Understanding Boilerplate Clauses in Commercial Agreements

CONTRIBUTED BY EBEKHILE LOVE ELIZABETH

INTRODUCTION:

Commercial agreements are legally binding contracts, often entered into between business entities to regulate the business relationship between persons engaged or involved in business with each other.

The types of commercial agreements are by no means exhaustive. The classification could range from simple to complex; bilateral, tripartite and multilateral; regulated and non-regulated; sector-specific and general-purpose agreements, etc. Examples of regulated commercial agreements in Nigeria will include agreements for the transfer of technology into Nigeria, which are required to be registered at the National Office for Technology Acquisition and Promotion.

The nature of the contracts often appears lengthy in their detailing of the obligations of each party to the contract. However, a large body of the agreement is standard terms that more or less apply across every type of agreement. These are known as boilerplate clauses in commercial agreements.

This paper will highlight the following boilerplate clauses and examine their effects on a commercial agreement.

WHAT ARE BOILERPLATE CLAUSES?

Boilerplate clauses are known as standard, miscellaneous, or general clauses, and they are found at the end of most legal documents (agreements). These clauses address a range of things, such as what happens if a document is declared unenforceable, how disputes will be resolved, which laws will govern or apply in the event of a dispute, etc. As such, Boilerplate clauses serve an important purpose in clarifying the relationship between the parties and spelling out any situations that otherwise wouldn’t be addressed in the operative section of the agreement.

In light of the foregoing, boilerplate provisions are therefore clauses that generally overlap with secondary commercial provisions, such as:

SEVERABILITY CLAUSE

It is a general legal principle that a contract must have a lawful aim in order to be enforceable. However, a contract may contain terms that may be found to flout the provisions of a law, which could ordinarily render the contract unenforceable.

Therefore, a severability clause provides that the terms and conditions of the contract are distinct and separate from one another such that the invalidity of a clause does not affect the remaining obligations of the parties under the contract. Thus, the contract will continue to be valid in the event that one or more of its provisions are declared illegal or unenforceable by a court.

An example of the clause is provided hereunder;

“In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the court or other tribunal making such determination is authorized and instructed to modify this Agreement so as to effect the original intent of the parties as closely as possible so that the transactions and agreements contemplated herein are consummated as originally contemplated to the fullest extent possible”^[1].

JURISDICTION AND GOVERNING LAW

Parties who enter into commercial agreements, especially trans-border contracts are usually confronted with jurisdiction barriers and the laws that would be applicable in governing the agreement or contractual relations between the parties. The issue becomes complex when the parties are residents in different locations, each having distinct laws governing their operations in those locations, except in cases where the transaction is carried out in a particular location that has its own laws. Then it may be decided that the laws of that place be applicable.

See a sample of the clauses below:

“This Agreement shall be governed by and construed in accordance with the laws of the Federal Republic of Nigeria without regard to conflicts of law’s provisions. The courts of Nigeria shall have jurisdiction over any action or proceeding arising out of or relating to this Agreement, and the party hereto irrevocably submit to the jurisdiction of the courts in any action or proceeding”.

DISPUTE RESOLUTION

A dispute resolution clause provides alternative dispute resolution mechanisms in the case of a disagreement under the contract^[2]. The insertion of a dispute resolution clause in any agreement can have profound implications on how any dispute arising from the agreement is to be resolved, and the contractual rights and obligations enforced.

There are many different methods of dispute resolution, but they broadly fall into one of two camps: non-binding or binding.

Non-binding forms of dispute resolution focus on the parties reaching a consensual resolution. Examples include negotiation and Mediation while in binding forms of alternative dispute resolution, the parties submit their dispute to a third-party decision maker (e.g., a judge or arbitrator) to make a decision that will be binding upon them (subject to any agreed appeal process).

A dispute Resolution Clause may be drafted thus:

1. If any dispute, controversy or claim of whatever nature arises under, out of or in connection with this Agreement, including any question regarding its existence, validity or termination or any non-contractual obligations arising out of or in connection with this Agreement (a “Dispute”), the Parties shall use reasonable endeavours to resolve the matter amicably.

If one Party gives the other Party notice that a Dispute has arisen and the Parties are unable to amicably resolve the Dispute within 30 (thirty) days of service of the notice then the Dispute shall be referred to arbitration.

