Commercial contracts can often appear overly long and detailed, especially when drafted by a solicitor. Why is this? Expert commercial solicitors want to ensure that any contract prepared and negotiated by them covers all likely situations and gives you and your business, the best protection possible. As a result, you may see several clauses (pages of them sometimes) which don’t seem to form part of the actual deal or original instructions to your legal advisor. These are known as the boilerplate clauses.
What are boilerplate clauses in commercial contracts?
Boilerplate clauses in commercial contracts are provisions which do not necessarily form part of the commercial deal, but which are necessary or standard to include to provide some form of protection for a party, to explain certain processes or procedures which may arise pursuant to the contract or commercial relationship or to set out the legal situation. As a result, to the extent that these clauses require negotiation, this will often be done between the contracting parties’ legal advisors and as the client, you may not be particularly involved. That said, it is important that you fully understand the terms of the contract and your legal advisor should explain these clauses to you. If in doubt, ask why they’ve been included and what they mean for you.
Are boilerplate clauses standard?
Many boilerplate clauses are fairly standard and will be seen in most commercial contracts, but this is not to say that they can simply be cut and pasted from one contract to another.
Firstly, certain boilerplate clauses will not be required in some contracts, either because of the type of contract, the terms of the deal, the nature of the parties or another reason. Certain boilerplate clauses simply set out the position under English law and these clauses could, essentially, be removed from a contract if its length is a particular issue, although they can also alert the parties to the legal position, particularly if they are inexperienced in legal matters. If you are unclear as to why a boilerplate clause has been inserted or, conversely, you think that a relevant clause has been omitted, you should raise it with your legal advisor.
Secondly, certain boilerplate clauses may be drafted in various ways, each of which grant different rights to the parties. For example, see Assignment clause in the table below. How they are drafted will depend on the terms of the deal and your bargaining position with the other party.
Thirdly, certain clauses may include information relevant to the particular contract. For example, see Notices in the table below. If such a clause were cut and pasted into a different contract, the contact details included in the contract would be incorrect. This not only appears unprofessional but can lead to confusion and, in some cases, may affect the meaning or interpretation of the contract.
Should you use boilerplate clauses?
Absolutely. Boilerplate clauses aren’t just included in a contract to pad it out; they actually have an effect, even if this is simply to set out the common law legal position. That said, it is important that you take legal advice about which boilerplate clauses are relevant to your contract. Including irrelevant boilerplate clauses not only wastes time and paper but could also have legal consequences which you may not have considered.
Common boilerplate clauses in commercial contracts and what they mean
|Clause name||What it means|
|Agreement survives completion clause||This clarifies that the contract remains in force following completion. It may be seen in an acquisition agreement for example, to allow breach of warranty claims or enforcement of post-completion obligations following completion.|
|Announcements clause||Sets out the position regarding publicity and announcements concerning the deal and business relationship of the parties. Without this clause, any party is free to publicise this information as they wish. This clause provides for whether announcements can be made, whether they need to be mutually agreed, if consent is required or not, and so on.|
|Assignment clause||This clause permits (or prohibits) the parties from assigning the benefit of the contract to a third party. Under English law, all rights under a contract can be assigned without the other party’s consent; this may be a problem where the contracting parties wish to have some say in who they are entering into a relationship with. For example, a clause may provide that a supplier of goods cannot assign their right to payment to any other party or may only assign such right to a group company with the customer’s consent. The clause may also stipulate a different position for each party, for example, prohibiting assignment by one party but allowing it by another. |
Also see Subcontracting clause below.
