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Boilerplate clauses

Thursday, 10 November, 2011
Author: Sandra Braithwaite

Introduction

Boilerplate clauses are found in most contracts.  They are administrative in nature and not as glamorous as the key terms negotiated by the parties.  Consequently, the parties to a contract often cast a very quick eye over these boilerplate clauses, with little thought as to whether they are suitable.

However, poorly drafted boilerplate clauses can have serious and unforeseen consequences.  Recent case law has highlighted this issue.  This article sets out some of the traps inherent in not giving certain boilerplate clauses the attention they deserve.

Entire Agreement

An entire agreement clause states that no matter what else has been written or said by the parties, the written words of the contract contain absolutely everything which the parties have agreed.  This means that if a dispute arises, the starting point is that the words in the contract trump all other documents or statements.  This can be problematic.  Often there are other documents that do form part of the arrangements between the parties, and if this is the case, those documents should be incorporated into this clause.

In the 2008 case PAE (New Zealand) Limited v Brosnahan & Others[1] the High Court found that pre-contractual representations which distorted the financial position of a business being sold, while misleading, were negated by the entire agreement clause.  In 2010 the High Court in WaikatoLink v Comvita New Zealand Limited[2] also concluded that an entire agreement clause could defeat a misrepresentation claim (although in that case a remedy was available under the Fair Trading Act 1986).

Equally, care should be taken to ensure that obsolete documents are not referred to in this clause.  This can occur when the clause is copied from similar (but out of date) contracts.  In the 2007 case Gatehouse v Middleton[3] the entire agreement clause referred to documents which did not, in fact, form part of the arrangements, resulting in the court having to imply a term into the contract.

Assignment

It is common for a contract to restrict the parties from assigning their respective interests in the contract.  Before automatically adding a non-assignment clause, you should consider whether it is necessary or appropriate to restrict both parties.  If the service to be provided depends on the personal attributes of one of the parties then it is more likely that a non-assignment clause should be included.  It may, alternatively, be acceptable for the contract to be assigned upon obtaining the written approval of the other party.  Consideration should also be given to whether there should be a “deemed” assignment when the control of a party changes (e.g. due to a change in shareholding).

Power of Attorney

In a 2010 case, Totara Investments Limited v Crismac Limited & Ulster Limited[4], Totara believed that a clause in an agreement gave it a power of attorney to grant itself general security agreements over Crismac’s and Ulster’s assets and then appoint receivers. The High Court agreed with Totara’s view, although this was later reversed by the Court of Appeal and then the Supreme Court.  This case highlights the need for parties to ensure that boilerplate clauses accurately reflect their intentions.

Counterpart Signing

Insertion of this clause allows the contract to be signed in a number of separate parts and usually also by facsimile and/or e-mail.  When this clause is omitted, lengthy delays can be experienced. Counterpart signing is therefore important if time is of the essence.  The clause allows each party to sign a separate copy of the document.  All the copies are then brought together to form one document

Contracts (Privity) Act

The Contracts (Privity) Act 1982 provides that a person who is not a party to a contract is entitled to sue the parties to obtain a benefit conferred on them by the contract.  To ensure that this situation does not arise, contracts should include a provision stating that, unless the contract expressly provides otherwise, the contract is not intended to confer a benefit on any person who is not a party to it.

Force Majeure

A force majeure clause is designed to excuse one party from its obligations under the contract in special circumstances which are beyond the control of the parties.  It may have become impossible or impractical for a party to perform its obligations.  This may be due to an “act of God” such as an earthquake or flood, or an event caused by others, such as a labour dispute.

It is important that the parties consider exactly what events should qualify as a force majeure event, how notice is to be given if a force majeure event occurs and how each party’s obligations under the contract will be affected.  The clause should also require each party to mitigate its losses in the event of a force majeure event.

Jurisdiction

If there are cross-border elements to a contract, or the parties are located in two different legal jurisdictions, the contract should clearly state which country’s laws will govern the contract and which country’s courts have jurisdiction to resolve disputes.

Conclusion

Careful consideration should be given to drafting boilerplate clauses that correctly reflect the needs and intentions of the contracting parties.  There is a substantial risk in simply “cutting and pasting” standard clauses, without considering how those clauses fit with the rest of the contract and the relationship between the parties.