Common Contract Clauses: Part 1-Module 3 of 6

III. Common Contract Clauses: Part 1

Introduction to Contract Clauses

One other thing about contracts is virtually universal — and that is that the vast majority of contracts contain a cadre of clauses that are common. In the realm of contract drafting, these clauses are called “boilerplate.” Historically, the term “boilerplate,” as it relates to writing, derived from the newspaper industry. “BC” (meaning “before computers”), the newspaper industry relied on third-party companies to supply much of its non-local and non-hard-news copy (aka “filler”). These stories were delivered to the newspapers on metal plates with the type already embedded to facilitate the way newspaper printing was accomplished at the time. Because these plates resembled the metal plates that industrial and commercial boilers were made from, newspaper printers began calling this material “boilerplates.” By evolution, the stories embedded in the plates came to be called “boilerplate,” as well, because the writing on the plates largely was unoriginal. Ultimately, contract clauses that are unoriginal in the sense that they are so similar from contract to contract came to be called “boilerplate” clauses. What follows is a discussion of such common contract clauses.

          While contract boilerplate language can be located anywhere in a contract, it most commonly is relegated to the end of the contract and many times is preceded by a heading labeling it as “General Provisions” or “Miscellaneous” or the like. It is very important to note, however, that just because the boilerplate language commonly is located at the end of the document and given a label such as “Miscellaneous,” does not mean it is somehow lesser in importance than any other language in the contract. It can be extremely important and has been the subject of countless court decisions.[1] The “boilerplate” quite easily can spell the difference in winning or losing a contract dispute; i.e., all contract language is important.

          Until fairly recently, the language of contracts (at least the boilerplate provisions) was not thought to be copyrightable, but there has been some litigation over whether contract language can be “owned” via the Copyright Act.[2] Boilerplate clauses are not contained in contracts in any certain order, though patterns will be noted if enough contracts are read. Here they will be listed in alphabetical order of the title of the clause. They can read any number of ways and very often are quite specific to the contract at hand despite being located in the boilerplate section.

Common Boilerplate Clauses

          How many and which boilerplate provisions are contained in a given contract depends entirely on the sophistication level of the contract and the type of contract. The following set of boilerplate provisions is more or less comprehensive. In practice, most contract drafters have all these provisions in a single computer file and select them for inclusion and precise wording based on the particular contract they are drafting and the negotiations on these subjects by the parties, which can be quite intense (again, notwithstanding their location in the boilerplate).

Note: Most contract language is written in stark terms and declarative sentences, and much contract language is written as prohibitions. But that does not mean such language cannot be changed. Simply put, if the parties contracted to do or not to do “X” in the original agreement, they, by future agreement, can contract to change how “X” is handled and to any degree — or to simply do away with the subject of “X” altogether — and nothing written in the agreement itself can overcome this right of the parties. A really good example of this is where contracts state in a boilerplate provision that the agreement cannot be altered orally. With perhaps an exception or two, every state supreme court in the U.S. has ruled that, notwithstanding such language, the parties to a contract may agree to change the contract, including orally (or by the behavior of the parties during performance). The point here is that contract language does not become sacrosanct once written regardless of what the contract might say. This idea should be kept in mind when reading and considering the following boilerplate provisions. Unavoidably, there is some overlap among all these provisions.

Alternative Dispute Resolution

Alternative Dispute Resolution. Contracting parties, of course, ordinarily desire that the contract be performed flawlessly by both sides, but provision often is made concerning what is to be done should the parties have a disagreement concerning the contract. “ADR” means some procedure in lieu of or at least preceding actual litigation (the filing of a lawsuit, etc.). The parties could agree to first try mediation, whereby a third-party neutral is hired to facilitate, if possible, the resolution of the dispute between the parties. Should mediation fail, the parties then could resort to some form of arbitration whereby a third-party neutral is hired to hear the dispute (as, in effect, a private judge) and make a final, binding, non-appealable decision. “Non-appealable” is a bit of a stretch because there are a few narrow grounds on which an appeal from an arbitration award can be taken. One of those grounds is arbitrability; i.e., whether it was proper to arbitrate the case at all.