|Audit clause||Allows a party (for example a customer) to inspect another party’s (for example, a supplier’s) books and records to the extent they relate to the business relationship.|
|Break clause||See Termination clause below.|
|Change of control clause||Sets out the position if there is a change of control of one of the parties, for example, if the majority shareholding in the supplier is sold to a third party. Often, the other party will be entitled to terminate the contract in this situation.|
|Conditions precedent clause||Sets out any conditions which must be met before a contract or a clause in a contract will take effect. For example, if Party A will only commence works upon Party B receiving £x funds, the receipt of those funds could be a condition precedent.|
|Conditions subsequent clause||Provides that the contract will terminate if a specific event happens or does not happen.|
|Confidentiality clause||Explains any confidentiality obligations by any or all parties to the contract. Without this clause, only limited protection is given under English law and this may not be sufficient for the parties. Such a clause defines what is classed as confidential information (this may include trade secrets, financial information or customer or supplier details) and when it can and cannot be disclosed, e.g. to a group company, to certain staff members, to regulatory authorities, and so on. It may also set out what is to happen to any confidentiality information post-termination of the contract.|
|Conflict clause||Where a transaction involves numerous documents, there is always a risk that some inconsistency will arise. Similarly, inconsistency could arise between the clauses in one contract. This clause aims to prevent this by stating which document or clause will supersede another. It is often seen in a joint venture agreement where, for example, there may be a shareholders’ agreement and the company’s articles of association which could conflict. In this case, the shareholders’ agreement will normally prevail. Short, simple contracts are unlikely to require this clause as inconsistency will not be an issue.|
|Consequences of termination clause||Sets out the parties’ respective duties following the expiry or termination of the contract. For example, one party may agree to pay a sum on termination to another, documents or equipment may need to be returned, all invoices settled and so on.|
|Contractual lien clause||Allows a creditor under a contract, for example, a supplier of goods, to keep goods owned by the customer until amounts owed to the creditor are paid and often permits the creditor to sell those goods if the customer is in default.|
|Costs clause||Who pays the costs incurred in preparing the contract and any other documentation? The default position is that each party bears its own costs and this is often the wording seen in a costs clause, but it may not always be the case.|
|Counterparts clause||To be effective, a contract must be signed by each party. Often, the parties are unable to meet to sign the same document and so they sign in counterpart, i.e. separately. This clause ensures that all the signed counterparts when put together constitute the complete, signed agreement.|
|Cumulative remedies/rights clause||See Rights and remedies clause below.|
|Currency clause||Sets out the currency to be applied to any monetary amount referred to in the contract and also the exchange rate to be used if any currency conversion is required. This clause is unlikely to be required in an English law contract where payments are made in £ sterling.|
|Dispute resolution clause||The contracting parties may not always want disputes to be resolved by the courts (see Jurisdiction clause below). Alternative dispute resolution procedures, such as arbitration or mediation, may be preferable and this clause will provide for these and the process. It is a good idea to discuss dispute resolution options at the drafting and negotiating stage to avoid having to come to an agreement when the relationship may have broken down.|
|Duration clause||See Term of Contract clause below.|
|Entire agreement clause||Ensures that only the terms of the contract (and any other deal-related documents) set out the agreement between the parties. It seeks to prevent a party arguing at a later date that, for example, an earlier agreement between the parties or an email or letter between the parties, sets out the terms of the deal where such terms have not been included in the contract. As a result, it creates certainty between the parties as to their contractual duties and obligations to each other.|
|Force majeure clause||This clause provides for the situation where an event has occurred that is outside of the parties’ control. Often called an “Act of God”, it may include flood, earthquake, epidemic, and so on. The clause sets out what will happen if any of these events occur. For example, there may be a grace period to allow for things to return to normal, time periods under the contract may be extended or the contract could be terminated.|
|Further assurance clause||On occasion, additional steps or further documents may be required to be entered into by the parties to effect the contract. This clause provides that the parties will take such steps or enter into such documents as required or, if necessary, will ensure that a third party will do so. Although inserted for practical reasons, negotiation points can arise as to whether the action has to be reasonable and who will bear the costs.|
|Governing law||Often linked with the jurisdiction clause, this clarifies which country’s law governs the contract. Usually this will be English but if an overseas party is involved, this may not be the case. You should take legal advice from a legal professional of the relevant country.|
|Guarantee clause||A guarantee clause provides protection to a creditor party by stipulating a third party, for example a parent company, who will guarantee any payment obligations under the contract. The guarantor will be an additional party to the contract.|
|Inadequacy of damages clause||Where there has been a breach of contract, the remedy is usually a payment of damages by the party in breach to the non-breaching party. However, in certain situations, damages may not be an adequate or appropriate remedy. For example, the non-breaching party may wish to prevent continuance of the breach and seek injunctive relief (e.g. in the case of a breach of confidentiality) or the non-breaching party may wish to force the party in breach to act in accordance with the contract and so seek specific performance as a remedy. This clause permits the non-breaching party to seek these remedies instead of damages.|
|Indemnity clause||A promise by one party to pay a second party any specific costs or amounts incurred by the second party as a result of a given event or situation. For example, a manufacturer of goods may agree to indemnify a supplier for any loss incurred by the supplier as a result of the goods being defective. The clause should clearly describe the event and amounts covered.|
|Interest clause||Stipulates the amount of interest to be paid on the contract price in the event of late payment.|
|Joint and several liability clause||Where contractual obligations are shared between two or more parties, for example, where there are several sellers under a share purchase agreement, this clause will be required to explain whether their obligations are owed jointly, severally or jointly and severally. Where joint liability applies, each party is responsible for discharging the full obligation but where several liability applies, each party is responsible for discharging their respective part of the obligation. Different positions may apply in respect of different clauses so clear drafting is crucial.|
|Jurisdiction clause||Often included with the governing law clause, this clause provides which jurisdiction’s courts will consider any disagreement under the contract. This may be exclusive jurisdiction (the dispute must be brought in the courts stipulated in the contract) or non-exclusive jurisdiction (a party could bring a claim in any court that accepts jurisdiction). |
Also see Process agent clause and Service of process clause below.
