Don’t ignore the boilerplate provisions of your agreements. Although the language appears the same every time you read these clauses, subtle differences can and will make a difference in interpreting your commercial agreement or acquisition transaction documents.
By the time you get to the final page of your commercial agreements your eyes will have started to glaze over. Words such as “amendment”, “assignment”, “waiver”, “severability”, and “arbitration” all seem vaguely familiar, but if you are reading someone else’s contract, make sure you read these carefully. Clauses in this section of a contract are often considered to be “boilerplate” or standard, often repeated language. Be cautious when reading this section of your contracts as the subtle nuances will work to your favour or against you. Once you understand the intent of the clause, you can read a boilerplate clause more rapidly and with greater clarity. It is also helpful if you or your counsel have a checklist of what is considered standard in your contracts, to compare against agreements that are sent to you.
Here is some helpful information on the “General Matters” clauses to help you to round out your agreements, and to make sure you’re aware of the risks and protections that are built in.
Amendment:
Necessary to ensure that you are not inadvertently changing the agreement every time you have a discussion about it. Amend in writing, signed by all parties.
Assignment:
Important in the context of mergers and acquisitions or reorganization of your business, an individual or company should be able to assign an agreement to a holding company owed by them. As well, the contract should be assignable to an acquiring company (who may see the contract as part of the assets they are acquiring).
Language can be included that allows a rejection of the assignment if the acquiring company is in direct competition with either party. In many contracts only one (1) party is permitted to assign the agreement (for example, an employee would not have a right of assignment as it is their personal service that is sought).
Enurement:
Coupled with the assignment clause, this clause, if properly drafted, will extend the benefits of the contracts to successors or assigns. In the case of a successor – this ensures that your estate has the right to benefit from an active contract. In the case of an assign, this would extend the benefit to an acquiring or merging third party to the contract.
Waiver:
This clause preserves your rights in the event that you have been relaxed about enforcing your contract and your counterparty tries to assert that the contract has therefore become more relaxed as a result. The “doctrine of waiver” is the legal concept that continuing or repeating waiver of a certain right can be construed as an ‘intentional relinquishment of a known right.’ This doctrine is to be avoided with a no waiver clause, so that your negotiated rights are not diminished because you are “being nice”. Make sure to include language that requires a waiver to be in writing.
Costs:
If there is an ongoing expense (legal or otherwise) that could result from negotiation of an agreement, a costs clause should be included to clarify which party is paying for the ongoing legal expense. The costs clause is not to be confused with the “expenses” clause – which deals with ongoing expenses that are incurred in performance of an agreement. An expenses clause is usually found in an employment or consulting agreement, whereas a costs clause might be found in an M&A agreement. In the context of M&A, a break fee is sometimes included to compensate a party for the legal process, once the transaction reaches a certain stage (usually due diligence).
Dispute resolution:
Consider whether you would rather deal with a dispute via negotiation, arbitration or litigation (or by climbing a ladder past each of these). Many parties prefer to end the dispute in final and binding arbitration, as the costs and length of time taken to litigate can be ugly.
Notice:
When a party to an agreement is actively trying to terminate a contract, they will often rely on the method and location of delivering notice clause to take the position that the contract was not (for example) properly renewed. Tricky counterparties could take the position that notice in person or via email is not the required method for notice under contract, and therefore, that the renewal period has expired. Keep an eye out for this especially in lease renewals or the renewal of an exclusive negotiations period in the context of an M&A transaction.
Severability:
A contracting party may place clauses in a contract that create a period of non-competition or an interest rate for non-payment that might in the future violate a changing law. This clause is intended to sever an offending provision and to flag to the court that the contracting party had intended to be reasonable, to avoid the court from setting aside the entire agreement as “unconscionable.”
Headings:
A well-organized contract contains plenty of headings at the beginning of each section (similar to in this article) that will allow a reader to navigate a contract quickly. In contrast, a clever counterparty may remove the headings to make the contract less readable if they are looking to discourage negotiation. Some law firms/companies will hold on file an internal and external version of a contract, with only the internal version containing headings. A reasonable lawyer cannot help but be annoyed by this, as it takes away from the basic principle of consensus ad idem or “meeting of the minds”. The headings may not capture the meaning of the contract and this clause will flag that issue to the readers so that they do not rely on summary text.
Entire Agreement:
Parties may be relying on internet brochures, or advertisements or information outside of the contract, to come to an agreement. The entire agreement clause will specify that all outside information is superceded by the contract. Understanding this, the contracting party should carefully read the contract before signing and either strike out items that were not part of the deal, or add any additional items in, and ask the counterparty to initial the changes. This is a good rule for everyday life contracts (e.g. rental car agreements, apartment rental agreements, insurance agreements) as well, in which standard form contracts may not capture some of the pre-contract discussions. An experienced counterparty will not have a problem with making those changes.
Counterparts:
Not everyone is always able to be in the same room at the same time to sign an agreement. This clause specifies that parties can sign separately and that scanned-in or faxed-in signatures, once collected, form the agreement. A careful person will ask that every page of the agreement be initialled and that the entire agreement be scanned in and sent together.
These are but a few of the commonly used clauses that are found in the General Matters section of most contracts.
Check out www.clausehound.com – a free source for legal language (which I am a contributor to).
Bookmark here for a list of generally used clauses with sample language provided, and do a quick double-check before signing your contracts to see if you have missed any standard clauses.