In Southwinds Express Construction LLC v. D.H. Griffin of Texas, Inc., 513 S.W.3d 66 (Ct. of App.—Houston 2016), the contract between the parties indicated that Griffin, unilaterally, could eschew mediation in favor of arbitration where, in Griffin’s view, mediation would not be fruitful. When Griffin filed an arbitration claim in Houston through the American Arbitration Association, Southwinds objected to arbitration, arguing that Griffin could not unilaterally eschew mediation in favor of arbitration, even though the parties had expressly agreed to the same in their contract, because mediation was a “condition precedent” to arbitration and that Griffin’s agreement in the contract was illusory if Griffin could decide on its own not to mediate. The arbitrator ruled against Southwinds on the issue and arbitrated the case. After the arbitration award, which was in favor of Griffin, Griffin filed suit in a Houston district court for purposes of reducing the arbitration award to judgment. Southwinds objected on the basis that arbitration had been improper because no mediation had first occurred.  After written arguments, the trial court disagreed, affirmed the arbitration award, and granted judgment to Griffin. From that decision, Southwinds appealed to the 14^th Court of Appeals in Houston, which affirmed the lower court ruling stating: “Having concluded that the arbitration provision was not illusory, we further agree with the trial court’s conclusion that, under the plain language of the parties’ agreement allowing Griffin the option to bypass mediation (emphasis supplied by the court), mediation was not a condition precedent to arbitration for Griffin.”

Sample ADR clause: In the event a dispute arising out of or relating to this Agreement is not resolved through the negotiations of the parties, the dispute shall be submitted at any time by either party to mediation conducted through the National Arbitration Forum and its mediation rules then in effect. Should the dispute not be resolved through mediation, the dispute shall be submitted at any time post-mediation by either party to binding, non-appealable arbitration conducted through the National Arbitration Forum and its arbitration rules then in effect. The arbitration award may be reduced to final judgment in any court having jurisdiction of the subject matter.

Assignment and Attachments

          Assignment and Subcontracting. Generally, the parties to an agreement are contracting with precisely whom they wish to contract, and they do not want the other party to have the unfettered ability to substitute a third party for itself, by way of assignment or subcontracting or in any other way. Sometimes it is not allowed at all; sometimes it is allowed but only with express permission. If any such permission is granted, generally the assignee or subcontractor must agree to the terms of the original agreement. The exception to this is that, often, the party receiving income under the contract is allowed, without the requirement of requesting permission, to assign to a third party the right to receive the income (such as pledging the income against a loan). On the other hand, sometimes the right to assign the right to receive the income to a third party is prohibited unless the party making the payments agrees to the assignment.

In Kehoe v. Kehoe-Berge Coal Company, 130 A.2d 165 (Penn. 1957), the contract prohibited rights assignment without the obligor’s permission. The original obligee nonetheless assigned his payment rights to a third party, who then assigned the rights to another third party, who then assigned them even to a further third party. Through all these assignments, the obligor, notwithstanding the contract language, kept paying the obligation. Eventually, the original obligee, in a dubious twist of logic, sued the obligor for making all those payments without expressly granting itself the permission to do so. The appellate court adopted the decision of the lower court, quoting that court: “In making the assignment, the [original obligee] disregarded the plain terms of the contract and is not now in position to repudiate his act by objecting to the action of the [obligor] in treating the assignment as valid [by not objecting to the assignment]. When [the obligee] executed the assignment and [the obligor] recognized the same as valid and pursuant thereto made the payments called for in the contract to the assignee, the contract as between the [obligee and obligor] was terminated, and [the obligee] cannot now maintain an action thereon.”

Sample assignment and subcontracting clause: Neither party may assign this Agreement without the express written permission of the other party, which permission shall not be withheld unreasonably. Notwithstanding the foregoing, payments due or to become due under this Agreement may be assigned by the receiving party at its discretion. The work to be performed under this Agreement may not be subcontracted to a third party or third parties without the express written permission of the other party, which permission shall not be withheld unreasonably. Any permitted contract of assignment or permitted subcontract shall contain express provisions binding the assignee or subcontractor to all of the relevant terms and conditions of this Agreement as context would dictate.

          Attachments, Schedules and Exhibits. Often, contracts refer to “attachments” or “schedules” or “exhibits” (collectively, here, “Exhibits”). These terms are largely interchangeable. Exhibits are “attached” at the very end of the contract after the signature lines (and notary seals, if any). They may contain minute data (e.g., software code) or long lists (e.g., songs being conveyed by a songwriter to a music publisher) or legal descriptions of multiple real properties being conveyed. Normally, in the body of the contract where an Exhibit is referenced, there will be language such as this: “…attached as Exhibit A, which exhibit is hereby made a part of this Agreement for all purposes.” In contracts with multiple exhibits, this language can be expressed in the boilerplate section. Regardless of where located, it is done to avoid ambiguity due to the fact that the exhibits come after the signature lines. One issue that can result from an after-signatures document is whether the language in that document is enforceable under the agreement to which the document is attached. Language should be included in the agreement that makes it clear that the language in the after-signatures document forms a part of the agreement (if that is the intention of the parties). Sometimes the main document will reference the attachment but not specifically state that its language is meant to be enforceable under the main document; that can be problematic.