|Language clause||If a contract requires translation or involves overseas jurisdictions, there may be multiple versions of the same contract written in different languages. This clause sets out which language prevails in the event of inconsistency.|
|Liquidated damages||Provides an amount or calculation to be used to determine the amount of damages in the event of a specific breach of the contract (unless the breach is in respect of a fixed sum in which case an order for payment can be made, rather than a determination of damages). This can remove the need for a party to bring a claim for a breach of contract but if the parties are willing to take any such dispute to court, the clause will not be needed.|
|Non-reliance clause||Often included in the entire agreements clause, this ensures that only those statements made in the contract can be relied on. It therefore prevents a party from arguing that a throwaway statement made during the deal negotiation phase was a promise made by a party.|
|Non-representation clause||Often included in the entire agreements clause, this prevents a party from bringing a misrepresentation claim against the other. Generally, parties wish to limit any claims under a contract to a straightforward breach claim so that any limitation on liability included in the contract will apply. By including this clause, any statement made by a party which proves to be incorrect can then be the subject of a breach of warranty claim rather than a common law misrepresentation claim.|
|Notices clause||A practical clause, this sets out how any notices under the contract can be given and when such a notice will be deemed to have been received by the other party. Logistics and practicalities need to be considered here, for example, can a notice be sent by email and what happens if it’s received outside of business hours?|
|Partnership and agency clause||Stipulates that the contract or business relationship does not result in a joint venture or agency situation between the parties and that each party to the contract is acting as an individual. Although including this clause can be helpful, it is important to remember that the parties’ behaviour and their actual relationship, rather than the written contract, will be the deciding factors if such a question arises.|
|Precedence clause||See Conflict clause above.|
|Process agent clause||Only required if an overseas party is involved, this clause appoints a local process agent to deal with any claims made under the contract. |
Also see Jurisdiction clause above and Service of process clause below.
|Publicity clause||See Announcements clause above.|
|Restrictive covenants clause||Restrictive covenants prevent a party from acting in a certain way for a certain period of time. In commercial contracts, they can prevent a party from poaching another party’s employees, customers, or suppliers and even from competing with the other party. To be valid and enforceable, restrictive covenants need to be carefully drafted; if they attempt to go too far, they may not be enforceable. It is crucial to take legal advice when considering restrictive covenants.|
|Rights and remedies clause||Asserts that any rights and remedies set out in the contract apply alongside any rights and remedies which will apply under law. This clause is not strictly necessary but it does focus the mind on whether you wish to exclude any non-contractual remedies, such as misrepresentation where there has been a breach of warranty (see Non-representation clause above).|
|Set-off clause||The parties may wish to permit (or prevent) a liability under the contract which is owed by one party to be set off against the liability owed by another party. This clause provides for this.|
|Service of process||Explains the process to be used for serving legal proceedings in respect of the contract. |
Also see Jurisdiction clause and Process agent clause above.
|Severance clause||Permits any clause or part of a clause which is invalid or illegal to be omitted or “severed” from the contract, without affecting the remainder of the contract. The clause may also include an obligation on the parties to renegotiate the unenforceable section.|
|Subcontracting clause||Often included in the assignment clause, this clause sets out whether a party to the contract can subcontract any of its obligations under the contract or not.|
|Survival of terms clause||Certain clauses of the contract may need to continue to bite after termination or expiry of the contract. For example, confidentiality obligations or restrictive covenants may need to continue, as well as more practical clauses, such as the terms of delivery if an order is outstanding when the contract ends. This clause provides which clauses will continue once the contract has expired.|
|Termination clause||Determines when a party is permitted to terminate the contract and the process for this. Common termination rights include a material or repeated breach by one party, non-payment under the contract or a change of control of one party. The clause will also set out whether notice is required or whether termination can be effective immediately.|
|Term of contract clause||Where a contract is to be effective for a certain period of time or for a specific project, this will be set out in a term of contract clause.|
|Third party rights clause||Ensures that the Contracts (Rights of Third Parties) Act 1999 doesn’t apply to the contract. Otherwise, third parties could potentially receive rights under the contract.|
|Time of the essence clause||Where “time is of the essence” in relation to a certain action or obligation, any delay in performing the action or obligation will result in the other party having an immediate termination right. As a result, inserting this clause can have drastic consequences and should be considered carefully.|
|Variation clause||Explains how the contract can be amended at a later date. Usually, this will need to be in writing and signed by the parties, although it is important to consider the practicalities of the process and ensure that it’s achievable. Without the inclusion of this clause, contracts can be amended by simple agreement and so could be varied orally, potentially resulting in uncertainty and disagreement between the parties.|
|Waiver clause||A party may wish to waive a right or remedy under the contract and this clause allows for that. Usually, any such waiver will need to be given in writing and will only apply in a certain situation.|
Even though we’ve provided you with an in depth look at commonplace boilerplate clauses used in commercial contracts to give you a better understanding of the agreements you enter into, it’s always sensible to get sound advice from an experienced commercial solicitor. Whether you’re an entrepreneur just starting up a new business, or an experienced business owner, relying on your legal advisor to review, draft and/or edit your commercial contracts will help protect your business interests and give you peace of mind.