Counsel beware. Lawyers who reflexively plug boilerplate terms into their contracts, without thoughtful consideration as to whether those terms are warranted or appropriate under the circumstances, risk unforeseen consequences that could seriously impair the parties’ benefit of the bargain. Black’s Law Dictionary defines boilerplate as “ready-made or all-purpose language that will fit in a variety of documents” or as “fixed or standardized contractual language that the proposing party views as relatively nonnegotiable.” By their very nature, boilerplate terms appear innocuous and typically go under the radar until the business terms are set. However, an inartfully drafted indemnification or a seemingly benign arbitration clause could spell disaster for the unwary general counsel.
There are two basic types of boilerplate common to most commercial settings: risk management and allocation issues (e.g., indemnification, limitation on damages, shifting responsibilities for legal fees, merger clauses) and process and procedural issues (e.g., arbitration, mediation, notice requirements, choice of law, venue and jurisdiction.)
There is an understandable tendency among busy commercial lawyers simply to accept boilerplate terms that appear in a draft, or to ignore the need to customize their own template from a prior deal. Whether it is an executive employment contract, an operating agreement or a heavily negotiated commercial contract, lawyers focus almost all of their attention on negotiating and memorializing the deal points — which is all that the client usually thinks about in the context of “papering the transaction.” As a consequence, the standard boilerplate gets little, if any, meaningful attention.
Once an agreement is executed and important dates, performance metrics and other particulars are recorded, the document itself goes into a file in some desk drawer and may never again see the light of day — until, of course, there is a dispute. Once it becomes necessary to dust off the contract, the focus turns to risk assessment and management, and dispute resolution. It should come as no surprise that pressing the fast-forward button during the contract-drafting stage, at a time when these controversies are purely hypothetical, can provide invaluable insight.
Akin to a prenuptial agreement, a good commercial or business agreement should provide appropriate mechanisms for unwinding the relationship or for dispute resolution in the event that the chemistry doesn’t work or expectations are not met. When so much attention and focus are required to create the transaction (or relationship) in the first place, it is easy to imagine why short shrift is given to terms like notice, merger, successor and assigns; or to features like arbitration, choice of law, jurisdiction or venue. Too often, the attitude is “if something goes wrong, we’ll deal with it then.” In truth, many of these terms which are simply plugged into the draft by the lawyer as an afterthought warrant thoughtful attention and input from the business side and from litigators in order to understand and maximize the often subtle benefits of strategic drafting and to manage potential risks down the road.
For instance, having the upper hand in litigation often hinges on relative convenience and creating disincentives for your counterparties. While most litigations turn on the merits of the parties’ respective positions, controlling the venue of the contest and which law will apply can bring substantial advantages. The unwary draftsperson is not thinking about things such as having to sue the other side in an inconvenient jurisdiction in the event of a breach or, worse yet, being sued in an unfriendly forum. But if a dispute develops, forcing the other side to litigate in your home court under a more favorable rule of law can provide significant advantages.
As the term sheet takes shape, give some thought to whether your side is more or less likely to be the aggrieved party. For example, if you represent the party providing services or delivering goods, chances are that you do not much care about discovery in the event of a dispute. Your client’s issue will involve getting paid, and you will have little or no need to engage in costly document discovery and depositions. Thus, arbitration may be something that should be seriously considered at the onset. By the same token, if you represent the other side of the transaction, meaningful discovery is a must and streamlined arbitration could be too restrictive.
Likewise, if you are based in New York and you are providing banking, investment advisory or other financial services to customers and clients throughout the country, you will want to ensure that the well-developed, industry-specific laws of New York govern your relationship and that any dispute is venued here. New York is the well-recognized financial capital of the world, so why would you want to litigate your dispute in Broken Arrow, Oklahoma where the financial services industry is virtually non-existent? And why should you unwittingly subject yourself to a suit in an inconvenient or unfriendly forum?
In one case involving the equipment financing of private medical centers throughout Texas, a New York-based lender found itself embroiled in a volatile dispute over equipment warranties and merchantability. Although the equipment leases provided for venue in New York (credit the thoughtful draftsperson), they were silent as to which state laws would apply in the event of a controversy (an unfortunate oversight). As a consequence, the lender was able to sue in New York, but unfortunately found itself exposed to treble damages and an award of legal fees under a draconian Texas statute targeting deceptive trade practices. Definitely not the intended result.
The bottom line is simple. Customized boilerplate will not ordinarily drive a business deal. But a few minutes of thoughtful planning and informed drafting can pay real dividends in the event that a dispute arises and lines must be drawn.
This is the first in a series of three articles. The second installment will provide a more in-depth exploration of the critical procedural issues in the context of contract-driven disputes, such as indemnification, limitations of liability and merger clauses. The final article in the series will deal with the mechanisms of dispute-resolution such as arbitration, mediation, jurisdiction and choice of law.