; or to such other address of which a party shall have notified the party giving such notice in writing in accordance with the foregoing requirements.”

The good faith clause:

            Every contract carries with it an implied duty of good faith and fair dealing.  In other words, the law presumes that all of the parties to a contract should be dealing with each other in a fair and honest way.  If one party can show that the other party was not acting in good faith, they may bring a legal action for breach of the implied duty of good faith and fair dealing.  This claim, which is a tort cause of action, may be brought separately from any breach of contract claim.

            In light of the implied duty of good faith and fair dealing, it may seem redundant to include a requirement of good faith in the body of a contract.  Nonetheless, many contracts have a standard good faith clause that recites that the parties are dealing with each other fairly.  With such a clause, a showing of bad faith can lead to a claim for breach of that particular contractual clause in addition to the separate tort described above.

            Good faith language may look like this:

“The parties agree to proceed with the implementation of this agreement in good faith; that decision-making with regard to the applications and resolutions to be considered by virtue of this agreement will be undertaken in good faith, utilizing the criteria set forth in this agreement and generally accepted standards of dealing and good business practice.”

The “time is of the essence” clause:

            Most contracts will have a simple recitation that “time is of the essence.”  This means what it says.  The parties are expected to perform on their agreements in a timely way if a delay will cause a material harm to the other party.

Conclusion 

            As you can see, not all “boilerplate” is created equal.  Nonetheless, it is all important.  No “standard” language can be ignored, and any party to a contract would be wise to understand the meaning of even the seemingly least important provision.  If the devil’s in the details, the wise contracting party will negotiate and know those details and act accordingly.

            The best way to avoid getting surprised or harmed by boilerplate language is to put the negotiation of such language in the hands of a lawyer with experience in understanding and litigating the meaning of boilerplate language.  There’s usually nothing glamorous about grinding through these “standard” provisions, but there’s also nothing glamorous in losing a case because the devil in the details did you harm.

Randall K. Edwards practices law in Nevada, Utah, California and Arizona, with his primary office located in Salt Lake City.