Boilerplate provisions in contracts – does anybody really read this stuff? (Part 2)

Alex Hamilton, Lawrence E. Wilson

July 19, 2017

“All paradises, all utopias are designed by who is not there, by the people who are not allowed in.” – Toni Morrison

Congratulations! You’ve gotten through the Choice of Law, Choice of Forum, Waiver of Jury and Arbitration clauses in Part I and are ready to tackle some more “boilerbytes.” Let’s see what your contract includes and, at least as important, what it doesn’t include.

The bad news: some of the provisions you wrote may not be enforceable, and some of the agreements you made may not be included. The following provisions address particular problems in contract interpretation.

Who’s On First

What happened to all of those conversations, promises, and handshakes that led up to the signing? Are they part of the contract? Maybe. Maybe not.

The general rule – called the parole evidence rule – states that a party may not introduce evidence of previous discussions to contradict or supplement a written document that is complete on its face. So how do you know if a written document is complete without introducing evidence of those previous conversations, promises and agreements? You agree of course.

“This agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and incorporates all prior written or oral understandings of the parties. Neither party has made or relied upon any representation or warranty that is not contained in this agreement.”

Taken on its own, this looks good: the contract is complete and neither party can rely upon any prior agreements or representations that are not in the written agreement. And most of the time that is exactly the outcome.

As is so often the case, there is an exception: this clause is ignored when it comes to the meaning of an ambiguous term. And, of course, it’s never clear whether something is ambiguous until the parties can’t agree on what it means.

In a celebrated case out of New York (where else?), a buyer and seller entered into a contract for the supply of chickens. Seems pretty clear. To paraphrase The Bard, “… a chicken by any other name still smells as fowl.” But the buyer intended to purchase young tender birds and the seller delivered a mixture of young and old birds. Does “chicken” mean a young bird suitable for frying or broiling (as the buyer claimed) or does it mean any Gallus gallus domesticus (as the seller claimed)? The contract did not say.

So “chicken,” being ambiguous, the court allowed the parties to admit parole evidence to clear up the squabble. They looked at common definitions, usage in the trade, correspondence between the parties (which was conducted entirely in German but used the English word “chicken” instead of the German word “huhn” for some unexplained reason), and various other sources. In the end they gave up and held that the buyer had not satisfied its burden of proof to establish that “chicken” meant a young bird. So bad facts made fowl law.

What’s On Second

There are situations in which a contractual provision is not enforceable as written. They are too broad, or in conflict with a fundamental public policy, or violate an inalienable right of one of the parties. Lawyers spend a lot of time on this when they write enforceability opinions and usually exclude certain types of agreements because the law isn’t clear or the enforceability is based upon the particular facts involved. So what happens to the rest of the agreement if one of the provisions is not enforceable? Is the entire contract unenforceable? The severability clause comes to the rescue, sometimes:

“If any provision of this agreement is held to be invalid, such provision shall be severed from this agreement and the remaining provisions shall be enforced as if such invalid provision had never been included in this agreement.”

For some provisions – like the choice of law provision we discussed in the last installment – there is a ready-made judicial substitute. The courts will throw out the invalid provision and apply the normal choice of law rules. But if the invalid provision is so critical to the agreement and there is no judicially-made substitute, the entire agreement might fail in its purpose and the court would have no alternative but to make the whole agreement invalid.

The severability clause allows a court to use its “blue pencil” – like an old-time copy editor – to remove the offending clause from the contract. That’s a pretty good outcome for the party that would have had an obligation under the provision. It gets to enjoy the other benefits of the contract but has avoided the obligations under one of the provisions. Not so much for the party that would have received the benefit of that provision. It now has all the obligations of the contract without the benefit of the offending provision. Better check to see which side of that fence you are on before including a “blue pencil” severability clause.

Sometimes the parties will agree that a court can modify an offending clause to preserve the intent of the parties instead of removing it in its entirety. For example, it’s pretty common for parties to agree that a court may revise the duration in a non-compete clause instead of removing the clause completely. I’m always skeptical of allowing a court to insert its idea of what the parties’ intent was at the time of the contract. Would they have signed the same contract to buy a business if the seller could go into competition with the buyer after two years instead of the five years on which they agreed? Hard to say. Surely the seller would agree to this change since it has just received a reprieve after two years in non-competition prison. But the buyer has paid for a business that has some protection from competition for five years. It doesn’t look like the buyer will get what it paid for but it’s still a better deal than having the clause completely discarded.

Think about whether there are any provisions in a contract that, if they were changed in any way, should make the entire contract void or whether there should be compensation or some quid pro quo for a change.

I Don’t Know’s On Third

They say the only certainty in life is change. No matter how thoroughly the parties are, something might occur that they did not anticipate – or something they “knew” would happen doesn’t. When changes occur, the carefully drafted written agreement will need to be modified or supplemented.

I find it amusing how often lawyers insert the language “without the consent of the other party” in various places. Any contract can be amended, and the performance of a party may be waived, by agreement of the parties. So it’s completely redundant to say “without the consent of the other party.” But lawyers are nothing if not creatures of habit.

Amendments and modifications can be reduced to writing, oral, or implied by behavior that is inconsistent with the terms of the written document. In fact, it is possible to amend a written agreement without realizing it. So much for certainty. The following clause restores order to the universe:

This agreement may be modified or amended, and the observance of any term may be waived, only by a written instrument executed by all parties. No course of dealing between or among any persons having any interest in this agreement shall modify, amend or discharge any part of this agreement or any rights or obligations of any party under or by reason of this agreement.  

Up Next

We’ve now established some guidelines on how to handle specific issues about whether the contract survives the unenforceability of any provision, whether the written agreement is complete or may be supplemented by evidence of prior agreements, and whether changes to the agreement may be made after the fact. The next installment will cover the other positions.