“Don't
Worry, It's Just Boilerplate” and Other Contract Dangers
(Part I)
By: Daniel A. Batterman, Esq.
DISCLAIMER: This article is intended for informational purposes only and does not constitute legal advice. You should not rely or act upon any information contained in this article without seeking the advice of qualified legal counsel.
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It’s very common in business. After the “essential” terms
of a deal have been negotiated, the other side will make sure all of those
standard “boilerplate” provisions are thrown in for good measure.
It’s heard so frequently that it’s often ignored by unsuspecting
parties. While it may seem harmless, it’s anything but. In short:
Beware of boilerplate.
So what is “boilerplate?” It’s all-purpose, widely used,
and standardized contract language. The party which provides the first
draft of a contract typically inserts boilerplate favorable to itself.
Widespread usage, however, doesn’t make boilerplate any more acceptable
than other terms. I’ve been involved in many cases where boilerplate
has created major headaches and spawned time-consuming litigation.
Why would such widely used and all-purpose language have this effect?
Because it can have a dramatic impact upon your legal rights. The other
side knows this, so make sure you do too. In this article, I discuss three
common boilerplate provisions: (1) Choice of forum; (2) Choice of law;
and (3) Notice.
“I’ll see you in court . . . in North Dakota.”
A “choice of forum” provision is among the most widely used
boilerplate that you’ll see in just about every agreement, especially
if the parties are located in different states. Usually the side which
provides the first draft will ensure that its home forum is chosen. There
are many variations, but a typical clause reads something like this:
“Both parties hereby irrevocably agree to the jurisdiction
and forum of the Commonwealth of Massachusetts, Suffolk County with
respect to any cause-of-action, lawsuit, claim, or dispute initiated
or arising hereunder.”
So why is this important? If a dispute arises and the other side is located
across the country, you would have to file a lawsuit (or arbitrate) there
regardless of any inconvenience or expense to you. That’s the point.
Hiring a lawyer in your own state is expensive enough, but hiring one elsewhere
is even more so—and very inconvenient. The other side knows that
few people will ever do it. You almost always want to have the ability
to sue someone on your “home turf.”
One of my clients had a dispute with a company in Florida. The company
was clearly wrong and owed $12,000. My client, however, entered into a
contract whereby Florida was chosen as the forum state. So even though
he had a strong case, he decided not to pursue his claim in Florida due
to the expense and inconvenience. My client considered the loss to be the “cost
of doing business.” So this boilerplate provision cost him $12,000.
It was an expensive lesson.
A Wolf in Sheep’s Clothing
Closely related to the forum issue is which state’s law applies
if there’s a dispute. Most times this will be the law of the forum
state, but not always. “Choice of law” provisions typically
read as follows:
“This Agreement shall be governed by, construed, and interpreted
in accordance with the laws of the Commonwealth of Massachusetts, excluding
its rules governing conflicts-of-law.”
These provisions can present all types of hidden problems. If a company
in Boston enters into a contract with one in California, and the parties
agree that California law applies, then the Boston company will likely
be bound by California law—even if suit can be brought in Boston.
This may not sound like a big deal, but it can become one. Different states
have much different laws on some issues.
For example, while Massachusetts (like many states) enforces non-competition
provisions, California doesn’t. So if you entered into a contract
expecting that you’d be able to keep the other party’s employees
from competing against you, you may be in for a surprise. If California
law applies, a court in Massachusetts may refuse to enforce this provision,
which can dramatically affect whether you would have even entered into
the contract in the first place.
Another example: In the technology field, there’s a law called the
Uniform Computer Information Transactions Act (“UCITA”). UCITA
was proposed in many states but was rejected in most as being too anti-consumer.
Virginia and Maryland, however, passed it. So whenever I see a provision
which applies Maryland or Virginia law and the transaction involves “computer
information” (which is very broad), a red flag goes up. I typically
need to renegotiate this clause or include other language to negate UCITA’s
impact.
If your state’s law is favorable to you, choose it if possible.
But you won’t be able to “shop around” and use any state’s
law that you want. A court will only apply the chosen law as long as there’s
a reasonable relationship to the transaction. Of course without this provision,
it’s up to a judge to determine which law applies. Neither party
may like this uncertainty. It may therefore be better to agree on a specific
state’s law, provided that it’s beneficial to you. Or at the
very least, not detrimental to you.
Notify Thyself
“Notice” provisions provide the manner and method of informing
a party when certain things happen. For example, if a party fails to perform,
or something goes wrong, or money is owed, the contract then provides how
the other side will be notified. This provision generally reads as follows:
“Any notice required or permitted to be given under this Agreement
shall be in writing and hand-delivered, or if sent by certified mail, to
the last known office or principal place of business of either party.”
After notice is given, the clock typically starts ticking. Towards what?
Any number of things. Usually the party giving notice has certain rights
after the time period expires. If the other party fails to respond, these
rights can then be exercised. Some of the more common ones include terminating
the contract, pursuing litigation, adding interest, or extinguishing certain
rights of the other party. The options are endless, however. Don’t
underestimate the importance of notice.
I represented a developer who was very close to completing a large software
project. A few days before it was due, the company pulled the plug. My
client was understandably frustrated. The company, however, failed to give
him the proper notice under the contract. We made them go back and give
it properly, which in turn gave my client 10 more days to finish the software
and make delivery. And he did. The company then had to pay him. Once again,
a boilerplate provision can have a profound impact.
When you need to know, you need to know. Make sure that this provision
is tailored to actually notify you. For example, more and more companies
want to provide notice via e-mail. I tend to resist this unless my client
really wants it. Given the daily deluge of e-mail, the ease at which it
can be deleted or overlooked, and unpredictable spam filters, I opt for
traditional methods of notice and prefer having a piece of paper delivered.
It’s harder to ignore. Again though, it depends upon what my client
is comfortable with.
Getting to Yes
So is boilerplate negotiable? It depends. In consumer transactions it’s
usually not, but in business transactions most terms are open to discussion.
While “deal killers” are often assumed to be disagreement over “essential” contract
terms, I’ve had many negotiations where boilerplate has been the
main obstacle to closing the deal. With a little creativity and persistence,
however, this can usually be overcome. But awareness is always the first
step. So be aware. And then beware!
© 2008 Daniel A. Batterman. All rights reserved.
DISCLAIMER: This article is intended for informational purposes only and does not constitute legal advice. You should not rely or act upon any information contained in this article without seeking the advice of qualified legal counsel.
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