In Thurman v. Wood Grp. Prod. Servs. (E.D. La. 2010), the Court ruled that the attachment at issue was a part of the main agreement by its physical attachment to the main document and the fact that the main document referenced the attachment even though the main document did not indicate expressly that the attachment was a part of the main document. The Court also looked to the intent of the parties and found that the parties’ intent was to include the attachment as a part of the main agreement. Many other courts have decided this issue differently on these facts.

          Sample attachments, schedules, and exhibits clause: All attachments, schedules, and exhibits (collectively, Exhibits) referred to in this Agreement are hereby made a part of this Agreement for all purposes. Any and all changes to the Exhibits at any time subsequent to the full execution of this Agreement by the parties shall comply with the provision of this Agreement relating specifically to amending this Agreement.

          Collection and Attorney Fees/Costs. Where a contract requires payment from one party to the other that has not been timely made or where there has been a successful lawsuit by one party against the other concerning some contract issue, the non-breaching or prevailing party naturally wants to collect such monies and be reimbursed its costs. This process usually involves the services of an attorney, so the collecting or suing party wants the other party not only to pay the principal amount and any associated interest that has accrued but also to pay the cost of collection or suit — attorney fees, court costs, and other actual and reasonable costs of collection. Generally, costs are collectable. In some jurisdictions, attorney fees are not recoverable in all circumstances; in others, they are recoverable generally, and in still others they are recoverable but only at the court’s discretion. In any event, contract drafters generally will attempt to cover all these bases. Many contracts call for the “prevailing party” to be entitled to attorney fees.

          In Benchmark Builders, Inc. v. Schultz, 294 Ga. 12, 751 S.E.2d 45 (Ga. 2013), the construction company that built a home sued the homeowners for unpaid monies and the homeowners counterclaimed seeking various types of damages. The jury found that the homeowners were not liable to the builder and that the builder was liable to the homeowners, but the jury awarded no damages at all; however, the jury did award attorney’s fees to the homeowners. The trial court granted judgment in that amount, and the builder appealed. The Court of Appeals affirmed, as did the Supreme Court. The contract between the parties stated: “If any action at law or in equity...is brought to enforce or interpret the provisions of this agreement, the prevailing party shall be entitled to recover reasonable attorney’s fees from the other party, which fees may be set by the court in the trial or appeal of such action or may be enforced in a separate action brought for that purpose and which fees shall be in addition to any other relief which may be awarded (emphasis supplied by court).” The Court agreed with the homeowners that the specific language of their agreement permitted the award of attorney’s fees even where no other damages were awarded because the homeowners had prevailed on liability and because the contract phrase “may be awarded” did not require other damages actually to be awarded.

Collection and Enforcement

Sample collection and attorney fees/costs clause: In the event the party to this Agreement who is to receive funds from the other party pursuant to this Agreement does not timely receive all or any part of said funds and the non-receiving party chooses to employ an attorney in the collection thereof, the non-paying party hereby agrees to pay the non-receiving party’s actual and reasonable attorney fees and costs of collection. In the event there is any controversy or claim arising out of or relating to this Agreement or to the interpretation, breach or enforcement thereof and any action or proceeding is commenced in relation thereto, the prevailing party shall be entitled to its actual and reasonable attorney fees and costs from the non-prevailing party.

          Compliance with Law and Regulations. In some situations, one party to an agreement is quite interested in the other party to the Agreement complying with all laws and regulations relating to the performance of the agreement. A very good example is where an owner has signed an agreement with a contractor to demolish a building. Pursuant to permission granted to it by the owner, the contractor enters into various subcontractor agreements in relation to the project. One of those subcontracts could be for asbestos abatement. It is vitally important to the owner and the contractor that the subcontractor comply with all laws (federal and state) and regulations (federal and state) relating to, for example, environmental concerns because the owner and the contractor could be held liable by federal and/or state authorities for the noncompliance of the subcontractor.

Sometimes, one party to a contract-based lawsuit will want to hold the other party liable for not complying with certain laws or regulations where the contract itself does not require the same. The question is whether such requirements can be implied.       In Devona v. Zeitels (D. Mass., 2016), the court ruled: “As to the dispute over FDA compliance, it is undisputed that the Agreement contains no provision obligating DeVona to maintain Endocraft in compliance with FDA regulations. The Agreement is unambiguous as to DeVona’s FDA compliance obligations; the obligation is simply not present in the Agreement,” meaning that unstated requirements concerning compliance with law and regulations would not be implied by the court.

