News
Winter 2005

Boilerplate Blunders: A Reminder That "Standard" Contractual Provisions Should Be Used With Care

The Commercial Law Connection

Introduction

At one point or another, we have probably all heard words to this effect: "Don't worry with that provision, it's just boilerplate - standard stuff." It is also likely that many among us have been tempted, in the course of reviewing an interminably long agreement, to skim over or pay less attention to the "miscellaneous" sections at the end of the document (with captions such as "Notices," "Counterparts," "Severability," "Further Assurances," and the like) on the assumption they are entirely standard and innocuous. And in drafting a contract, have we not all, particularly as younger lawyers, felt (but, it is hoped, resisted) the impulse to "copy and paste" standard language into a contract without fully considering whether those imported words are appropriate to the parties' intentions and the nature and circumstances of their agreement?

"Boilerplate"1 provisions are often viewed as time-honored (and therefore flawless), immutable (and therefore nonnegotiable), and ready-made (and therefore fungible) language that may be fluently transplanted among and between any variety of different agreements. As discussed below, this viewpoint is untrue and can produce dire and unwanted results. This article is intended as a reminder that these boilerplate provisions are not one-size-fits-all propositions and should be carefully reviewed and tailored to suit each contract. (For example, one should not reflexively include a "time is of essence" clause in a contract governing a performance whose timeliness is not required and cannot be assured.) This article will present examples of a few common boilerplate provisions and, in the process, some illustrations of potential unintended consequences and pitfalls associated with careless or injudicious use of such provisions.

Assignment Provisions

An assignment provision ordinarily requires the counterparty's consent before a party may assign its rights under the related contract. This provision is useful because, generally, unless the contract contains express terms to the contrary, "all contractual rights may be assigned . . . [and] the right to assign is presumed, based upon principles of unhampered transferability of property rights and of business convenience."2 A common boilerplate formulation of an assignment provision would provide as follows: "Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party without the prior written consent of the other Party."

Of course, this assignment (or, perhaps more accurately, anti-assignment) provision should not be used in this form if a party foresees the possibility that it may assign contracts to third parties. For example, without more, this provision in a contract might be construed as an obstacle if one of the parties subsequently wants to sell all or substantially all of its assets, including that contract, to an acquiror.3 It might also potentially hamper a reorganization pursuant to which the party might need to transfer that contract to a wholly-owned subsidiary. To avoid potential disputes over these points, a simple fix might be to include the following proviso: "provided, however, that a Party may (i) assign this Agreement to any entity that acquires all or substantially all of such Party's assets or its business that is the subject hereof, or (ii) upon written notice to the other Party, assign this Agreement to any entity that is owned by such Party."

Confidentiality Provisions

A "typical" confidentiality provision in a commercial contract identifies what constitutes confidential information for purposes of the contract,4 prohibits disclosure of the confidential information and identifies countervailing factors that exempt or exclude otherwise confidential information from that prohibition (e.g., where required by law or regulation to be disclosed), and stipulates the duration of the confidentiality obligation.5

As discussed above, the assignment provision in a contract may be drafted to permit a party to assign the contract to an acquiror of all of that party's assets. In connection with such an assignment, however, a confidentiality provision in the form outlined above might be construed to require the assigning party to obtain a consent/waiver from the other party with respect to that confidentiality obligation. Moreover, if these formulations of the assignment and confidentiality provisions were reflexively added to multiple other agreements of the party being acquired, the requirement to obtain such consents/ waivers from parties to each of those agreements could significantly delay or even stymie the pending acquisition. In this scenario, including a provision to the following effect should solve the issue: "A party that so receives confidential information from the other party may disclose such confidential information to a permitted assignee of such recipient party under Section [assignment provision], provided that such permitted assignee is first informed by such recipient party of the confidential nature of such confidential information and shall have agreed in writing to maintain its confidentiality in accordance with this Section [confidentiality provision]."

