Boilerplate provisions in contracts – does anybody really read this stuff? (Part 3)

Cyrus Chin, Lawrence E. Wilson

July 26, 2017

“I know you think you understand what you thought I said but I’m not sure you realized that what you heard is not what I meant.” – Alan Greenspan

Let’s review. We have a written document evidencing an agreement between the contracting parties that is governed by the substantive laws of the State of Utopia, with any claims being addressed in accordance with the procedure followed by the State of Nirvana, that cannot be supplemented with evidence of other agreements but can be amended with the written consent of the parties.

What more could you need? You’d be surprised. We’ll be brief (and lay off the Abbott and Costello references).

Did I Really Say That?

Shouldn’t a party to a contract be required to live with the consequences of their own language? Remember this term – contra proferentem. It means ambiguous language will be interpreted against the draftsman and is a very useful tool when you want to use someone’s words against them. The following language may be used to preserve contractual bliss:

“Each of the parties hereto acknowledges that such party was actively involved in the negotiation and drafting of this agreement and that no provision shall be construed in favor of or against any party because it is deemed to be the author thereof.”

Did I Really Sign That?

Parties to contracts used to sit down at a table together to sign the same document. Not any more. Nowadays, many contracts are electronically signed or manual signatures are exchanged electronically by email – or if you are really old school, by fax. So is the contract really signed by all parties?

This became enough of a concern that most states have adopted the Uniform Electronic Signature Act and the Federal Government adopted the Electronic Signatures in Global and National Commerce Act – the ESIGN Act (I love it when Congress spends time and tax dollars to make sure that the acronym has a cute meaning). Together these laws provide that a contract or signature “may not be denied legal effect, validity or enforceability solely because it is in electronic form.” Generally, for an electronic signature to be enforceable, the parties must agree to do business electronically. That agreement can be established by the circumstances of the contract but it’s easier to include a boilerbyte:

“This agreement may be signed in multiple counterparts, each of which is signed by at least one of the parties and all of which together shall be considered a single document. Any counterpart may be signed electronically by delivery of a facsimile or electronic copy of a manual signature or any other means acceptable under applicable laws.”

There are special requirements for consumer agreements but, generally, an electronic signature is just as effective as a manual signature and … Be sure to consider the environment before you print that scanned copy of the signatures.

Assignment

May a party to a contract assign the benefits to another person? Generally, contract rights are freely assignable. But that means that a person may be forced into a contractual relationship with someone that it would never have entered voluntarily. On the other hand, shouldn’t a party be permitted to assign a contract to a subsidiary, a trust or any other person over which it has control? And what about a change in control of a contracting party? If Gus Fring sells Los Pollos Hermanos to Madrigal Electromotive GmbH isn’t that the same as a transfer of the Los Pollos Hermanos distribution agreements from Mr. Fring to Madrigal Electromotive? We need a provision to address that. It might look like:

“This agreement may not be assigned by any party except to a subsidiary, trust or other entity controlled by such party. For the purposes of this provision any death, disability, liquidation, bankruptcy, merger, consolidation or change in the control of a party to this agreement shall be deemed to be an attempted assignment of this agreement by such party.”

Third-Party Beneficiaries

Who is entitled to the benefit of the contract? Did the parties intend to confer a benefit on a person that isn’t a party to the contract? Heck no! Let’s exclude all non-parties from having any rights or benefits under the contract. But wait. The indemnity provision says that the parties, their affiliates and their respective officers, directors, employees, and long lost cousins of less than the second degree of sanguinity are entitled to indemnification. Aren’t they beneficiaries? We need a provision for that. It might look like:

“This agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this agreement and their permitted successors and assigns. This agreement will not be construed to give any other person any legal or equitable right, remedy, or claim under or with respect to this agreement except for persons that are specifically entitled to indemnity under this agreement, which the parties intend to be beneficiaries of that provision.”  

Captions

A basic rule of contract construction says that all words in a contract are to be given meaning. So what happens if the caption for a section says “Commodity Prices” and the text in that section discusses the crop report for “Frozen Concentrated Orange Juice?” Is this an ambiguity that would permit the introduction of parole evidence of the agreement between Clarence Beeks and the Mortimer Brothers? And what if one of the important sections of the contract is completely omitted from the Table of Contents? We need another provision:

“The table of contents and headings of this agreement are inserted for convenience only, and shall not constitute a part of this agreement or be used to construe or interpret any provision hereof.”

Attorneys’ Fees

There is a quirk in Texas law that a lot of people don’t know about unless they follow the BoyarMiller’s ViewPoints on Legal Matters.

The Civil Practice and Remedies Code (that’s legalese for who gets what in litigation), says that a person may recover legal fees in a claim against an “individual or corporation.” A good thing too since litigation is so expensive. But the law doesn’t mention limited liability companies and limited partnerships and the courts read laws – or at least they read this law – literally. The Texas legislature has considered an amendment to the Civil Practice and Remedies Code to address this in the last two legislative sessions but failed to change the law. So, for now, legal fees can be recovered from individuals and corporations but not from limited liability companies or limited partnerships unless you have contractual provisions that reads something like this:

“The prevailing party in any claim to enforce this agreement is entitled to recover its attorneys’ fees from the non-prevailing party.”

Of course, you will have to figure out which party is the “prevailing party” but that’s a question for a different day. After all, “Keep Austin Weird” is a real thing.

Conclusion

Someone reads these terms. And they think about them … or at least they thought about them before they became a habit. And you should too. In fact, next time, start by reading the “Miscellaneous Provisions.” They might be some of the most important terms in the agreement.