Don't Get Burned On Boilerplate Contract Clauses
Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.
If you are in business, sooner or later you are going to have to sign a contract, maybe a bunch of them. Now while every contract is different, there are certain “standard” clauses, or “boilerplate provisions” that will be found in the vast majority of them.
Therein lies many traps for the unwary business person, even for those being advised by “standard” attorneys.
Too many attorneys casually glance over these provisions, because they “think” they know what they say, after all, they are “standard” clauses; they are “boilerplate provisions.” You know, “been there, done that, got the tee shirt” kind of contract clauses.
The attorney in a hurry can race you to the brink of contract disaster, and that’s a finish line you do not want to cross.
If you have an attorney like that; run, don’t walk, in the opposite direction, because these “standard” contract clauses can be dangerous to your legal and fiscal health. These “boilerplate provisions” can cause you to get third degree burns on your business. They can be time bombs waiting to explode.
Forget about “standard,” because that word does not mean the same thing as “good for you,” or “everybody agrees to these,” kind of contract clauses. These provisions must be carefully analyzed to see what the other side “taketh away” from your legal rights.
Let’s go over some of these types of “standard” provisions
LEGAL FEES PROVISIONS
Many contracts have provisions wherein if there is a dispute, or a court or arbitration action arising from the contract, the prevailing party will be entitled to legal fees. Except a lot of times the word “prevailing” isn’t used, and it’s a one sided agreement where the contract drafting party gets that benefit, and you don’t.
Don’t sign that, if they get fees if they win, so do you.
Further, the term “prevailing” has to be carefully defined.
Is that after a court verdict, or an appeal of the court verdict which affirms the lower court decision? What if there is a settlement before a verdict or determination by a hearing officer? Who then is the prevailing party? When does the term “prevailing” come into play? Guess what—it’s subject to negotiation.
So get an attorney that knows how to negotiate this type of clause.
Then there are frequently terms like “costs and expenses” in addition to legal fees which you might have to pay in a dispute. What are these? A better way to limit these is to negotiate a provision along the lines of “costs and expenses actually and necessarily incurred and paid for in the legal action/arbitration of the prevailing party.” (Remember; “prevailing” needs to be defined also).
Often these provisions deal with “reasonable” legal fees. Better to have a capped amount, or if that isn’t practical, something like “reasonable legal fees actually incurred and paid.”
These can be some of the most dangerous open end risk “standard” clauses in a contract. They can literally ruin you, and subject you to a contractual risk that is far in excess of whatever contractual benefit you might be receiving.
In these clauses, you might be required to “indemnify and hold harmless the other side for all judgments, damages, legal fees, court costs, etc.” in the event someone sues them either separately or along with you for reasons arising out of the contractual relationship.
If you agree to that type of contractual language, you might as well close your business doors, lay down in front of them with a “Welcome” tattoo on your chest, so that the rest of the universe can walk all over you too.
Never, never, never (are you getting the message?) NEVER agree to an indemnification clause like that.
Indemnification of the other party should only be triggered upon the “adjudicated” determination that by reason of your negligence or bad act, the other side, without any fault on their part, has been damaged.
Tough to negotiate that, but not at all impossible; the key is to limit as much as possible the triggering event that will bring an indemnification clause into play. For that, you need an attorney that not only knows how to read a contract, but how to negotiate changes to it.
FORCE MAJEURE CLAUSES
This “standard” clause, which sounds like something you’d order in a French restaurant, deals with situations where the other side is not responsible for breaching its contract with you. Again, here is where a careful reading of the clause is crucial, because there are times where a “clever” attorney will draft this contract so that there are reasons why his client does not have to perform, that are completely within the power of the client to deal with.
Now normally these clauses excuse non performance when there are strikes, wars, storms, government interventions and alien invasions from the planet Jupiter, things like that. (Actually that last event isn’t usually covered—at least not yet).
But you have to watch out for language like “and similar events” or language where they say, “including but not limited to” those wars, storms etc. Because therein lies danger for you and your business.
You are going to run into these clauses, and others in most of the agreements you are required to sign, with suppliers, landlords, lenders, etc. You are not, on your own, going to be able to fully understand and properly negotiate these clauses to your advantage, or at least for your maximum protection, because that’s not what you do for a living.
Before you sign on the line which is dotted, if you wish to act like an intelligent and reasonable business person, you really should contact an experienced contract attorney who can review the agreement, see where the “rough spots” are, and help negotiate with the other side to smooth them out.
Failure to do so, “going it on your own” when it comes to these “standard clauses” and contract review and negotiation in general, is an express train to potential disaster for your enterprise.
What is someone asking you to sign today?