Legal Article – Dangerous Neglect – Importance of Careful Drafting of Boilerplate Provisions in Contracts

By February 17th, 2015

Blog No. 55

February 17, 2015

NOTE: The following business and transactional law article was originally published in The San Francisco Daily Journal and The Los Angeles Daily Journal on January 14, 2015

Dangerous Neglect

By Mack W. Borgen.

Santa Barbara, California

University of California at Berkeley (Honors, Economics); Harvard Law School; Author, The Relevance of Reason – Business and Politics (Vol 1) and –Society and Culture (Vol 2)  – As Advertised in The New York Review of Books and Recipient of Four National Book Awards

          Amidst the press of contract formation, boilerplate provisions oftentimes receive just a glancing attention from clients. Sometimes they are entirely ignored.

Even experienced business attorneys deem them to be, at best, a matter of tedium and the subject of rote drafting. Sometimes such provisions are dangerously neglected by attorneys as well. The provisions are merely cloned from prior contracts without transaction-specific focus, and the client is not fully apprised of the importance of strict conformity and the fact that some such provisions may not be enforceable in accordance with their terms.

In a dangerous duality, boilerplate provisions are too often accepted by clients and their attorneys as being mechanical, procedural, and almost inconsequential – barely worthy of the ink, let alone the fine print.

However, looked at from other perspectives, the unique characteristics and the importance of boilerplate provisions are revealed.

Boilerplate provisions are almost emblematic of the various stages of the contract process. During the period of contract negotiations and formation, there is normally a spirit of goodwill, optimism, and expectation among the parties. It is not surprising that both clients and their attorneys focus upon the critical matters of product pricing and payment terms; product definitions and delivery schedules; default triggers and contract-specific representations and warranties. This is a period of business development and contract execution, and clients routinely deem boilerplate provisions to be the province and responsibility of their attorneys. As such and as noted above, such provisions are oftentimes not read, let alone closely reviewed, by clients.

During the life of the contract and amidst the shuffle-exchange of emails and the accelerated speed of modern American commerce, boilerplate provisions are oftentimes honored only periodically or only in the breach. The details and importance of boilerplate provisions oftentimes do not surface except in the downstream context of dispute — where the parties are suffering from disappointment, disagreement and even acrimony.

For all of these reasons, boilerplate provisions have a unique and lonely existence. They are written by business attorneys. They are ignored by clients. And they are enforced by litigators. But it is rarely that simple.

A distinction needs to be made between (a) the inclusion of such boilerplate provisions in negotiated contracts where both parties are represented by counsel as opposed to (b) the inclusion of “Click/I Agree” standardized terms in non-negotiated consumer contracts such as used in electronic commerce or in the take-it-or-leave appendage terms buried on our airlines tickets, parking stubs, medical bills, and purchase orders. Especially in non-negotiated consumer contracts, the complexity and the verbosity of boilerplate provisions have become absurd. See, e.g. Siegel, A., Etzkorn, I., “When Simplicity Is the Solution,” The Wall Street Journal, March 30-31, 2013 (“In 1980 the typical credit card contract was about 400 words long. Today, many are 20,000 words.”). One of the carryover effects of these “Click/I Agree” terms is that more and more people, including more and more clients, may gain a false comfort in not reading boilerplate provisions. The issue no longer relates simply to the client’s patience to read or his ability to understand the boilerplate provisions of their own contract. Instead, the issue is the client’s growing inclination to view such provisions as areas of little concern or inappropriate, almost pedantic subjects of negotiation and contractual adjustment.

The dirty little secret is that boilerplate provisions oftentimes do not fit into any of the traditional theories of contract. Especially in the context of the standardized terms in Internet- or other consumer commerce, there is no expectation of negotiation between the parties. There is no permitted modification. The price is the price. The terms are the terms. Click or Go Away. There is no sense of “offer and acceptance” in any meaningful sense of such phrase. “(T)he terms aren’t bargained for … they aren’t consented to in any traditional sense, (and thus) there is not meeting of the minds between the parties.” Nagel, Robert, “Devil’s in the Small Print,” The Wall Street Journal, December 21, 2012. Instead, the basis for both the recognition and the enforcement of terms-of-service and other boilerplate provisions is our submission to the realities of product consumerism and modern commerce. For an excellent and detailed, albeit at times academic, analysis of the bases for and enforceability of standardized, “Terms of Service” and “Click/I Agree” boilerplate provisions, see Professor Margaret Jane Rudin’s book, Boilerplate – The Fine Print, Vanishing Rights, and The Rule of Law (2013)(Princeton University Press).

