Why Boilerplate Clauses in Contracts Matter More Than You Think

“It’s Just Boilerplate” and Other Lies – Common Contract Provisions and Their Meanings

1. Choice of Law (Governing Law)

This provision specifies which jurisdiction’s laws will apply to the contract. It is particularly important in agreements involving parties from different states or countries, as laws can vary significantly across jurisdictions. A well-drafted choice of law clause ensures consistency and predictability in interpreting the contract.

Pros:

• Provides clarity on applicable laws, avoiding confusion in case of disputes.
• Helps parties select a favorable jurisdiction that aligns with their interests.
• Reduces the risk of unexpected legal interpretations by applying a known legal framework.

Cons:

• May put one party at a disadvantage if they are unfamiliar with the chosen jurisdiction’s laws.
• Some jurisdictions may have unfavorable or outdated laws that disadvantage one party.

2. Jurisdiction

While the governing law section decides which law applies, the jurisdiction provision specifies which courts have jurisdiction over the parties and the subject matter.

Example: A contract might specify that “all disputes shall be subject to the jurisdiction of the courts of Oregon.” It may also specify that the parties agree to be bound by the jurisdiction of the state of Oregon. This means Oregon courts have the power to decide the case.

Pros:

• Clearly defines which courts have authority, reducing disputes over where to litigate.
• Prevents cases from being heard in courts that may be unfavorable or unfamiliar.
• Avoids legal battles over jurisdiction, saving time and expenses.
• Stops parties from seeking courts that may give them an advantage.

Cons:

• Parties may be stuck with a jurisdiction that becomes inconvenient or unfavorable over time.
• If the jurisdiction selection differs from the governing law, additional legal costs may be required to educate a court about a foreign law.
• Some courts may refuse to uphold jurisdiction clauses if they conflict with local laws.
• If the chosen jurisdiction is far or costly for one party, litigation expenses may increase.

3. Venue Selection

Within a jurisdiction, it may be necessary to specify which court will hear the case. A venue provision might point to Clark County Superior Court in the State of Washington to ensure it is not litigated in Seattle, for example. It can minimize certain costs by pre-determining the location for legal proceedings.

Pros:

• Reduces uncertainty by pre-determining the venue for disputes, making legal enforcement more predictable.
• Can prevent expensive litigation in inconvenient or unfamiliar locations.
• Helps businesses plan ahead for potential legal issues by choosing a convenient venue.

Cons:

• May be unfair to one party who must litigate in an unfamiliar or distant venue, increasing costs and logistical difficulties.
• Can limit access to favorable courts that may offer better legal protections to a disadvantaged party.
• May not be enforceable in certain jurisdictions if deemed unfair or unreasonable.

4. Arbitration

Relatedly, this clause requires parties to resolve disputes through arbitration instead of litigation. Arbitration is sometimes preferred for its privacy, speed, and cost. Arbitration is much like a traditional court setting, except all matters of law and fact are decided by an arbitrator instead of a judge and jury.

Pros:

• Generally faster and less expensive than traditional litigation, which can save both time and money.
• Proceedings are private, which can help protect sensitive information and trade secrets.
• Arbitrators with expertise in the law or a specific industry can lead to more informed decisions than a jury could render.

Cons:

• Limits parties’ ability to appeal decisions, making unfavorable rulings harder to challenge.
• Some arbitration procedures may favor repeat players (e.g., large corporations with experience in arbitration).
• Arbitration costs can still be significant, particularly in complex cases requiring multiple arbitrators.
• Loss of access to a jury may result in decisions based more on the nuts and bolts of the law than on perceived notions of general fairness.

5. Indemnification

This provision requires one party to compensate the other for certain losses or damages – typically those incurred by third parties. It is commonly used to allocate risk between contracting parties and protect against financial harm.

Pros:

• Protects against financial losses due to another party’s actions, such as negligence or breach of contract.
• Encourages accountability by ensuring that responsible parties bear the cost of damages.
• Can be tailored to specific risks, ensuring appropriate coverage for potential liabilities.