Sample compliance with law and regulations clause: The party to this Agreement receiving compensation for the performance of this Agreement expressly agrees to comply with all laws and regulations relating to the subject matter of this Agreement, keep records evidencing such compliance, provide such records of compliance to the other party on the other party’s reasonable request, and notify the other party when at any time and within a reasonable time thereof it becomes aware of any allegation of noncompliance or suggestion of noncompliance or inquiry concerning noncompliance by any federal or state regulatory agency.

          Conflicts of Interest and Fraud. In this context, conflicts of interest involve one party to a contract being in the position of having to choose between fidelity to the other party in that agreement or fidelity to its own self-interest. An example might be where a consulting company is contracted with by an owner to choose objectively from a group of general contractor bidders but where the consulting company turns out to have a financial interest in one of the bidders (it may not have known the conflict would arise when it accepted the contractual assignment). When the conflict arises, the party with the conflict, under relevant boilerplate language, has the responsibility of disclosing the conflict to the other party such that the conflict can be avoided or the agreement terminated. Where disclosure is not made and the company in whom the financial interest exists gets the bid (especially when it was not the lowest bidder or the highest-quality bidder), the non-disclosing party could be committing civil fraud against the other party and could be liable for damages and subject to injunctive relief. Breach of contract for fraud and conflict of interest can occur without language to that effect in the agreement itself, but having the language in the agreement has distinct advantages, such as making it clear that the non-breaching party has a particular interest in not being the victim of such actions by the other party.

          In Victory Lane v. Paul, Hastings, Janofsky & Walker, 409 F.Supp.2d 773 (S.D. Miss. 2006), the court allowed a cause of action for fraud and conflict of interest to proceed to trial on the theory that they constituted a breach of fiduciary duty because the defendant knew or reasonably should have known of the conflict.

          Sample conflicts of interest and fraud clause: Each party represents and warrants that it has no business, professional, personal, or other interest that would conflict in any manner or degree with the performance of its obligations under this Agreement and that if any such actual or potential conflict of interest arises during the term of this Agreement, the party experiencing the actual or potential conflict of interest immediately shall inform the other party in writing of such conflict. If, in the reasonable judgment of the party so notified, such conflict poses a material conflict to and with the performance of the notifying party’s obligations under this Agreement, then the notified party may terminate this Agreement immediately upon written notice to the notifying party; such termination of this Agreement shall be effective ten (10) days after the receipt of such notice by the notifying party. Should a conflict of interest go undisclosed, the non-disclosing party shall be liable in civil fraud to the other party for all damages, including attorney fees and costs, suffered as a result of the non-disclosed conflict of interest and the non-disclosing party shall be subject to injunctive relief in favor of the other party.

Miscellaneous Clauses

          Counterparts.        Given the role of electronic devices and systems in the modern world of commerce and the desired speed of transactions, it is not always realistic to conclude a negotiated agreement with a single, original document containing the original signatures of all the parties (and notaries, if applicable). So the remedy for this conundrum is to have boilerplate language that does away with the requirement of original signatures on a single document, replacing that construct with the idea that as long as the document is exactly the same, there can be as many “counterparts” as necessary, i.e., as few as one signature per document. This idea took a while to gain acceptance but is universally accepted today. Of course, when a party is looking to avoid its obligations under a purported contract, it will look to any and every provision of the contract that might invalidate the contract, such as the provision allowing the contract to be signed in counterparts.

          In Bohlen Industries of North America, Inc. v. Flint Oil & Gas, Inc., 483 N.Y.S.2d 529, 106 A.D.2d 909 (N.Y.A.D. 1984), the parties were negotiating a settlement agreement to the underlying contract. The settlement agreement contained a provision stating: “This document may be signed in several counterparts, all of which when attached together shall constitute a single, complete agreement.” Per that provision, all of the parties signed the settlement agreement and that fact was announced to all the parties but copies of the various counterparts were not delivered to the parties or “attached together.” On that basis, one of the parties argued that the settlement agreement never was effectuated. The court ruled that actual delivery of an executed agreement to each party was not essential for the contract to be effective unless the contract itself stated that the executed contract was invalid unless delivered to all the parties.

Sample counterparts clause:    This Agreement may be executed in any number of counterparts with each such counterpart deemed to be an original instrument; all such counterparts together shall constitute one and the same agreement.

          Data Protection. The U.S. Data Protection Act of 1998 and other laws have had a profound impact on the collection, use, and transfer of personal information about individuals by companies, organizations, and government entities. By no means do all contracts require a data protection clause. Given the complexity of the issue and the length of data protection “clauses,” there will be no general discussion of it here. “Clauses” is enclosed in quotations marks because contract language concerning data protection requires a great deal more space than a clause. Readers of this writing are encouraged to study independently the idea of the inclusion of data protection language in contracts.

Sample data protection clause: See above paragraph.