Don’t get caught overlooking boilerplate clauses in commercial contracts

Due to the need for speed and efficiency in today’s fast-paced business environment, commercial contract review tends to focus on the economic provisions at the expense of the seemingly standard, “boilerplate” provisions. While often thought of as not controversial and relatively non-substantive, boilerplate provisions play an integral role in clarifying the relationship between the contracting parties. Neglecting those provisions can lead to unintended legal consequences.

Instead, a business should confirm its understanding of, and agreement with, each boilerplate provision. Here are a few examples of common boilerplate provisions that warrant closer review:

Assignment

The assignment clause restricts each contracting party’s ability to assign its rights and delegate its obligations under the contract. Failure to properly define these rights may lead to an unfamiliar or even undesirable third party becoming the counterparty to the contract. Here are a couple key considerations:

• How important is it for the original counterparty to perform the obligations under the contract as compared to some unknown third party? Should an affiliate of the original counterparty be treated differently than an unknown third party?
  
  
• If the original counterparty is still performing the obligations under the contract but is now owned by an unaffiliated third party (which could be a competitor), would the business want to have the right to terminate the contract, or at least receive notice of or have the right to consent to the change of control?

Governing law and jurisdiction/venue

The governing law and jurisdiction/venue clauses set forth which laws will govern the contract and the forum in which the parties may (or are required to) bring any action related to the contract. Failure to carefully consider the proposed governing law and forum may lead to greater uncertainly of the outcome in a future dispute and the incurrence of additional expenses and disruptions with respect to any such dispute. When examining governing law and venue, consider:

• Is the business familiar with the laws which will govern the agreement and any related disputes?
  
  
• Are such laws more favorable to the counterparty based on the type of business relationship to which the contract relates? For example, laws in certain states may be more favorable to service providers compared to the service recipient.
  
  
• Is the counterparty located in the proposed forum (generally speaking, a local venue may give one party a “home field” advantage) and, therefore, a different and potentially more neutral location is preferable?
  
  
• Is the business willing to incur additional expenses and disruptions (including engaging separate local counsel, and expenses and time related to travel) to litigate a dispute outside of its home venue?

Entire agreement

The entire agreement clause provides that the contract sets forth the entire agreement between the contracting parties and supersedes any prior agreements or understandings. Failure to understand this clause may disrupt the enforcement of certain agreements or understandings between the contracting parties. Here are a few considerations:

• Have the contracting parties come to any agreement or understanding (e.g., an oral or email agreement as to payment or other terms) that has not been incorporated into the operative provisions of the contract?
  
  
• Are there other written agreements with respect to the same subject matter that the contracting parties intend to remain in full force and effect?

Given the importance of “boilerplate” provisions and the potential for unintended material consequences if ignored, be sure to consult an experienced attorney early in your contract review process.

Brent Trame is an attorney in Thompson Coburn’s Corporate Finance & Securities group.