The parties should also consider a clear stipulation as to the remedies available in the event of breach of the confidentiality provision. For example, they might wish to expressly provide that monetary damages alone would be an inadequate remedy for such breach, and that they are therefore also entitled to injunctive relief.

Integration Clauses

Generally, a properly drafted integration clause (also called an entire agreement clause or a merger clause) in a written contract will influence a court to disregard evidence of prior (or contemporaneous) agreements or terms, whether consistent or inconsistent, within the scope of that contract.6 The general intent and benefit of the integration clause is, among other things, to prevent a disgruntled party from avoiding obligations by alleging prior agreements that conflict with or supersede the written agreement. Accordingly, this is generally a useful provision to include in a written agreement. There are, however, lurking dangers associated with the imprudent use of unrefined boilerplate integration clauses.

Consider, for example, the contracts pursuant to which a company implements an incentive compensation plan for its employees. In addition to providing to employees certain bonus payments and stock option grants contingent upon satisfaction of specified job-performance criteria, assume each contract states that its terms "represent the complete agreement of the parties and supersedes any and all prior agreements." Also, assume that the employees have entered into other preexisting agreements with the company governing restricted stock grants or other incentive compensation matters. Under these circumstances, there is some risk that those preexisting agreements could be deemed by a court to be superseded and unenforceable because of the integration clause quoted above. To alleviate this risk, the integration clause might appropriately refer to those preexisting agreements somewhat as follows: "This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents [referred to in this Agreement and] [listed on Exhibit A]) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter."

Severability Provisions

Generally, this provision requires that any provision in the related contract found to be unenforceable (e.g., because of vagueness, illegality or other factors) should be disregarded, leaving the remainder of the contract preserved intact. Although a court may (or may not) decide to sever an unenforceable provision irrespective of the presence or absence of a severability clause,7 the inclusion of the clause can persuade a court to treat the unenforceable provision as severable from the rest of the contract.8

A boilerplate severability clause could take the following form: "If any provision of this Agreement is held illegal or unenforceable in a judicial proceeding, such provision shall be severed and shall be inoperative, and the remainder of this Agreement shall remain operative and binding on the Parties." As so drafted, the potential effect of this clause, in a scenario where an obscure and overlooked statutory provision renders unenforceable a term of the contract that is economically indispensable to a party, could be devastating. As an extreme example, assume that a long-term contract for services (with a severability clause in the form quoted above) provides for periodic payments by the service customer to the service provider, subject to an annual inflation adjustment that the provider considers a vital component of the deal. Assume, further, that a subsequently enacted statute prohibits inflation adjustments in those types of contracts, and the parties thereafter litigate the provider's efforts (based on this supervening illegality) to excuse its further performance under the contract. Confronted with that severability clause (and the able exhortations of counsel to the service customer), the court might decide to sever the inflation adjustment provision and leave intact the remainder of the contract. Obviously, the service provider would be very unhappy with this outcome.

To reduce the likelihood of this undesirable result, the service provider in the preceding hypothetical could have qualified the severability clause to express an intent that the inflation adjustment be deemed inextricably essential to the agreement. This might be achieved through a variety of drafting alternatives, including reformulating the clause to read as follows: "If any provision of this Agreement is held illegal or unenforceable in a judicial proceeding, such provision shall be severed and shall be inoperative, and, provided that the fundamental terms and conditions of this Agreement (including, without limitation, Section [the inflation adjustment provision] and [add any other indispensable provisions]) remain legal and enforceable, the remainder of this Agreement shall remain operative and binding on the Parties."9

Further Assurances

This commonly used boilerplate clause generally seeks to ensure that the parties will cooperate to accomplish whatever routine matters are necessary to effectuate the intent of their contract. A simple formulation of this clause may be as follows: "Each party covenants to take all such actions and to execute all such documents as may be desirable to implement the provisions of this Agreement fully and effectively." Depending on the relationship between the parties, including such an expansive and generic formulation of this provision in the contract could lead to capricious or unreasonable "further assurance" requests (or disputes over whether such vague language covers a particular such request). Accordingly, the draftsperson might consider: (i) qualifying the standard of required further assurances to that which is reasonable and necessary or desirable; (ii) providing more detail regarding the nature and categories of further action prescribed by the clause; and (iii) expressly enabling the parties to request such further assurances from each other.

