"Don't Worry, It's Just Boilerplate" and Other Contract Dangers (Part 1)

-This blog is 100% Human Generated-

Contracts are the lifeblood of any business. And they all have their unique elements that are tailored to a company’s particular business model and needs. However, after the essential terms of a deal have been negotiated, don’t be fooled into thinking that those numerous “boilerplate” provisions found at the back of most agreements don’t need to be carefully reviewed and negotiated too at times. They are not harmless and could contain some hidden dangers and traps for the unwary. In short: Beware of boilerplate. Cases and disputes can be won and lost on it.

While the term is common, what exactly is “boilerplate?” It can best be described as all-purpose, widely used, and standardized contract language that’s incorporated into most agreements. You might, for example, find boilerplate provisions in the cryptically titled “Miscellaneous” section of a contract, but not always. The party that provides the first draft of a contract typically inserts the boilerplate—which is usually favorable to itself. Widespread usage, however, doesn’t make boilerplate any more acceptable than any other contract terms no matter how many times it’s been reused or how innocuous it sounds.

I’ve had many disputes where boilerplate can have a dramatic and sometimes detrimental impact upon a party’s legal rights. It can create major headaches and spawn time-consuming and expensive litigation. In part 1, I discuss four frequent boilerplate provisions: (1) Choice of forum; (2) Choice of law; (3) Assignment; and (4) Notice.

I'll See You in Court...In North Dakota

A “choice of forum” provision is among the most common boilerplate that you’ll see in many types of agreements, especially if the parties are located in different states. Usually, the party which provides the first draft will ensure that its home forum is chosen. There are many variations, but a typical (albeit somewhat simplified) clause looks 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 claim 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 where you’re likely to be unfamiliar with the legal landscape is even more so.

It’s very inconvenient too, especially if you or your employees have to travel there on multiple occasions to provide evidence or give testimony. Many companies—especially small ones—are unlikely to file suit elsewhere unless there’s a great deal of money at stake. You almost always want the ability to sue someone on your “home turf.” It’s not just the psychological tactic of making the other party the outsider, but has practical benefit of forcing them to come to you.

Many years ago, one of my Massachusetts clients had a dispute with a company in Florida. The company clearly breached the contract and owed him about $12,000. The client, however, had entered into the agreement—without the benefit of counsel review, I might add—which provided that Florida was the forum state. So even though he had a strong case, he decided to forego his claim due to the expense and inconvenience of pursuing it there. He considered the loss to be part of that amorphous and disheartening “cost of doing business” category, which is often the ultimate fallback position of business owners who don’t want to be bothered with additional expense and aggravation. This boilerplate provision cost him a not insubstantial $12,000. It was an expensive lesson—not the least of which is to have your lawyer review a contract before you sign it.

Forum selection clauses can get even more expensive and inconvenient. Given the ease by which foreign business is conducted online nowadays, it’s not uncommon to see different countries as the forum, especially if you’re dealing with international companies with a presence around the world. I’ve been involved in negotiations and disputes whereby the contract required suit be brought in countries such as Switzerland, Germany, Dubai, Ireland, and Israel (for example). And if you think it’s difficult and expensive litigating in a different state, just wait until you have to travel outside the country to do it. That’s real inconvenience. Therefore, pay attention to the forum provision.

A Wolf in Sheeps Clothing

 Choosing what state’s law applies in a dispute is also an important boilerplate provision to be mindful of. In many instances, this will be the law of the forum state where suit can be brought, 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 dangers. If a Boston company enters into a contract with one in Texas and the parties agree that Texas law applies, then the Boston company will likely be bound by Texas law—even if suit can be brought here. This can be problematic at times as states can have much different laws on some issues.

For example, before Massachusetts changed its law in 2018 restricting the use of employee non-competition provisions, I would sometimes see California as the chosen law in a party’s remote employment or independent contracting agreement if the other party was located there. The problem was that California had an absolute prohibition on employee non-competes. As such, if a Massachusetts company expected to keep its California remote worker from competing against it, it may be out of luck. Even if Massachusetts was the chosen forum for the dispute, a court here could then refuse to enforce the non-compete under California law—which can dramatically affect whether the parties would have worked together in the first place. It illustrates how different some states’ laws can be.

A more current 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 applying Maryland or Virginia law and the transaction involves “computer information”—which is a very broad term encompassing things like software, computer games, multi-media goods, etc.—it gets my attention. I sometimes need to renegotiate this clause or include other language to negate UCITA’s impact.

It can be any number of things. Some states allow for recovery of certain types of damages, while other states don’t (or may limit them). Some states award attorney’s fees in certain cases while others do not. The point is to pay attention to this provision. If your state’s law is favorable to you, choose it if possible. It’s yet one more reason to have your attorney review the contract beforehand.