The focus of this article is, however, more limited. This article focuses upon negotiated contracts, and the necessity of business attorneys to assure that clients understand at least three aspects of boilerplate provisions: (a) the substantive nature and potential economic importance of certain boilerplate provisions; (b) the need for consistent compliance with such provisions; and (c) the potential non-enforceability of some provisions in certain jurisdictions — California included.

The very phrase “boilerplate provisions” may vary from counsel to counsel and may depend upon the industry or type of contract at hand. However, as used in this article, boilerplate provisions are deemed to include at least the following seventeen provisions: power and authority; integration/entire agreement; amendments; waivers; attorneys’ fees; notices; governing law and venue; binding nature; survivability; partial invalidity; captions and construction; counterparts; arbitration; cooperation and further documents; rights and exercise of independent reviews; time of the essence (and force majeure); and no implied or additional representations, warranties or agreements. Collectively, these comprise the base minimum boilerplate provisions used in most business contracts.

The substantive nature and economic importance of boilerplate provisions may be exemplified by the governing law and exclusive venue provision. Some parties select governing law based upon proximity, familiarity, or legal necessity. Others may have selected a jurisdiction based a comparative analysis — such as, for example, upon the mere fact that class actions on not permitted in such jurisdiction. Similarly, the selection of venue is worthy of focus, careful attention, and even stubborn insistence because in the event of a later dispute under the contract — and especially those involving routine or small and moderate-sized claims — the instances and likelihood of litigation (or, conversely, the likelihood of settlement and resolution) can be greatly affected by the selection of venue. Judicial familiarities, cost burdens, time savings, and ease of access to familiar counsel can mitigate the likelihood of litigation and increase the likelihood of settlement.

The need for consistent compliance with boilerplate provisions may be exemplified by the boring, but varying interplays between the amendments, notices, and arbitration provisions. Especially with the convenience and speed of electronic communications, more and more non-reviewed communications are exchanged between clients and their customers. In the instance of a later dispute, the issue of whether a communication constituted an enforceable amendment to the parties’ contract can come into play. In order to avoid inadvertent (and casually drafted, email-type) amendments, it may be prudent to provide that a communication (electronic or otherwise) shall be deemed an amendment to a contract only if it specifically identifies itself as such, refers to the underlying contract, and a hard-copy thereof is promptly distributed pursuant to the notices provisions. Similarly, the raw importance of boilerplate provisions is underscored by the inclusion or exclusion of arbitration provisions. Arbitration provisions are deemed attractive by some clients because of the reality (or at least the perception) that arbitration is a far more expedited and cost-effective manner of dispute resolution compared with litigation. Wholly apart from the possible merits of such claims, however, the prudent business attorneys need to advice their clients to carefully consider the sub silentio effects of incorporating arbitration provisions – the waiver of jury trial, the limitations of discovery, and the curtailed rights of appeal.

The potential non-enforceability of some boilerplate provisions in certain jurisdictions is even more troublesome. Business attorneys need clients to understand that some provisions may be unenforceable in certain jurisdictions — California included. There are substantial jurisdictional variances in the enforcement of certain provisions, and the courts use various theories (e.g. unconscionability, fraud, duress, adhesion, coercion, misrepresentation, mistake, bad faith, public policy, absence of consideration) to constrain or even set aside certain terms. See, e.g. Chavarria v. Ralphs’ Grocery Company (2013) (Company’s arbitration policy so one-sided in its terms that it was held unconscionable under California law and therefore unenforceable). See, 35 Cal Bus L. Rptr. 113 (January 2014). Apprising the client that certain such provisions may not be enforceable in certain jurisdictions is the responsibility of business attorneys, and it is prudent and certainly appropriate even absent the request for or issuance of a legal opinion.

As a practical recommendation and because it is easiest to update a singular model of the boilerplate provisions, it is recommended for your consideration that an integrated model of boilerplate provisions be maintained and that such provisions be integrated into contracts or, alternatively, attached to contracts (and even, if not especially, all letters agreements) as an Exhibit A – Miscellaneous Provisions.

Both the number and length of boilerplate provisions will continue to grow. Many of them will remain critical in contract construction and enforcement. Thus, business attorneys and their clients need to understand both the importance and the limits of boilerplate provisions. To do otherwise, would be dangerous neglect.

 

 

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