Cons:

• May be overly broad, potentially forcing a party to bear excessive liability for unforeseen events.
• Negotiations over indemnity terms and procedures can be time-consuming and complex, leading to prolonged contract discussions.
• If not clearly defined, indemnification obligations may lead to disputes over what is covered.

6. Force Majeure

Also sometimes called the “Acts of God” provision, this clause excuses a party from performing contractual obligations due to unforeseen events like natural disasters, wars, disease, or other major events out of the parties’ control. It is particularly important in contracts where external factors could significantly impact performance. After the COVID-19 pandemic, many contracts reiterated that pandemics, epidemics, and government mandates are acts of god.

Pros:

• Provides protection against liabilities arising from uncontrollable events, reducing risk exposure.
• Reduces the risk of breach of contract claims during crises, allowing parties to focus on recovery efforts.
• Can include specific triggering events, ensuring clarity on when the clause applies.

Cons:

• If poorly drafted, it may not cover all relevant events, leading to uncertainty.
• Could be abused by parties looking to escape obligations even when performance is still possible.
• The burden of proof to invoke force majeure may be high, requiring substantial evidence of the event’s impact.

7. Severability

This clause ensures that if one part of the contract is found to be unenforceable, the rest of the agreement remains valid. It prevents an entire contract from becoming void due to one problematic provision.

Pros:

• Prevents an entire contract from becoming invalid due to one issue, preserving the agreement’s overall enforceability.
• Provides flexibility by allowing courts to modify or remove invalid provisions without redefining all the other terms of the contract.

Cons:

• If too broadly worded, courts may struggle to determine how much of the contract remains enforceable.
• Could lead to unintended consequences if key provisions are severed while others remain, altering the contract’s original intent.

8. Attorney Fees

This clause specifies whether the prevailing party in a legal dispute will be entitled to recover attorney fees from the losing party. These are usually “winner take all” provisions, regardless of who files suit against whom. (Alternatively, this provision may be written in the opposite, indicating that each party typically pays their own legal costs, regardless of the outcome).

Pros:

• Encourages fair litigation by ensuring that the winning party is not financially burdened by legal fees.
• Can deter frivolous lawsuits if the losing party risks paying the winner’s legal costs.
• Provides clarity on financial risks associated with legal disputes, allowing for better planning.

Cons:

• If mutual, both parties take on the risk of covering attorney fees in the event of a loss, increasing the stakes of litigation.
• May discourage settlement if parties are overly confident in their chances of winning, leading to prolonged disputes.
• Courts may have discretion in enforcing these clauses or deciding what the amounts of attorney fees should be, leading to unpredictability in outcomes.

9. Notice

This provision dictates how and where official communications related to the contract must be sent (e.g., email, registered mail, etc.).

Pros:

• Ensures all parties are aware of important notices, reducing the risk of missed communications.
• Helps prevent disputes over whether proper notification was given in legal matters.
• Standardizes communication methods, ensuring clarity on how parties should interact.

Cons:

• If too rigid, such as requiring notice to be by first class mail only, it might create problems in modern business environments where digital communication is preferred.
• Failure to follow strict notice requirements may render a notice ineffective, potentially harming a party’s rights.

10. Entire Agreement

Sometimes called a “Merger” or “Integration” clause, this provision makes clear that the contract contains the entire universe of terms between the parties. It usually specifies that the agreement supercedes all prior agreements, written or oral.

Pros:

• Ensures all parties need to be aware of only this document for the terms of the transaction or promise.
• Helps prevent disputes over side agreements or verbal promises.

Cons:

• Modifies and/or eliminates prior agreements that might have been advantageous to one party or another.
• This is a quintessential “it’s just boilerplate” provision. Because prior oral agreements are excluded, careless signatories might not realize existing promises have been modified or eliminated.

Conclusion