Boilerplate provisions in contracts – does anybody really read this stuff? (Part 1)
“Habit is habit, and not to be flung out of the window by any man, but coaxed down stairs one step at a time.” – Mark Twain
If you ever have trouble sleeping, pick up a copy of any contract and turn to the “Miscellaneous Provisions” – the ones in the very back. These are the provisions that are frequently referred to as “boilerplate;” so named because, once upon a time, text that was intended to be used over and over again without change was preserved on steel printing plates that resembled the sections of a boiler. Nowadays, the same language is preserved electronically. Maybe it should be called “boilerbytes.”
Regardless of etymology, these provisions were created by someone, long ago, to address a specific issue and are now repeated, often verbatim, simply because they have always been included. Generally, little thought is given to how they actually apply to the particular contract or the impact they could have on a transaction. It’s important to realize that when it is least convenient to you, someone will read these provisions (possibly for the first time) and they will either be your best friend or worst enemy. So understand them now.
This is the first of a three-part series.
Which Rules Rule?
The granddaddy of all boilerplate provisions almost always reads something like this:
“This contract will be governed by, and construed in accordance with, the substantive laws of the State of Utopia, other than those provisions that would direct the application of the laws of any other state.”
In a simpler time, contracts were governed by the laws of the state in which they were formed or the state in which they were to be performed. The determination of the applicable law was pretty simple until Alexander Graham Bell made it possible for the contracting parties to be in different states at the time of formation. The modern approach is to apply the laws of the state with the most significant contact to the transaction. This leads to some interesting conclusions because there is no real agreement on whether the domicile of the parties is more important than the location at which the contract is formed, or whether the location at which goods are manufactured is more important than the location at which they are delivered.
So, to clear up any confusion about the applicable rules, contracting parties began agreeing on which laws would apply to any dispute. Sounds simple, right? Just pick a state with laws that are favorable to you. Besides, they’re all pretty much the same. WRONG!
Most courts will give great weight to the laws chosen by the parties to a contract and apply the chosen law. However, there must be some relationship between the contract and the chosen laws. You can’t just name the laws of a jurisdiction because you like them or because they provide an advantage. Fortunately, many states take a pretty broad view of what transactions may be governed by their laws. One state (at least) believes that any contract involving more than $250,000 can be governed by its laws, even when neither of the parties nor the transaction has any other relationship with the state.
Even if the parties make a valid choice relating to the laws governing the construction and interpretation of a contract, it doesn’t put the issue to rest. Claims relating to contract formation, like fraudulent inducement, might be governed by the laws of the state in which the contract is formed even if the parties agreed to a different state. The Fifth Circuit has held that a clause similar to the above example electing to apply New York law did not apply to tort claims based upon the contract. The result? Benchmark Electronics was allowed to pursue a claim of fraud against J. M. Huber Corp. under Texas law even though the parties agreed the contract would be interpreted under New York law and a breach of contract claim would be governed by New York law.
Where Do We Meet?
Just because a contract is governed by the laws of the State of Utopia does not mean that a claim has to be filed in a Utopian court. In fact, a claim could be filed in any state that can obtain jurisdiction over the party against whom the claim is filed – usually the state in which they reside or in which they conduct business. And it has long been recognized that laws of the state in which the case is filed govern how disputes are resolved. Contracting parties frequently agree in advance where claims must be filed. The usual language:
“The parties to this agreement irrevocably submit to the exclusive jurisdiction of the State and Federal courts sitting in the City of Moksha, State of Nirvana, over any dispute between them relating to or arising out of this contract.”
More often than not, the parties try to pick a forum that is convenient without regard to how the choice can affect the outcome of a claim. After all, the laws of the State of Utopia will apply regardless of where the case is heard. Big mistake.
Ask any baseball fan about the “ground rules.” The number of outs in an inning, the number of strikes for an out, the free pass to first base for four balls (or for being hit by a pitch), and the rules that determine whether a run is scored – the substantive rules of the game – are agreed between the players and are the same in every venue. But every ball park has a set of rules regarding how the game is played in that venue – the procedural rules. Take, for example, the rule that treats a batted ball lodged in the ivy-covered walls of Chicago’s Wrigley Field to be a two-base hit and all baserunners advance two bases. However, in Atlanta’s Turner Field, the same batted ball lodged in the chain link fence in front of the field level scoreboards is a dead ball and the runners advance one base.
Apply this same idea to litigation over a breach of contract. You agreed that the substantive rules to determine whether a contract exists and whether a breach has occurred are established by the laws of the State of Utopia. However, the statute of limitation, burden of proof, admissibility of evidence, presumptions, and rebuttability of presumptions, are usually procedural matters and determined by the “ground rules” of the court in which the case is pending – the procedural rules of the State of Nirvana. Imagine this: evidence of a breach may be recognized by the State of Utopia but may be inadmissible in the State of Nirvana; or a case that may be brought in Utopia at any time within four years after the event may have to be brought within two years in the State of Nirvana.
The outcome of a case between contracting parties (or of a game between the Cubs and the Braves) easily could be determined based upon where the contest is played.
So Who Will Decide?
Unlike baseball, the players have some flexibility if they don’t like some of the ground rules and they don’t have to rely on the umpires provided by the league, to decide whether there has been a violation of the substantive rules. For example, the parties might believe that a contract for the development of a property tax management system is too complicated for the average jury. Or maybe they don’t want the time and expense of a jury trial. What to do? Agree in advance that claims under the contract will be resolved by the court without a jury.
“Each party hereby expressly and knowingly waives and releases all rights to trial by jury in any proceeding brought by any party against the other on or with regard to any matters arising out of this agreement.”
But you have to be careful. While parties can generally agree to changes in the procedural rules, they cannot generally agree to make changes to the substantive rules. Some states, like California, do not recognize a pre-dispute jury waiver unless expressly authorized by statute. In that case, the enforceability of a pre-dispute jury waiver is a matter of the substantive law – part of the rules of the game – and the case will be heard by a jury even though the parties agreed otherwise.
One solution is to opt out of the litigation process entirely and agree to resolve disputes through arbitration. All states recognize the enforceability of an agreement to arbitrate disputes. Arbitration clauses can be incredibly simple or incredibly complicated. They can rely on the rules and procedures prepared by an established arbitration forum, like the American Arbitration Association or the International Chamber of Commerce, or the parties can write their own rules. Regardless of the approach, it’s important to weigh the advantages of arbitration – time, confidentiality and expertise – against its disadvantage – limited or no review of an adverse decision and higher costs. In addition, equitable remedies, like specific performance and injunctive relief, might be more effective if ordered by a court instead of an arbitrator.
This is one area in which one size does not fit all and where boilerplate or boilerbyte provisions can create obstacles instead of removing them.
So the first order of business is to make sure the contract is governed by an acceptable set of substantive laws and an acceptable set of ground rules. They can then agree on some changes to the rules and on who will be calling balls and strikes.