Conclusion

By eliminating duplicative effort and reinvention, boilerplate provisions make the drafting of contracts more efficient and cost-effective. Moreover, the standardized nature of these provisions facilitate certainty and predictability in their interpretation and application. The draftsperson should consider carefully, however, the specific circumstances of the transaction and the intent of the parties before importing a boilerplate provision into a contract. A draftsperson's thoughtless transplantation of a boilerplate provision into an agreement can unintentionally defeat the contractual intent of the parties and cause significant losses.

This article is intended to inform the reader of certain general legal principles. It does not provide, and should not be construed as, legal advice regarding specific problems or circumstances.

* Darren C. Skinner is a Partner in the corporate and securities practice group at Arnold & Porter LLP (www.arnoldporter.com), resident in the firm's Washington, D.C. office.

1 The term "boilerplate" has been defined as "[i]nconsequential, formulaic, or stereotypical language" (The American Heritage Dictionary of the English Language 206 (4th ed. 2000)) and as "language found almost universally in documents of a given type" (Barron's Law Dictionary 51 (3d ed. 1991)). Etymologically, "the modern sense comes from the use of the term to refer to copy set on printing plates . . . and distributed in that form to newspapers [with the result that] the copy could not be edited" (Black's Law Dictionary (8th ed. 2004)). See also Take Our Word For It: Word- Origin Webzine, Issue 9 (Sept. 28, 1998) (http://www.takeourword.com/Issue009.html) ("As the article printed on a boilerplate could not be altered, the term came to be used by attorneys to refer to the portions of a contract which did not change through repeated uses in different applications, and finally to language in general which did not change in any document that was used repeatedly for different occasions.").

2 Flack v. Laster, 417 A.2d 393, 399 (D.C. 1980) (adding that "[t]he effectiveness of an assignment does not normally depend upon the consent of the obligor unless the rights to be assigned involve the performance of unique personal services.").

3 R.A. Feldman, Drafting Effective Contracts 88 (1998). 4 Counsel should craft this definition of "confidential information" with care to ensure that it is neither too expansive nor too narrow.

5 See BethLynn Maxwell et al., Overview of Licensing Technology from Universities, Prac. L. Inst. Order No. G0-01BF (Sept. 2003 - Jan. 2004), available in Westlaw at 762 PLI/Pat 507 at *574 (presenting a form of such a "typical" provision).

6 Hercules & Co. v. Shama Restaurant Corp., 613 A.2d 916, 927-28 (D.C. 1992).

7 See, e.g., Booker v. Robert Half Int'l, Inc., 315 F.Supp.2d 94, 106 (D.D.C. 2004) ("[e]ven without a severability clause, if the obnoxious feature of a contract can be eliminated, without impairing its symmetry as a whole, the courts will be inclined to adopt this view as the one most likely to express the intention of the parties.").

8 See id. at 106 ("In Section 13 of the Agreement, plaintiff and defendant unequivocally agree as follows: 'The provisions of this Agreement are severable. If any provision is found by any court of competent jurisdiction to be unreasonable and invalid, that determination shall not affect the enforceability of the other provisions.' Under both District of Columbia and federal case law, the Court concludes that it should give effect to that clearly expressed intent of the parties.").

9 Alternatively, parties can limit the severability clause by adding it only to (and thereby limiting its coverage to) the section(s) of the contract considered more likely to be struck down as unenforceable (such as, perhaps, non-competition, exculpatory, liquidated damages, and penalty provisions).

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Darren Skinner
Darren Skinner
Partner
Washington, DC
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