One more thing clients sometimes ask me: You will not be able to “shop around” and use any state’s law that you want. Courts frown upon this practice and will only apply the chosen law if there’s a reasonable relationship to the contract. Without this provision, it’s up to a judge to determine which law applies. Neither party may like this uncertainty. It’s therefore better to agree on a specific state’s law, assuming that it’s beneficial to you. Or at the very least, not detrimental to you.

The Buck Stops Here....Well, Maybe Not

An “Assignment” clause is another ubiquitous boilerplate provision. It dictates whether a party can transfer its rights or benefits under the agreement to a third party who may have no relationship to the transaction. A simplified version usually looks something like this:

This Agreement shall be assignable and is binding upon, and shall inure to the benefit of, the heirs, executors, administrators, legal representatives, successors and assigns of the parties.

Sometimes the clause requires the consent of the other party for the assignment to occur. Sometimes it doesn’t. Sometimes it provides that only one party can assign its rights but not the other. No matter what it says, this provision has its risks and needs to be carefully considered in the context of the transaction.

For example, if you want a specific architect to design your new home, you don’t want them to assign the job to a different architect. The same holds true for an artist who’s creating your new logo. Personal service contracts are usually not assignable due to the unique skill, talent, or reputation of the other party, but it depends upon the contract’s language and whether there’s an assignment clause which allows for it.

As a technology lawyer, I’ve sometimes seen these provisions casually inserted into service agreements involving programmers, web designers, SEO providers, marketing consultants, and others where the person or company you’re hiring may not be who you end up with. Unless the state’s law governing the contract prohibits this type of assignment—and many do not—you’ll likely be bound by the contract’s terms and unable to stop it. And you’ll be working with another party, who you’re then obligated to pay.

Some boilerplate provisions can prohibit assignment too (like in a personal service contract). If so, any attempted assignment would be void and the original parties to the agreement will remain the parties throughout. A prohibition also needs to be reviewed in the context of the transaction, the ongoing relationship, the timeline involved, and the parties’ continuing needs. A bar against assignment can create problems too.

A client learned this the hard way in a dispute with a software developer. I represented a company that purchased a business that had contracted years earlier with the developer to write and periodically update some important operational software. The problem? The original contract’s assignment clause prohibited any assignment of the software—it couldn’t be used by the successor company. So when the business was purchased by my client, it had no rights to use the software or else it could have led to a breach of contract or copyright infringement claim. And the developer had no intention of allowing an assignment without an additional payment.

The client eventually paid thousands of dollars for the continued right to use the software. It was unclear to me if the assignment clause was subject to any negotiation at the time the development contract was first drafted, but it certainly should have been. If not, it’s yet one more example of a boilerplate provision having a costly impact on a party’s legal rights.

Notice the Notice

“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 and needs to be remedied, or money is owed, the contract then provides how the other side will be notified. This type of 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 specific 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 damages and interest, or extinguishing certain rights of the other party. Thus, don’t underestimate the importance of notice.

I represented a software developer who was very close to completing a project for a large biotech in Cambridge. A few days before it was due, the company pulled the plug and terminated it. My client was understandably upset since he was owed tens of thousands of dollars. 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 him 10 more days to finish the software and make delivery. And that’s just what he did. The company was then obligated to pay him under the terms of the agreement, which they eventually did (especially after we filed suit). Once again, a boilerplate provision can have a profound impact.

When you need to know, you need to know. Make sure this provision is tailored to actually notify you. For instance, many updated boilerplate provisions provide for e-mail notice nowadays. I tend to resist this method, certainly as the sole means of notice, unless my client really wants it. Given the daily deluge of e-mails that we all get, it’s very easy for an important notice to be deleted, overlooked, or get caught in an intermittently-checked spam filter. Everyone tends to have some form of “e-mail ADD” where it’s simply hard to stay focused and keep up with your inbox.

Therefore, I opt for traditional methods when possible and prefer having a genuine and old-fashioned tangible sheet of paper delivered to a client. Yes, I realize this makes me somewhat of a Luddite—postal mail is sooo twentieth century—but it’s much harder to ignore a physical document that’s staring you in the face, as opposed to a single e-mail lost in a flood of other e-mails. Again, it depends upon what my client is comfortable with.

Getting to Yes

So is boilerplate negotiable? It varies on the situation and context. In business-to-consumer transactions it’s usually not (unless it’s an especially large and expensive deal), but in negotiated business-to-business transactions most are open for discussion and revision. Of course, this doesn’t apply to those pervasive Terms of Service and other website agreements whereby you click “I agree” and there’s no negotiation regardless of whether you’re a consumer or business. But that’s life in the modern world.

While “deal killers” are often assumed to be disagreement over essential contract terms, I’ve had some negotiations where certain unfavorable boilerplate provisions have been the main obstacle to closing the deal. When I’m working with experienced counsel on the other side though, these differences can usually be overcome with a little creativity, persistence, and nuanced drafting. But awareness of the implications of boilerplate is always the first step. So be aware of them. And then….beware!