The arbitration shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act Cap. A18, Laws of the Federation of Nigeria, 2004 in force from time to time, subject to the following:

i. The seat of arbitration shall be Lagos, Nigeria;

ii. The arbitration shall be conducted before a panel of three arbitrators, appointed unanimously by the Parties. In the event that the Parties are unable to reach a unanimous agreement within 15 (fifteen) days, the arbitrators shall be appointed by the President of the Chartered Institute of Arbitrators UK, Nigeria branch;

iii. The arbitration shall be held as quickly as possible after it is demanded. The Parties shall request the tribunal to adopt such procedural measures as may be appropriate to secure the expeditious completion of the arbitration;

iv. The arbitrators shall be obliged to give (and the Parties to the dispute shall procure that they give) the award in writing, fully supported by reasons; and

v. The award of the arbitrators shall be final and binding on the Parties thereto.

4. Each Party shall be responsible for its attorney’s fees, preparation fees, witness and expert fees and similar costs.

5. Any costs, fees or taxes incidental to enforcing any award shall to such extent as is permitted by law be charged against the Party resisting such enforcement.

6. The Parties shall keep confidential all matters relating to the arbitration proceedings. Confidentiality also extends to the arbitral award, except where its disclosure is necessary for purposes of implementation and enforcement or to the extent otherwise permitted by this Agreement”.

THE FORCE MAJEURE CLAUSE

It is a principle of law that all contracting parties to an agreement fulfil their promises or obligations as provided in the agreement. This is reflected in the ancient Latin maxim “pacta sunt servanda.” And where a party fails to meet his contractual obligations, the remedies of the counterparty lie in either:

An order of the Court to compel the performance of that obligation (decree of specific performance), or
Payment of damages to assuage any financial loss directly occasioned by the breach of contract^[3].

However, parties to a contract may elect to circumvent the harshness of the above options in the event of non-performance for one reason or the other. In this circumstance, the parties will couch and insert a clause in an agreement to contain some exceptions to which non-performance will not be construed to include. The exception is the force majeure clause.

For a clearer glimpse of the force majeure clause, a vivid example is hereby provided below;

“In the event, either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes”

THE WAIVER CLAUSE

Where a party decides to waive a breach of contract, it means the party is giving up the right to pursue remedies for the breach. Such a party will still be responsible for performing his contractual duties and will not be able to use the breach as an excuse for non-performance. A waiver of a breach of contract only applies to a single matter. The injured party can still require fulfilment of the rest of the obligations described in the contract or have the right to receive damages. In most cases, these damages will take the form of money, which is meant to restore the party’s financial position prior to the breach^[4].

A sample draft of the clause is hereby produced hereunder.

1. “Neither the failure by a Party to insist on any occasion upon the performance of the terms, conditions and provisions of this Agreement nor time or other indulgence granted by one Party to the other shall act as a waiver of such breach nor as an acceptance of any variation, or as the relinquishment of any such right or any other right under this Agreement”.

TIME IS OF THE ESSENCE CLAUSE

A time is of the essence clause states that a party has to perform their duty, as spelt out in the contract, within a definite timeframe before the other party can carry out their contractual duty. A failure to carry out the said duty by the first party within the defined time frame would amount to a breach of contract^[5]. The parties in creating this clause should take into consideration the following factors:

The object and nature of the contract.
The business and transaction history of the parties.
The absence or presence of good faith.
The parties’ experiences.
The likelihood of hardship.
The likelihood of prejudice.
The definite number of days allowed for a contract to conclude.

In the event that the parties do not set a time frame, Nigerian Courts have taken to adopting what is considered a reasonable time within which the parties are to fulfil their obligations and what constitutes a reasonable time will depend on the facts and circumstances of the agreement.

Below is a sample draft of the time is of essence clause as thus:

“With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence”.

CONCLUSION

The effects of boilerplate Clauses in most corporate and commercial contracts serve an important purpose in clarifying the relationship between the parties. Consequently, their inclusion is very germane to the enforceability of the contract.

There are a variety of boilerplate clauses to be included in agreements depending on their suitability and context. Certain agreements may require different boilerplate clauses to be included and such clauses must be drafted to suit the needs of the parties and the nature of the agreement. In some circumstances, these clauses are comprehensive and, in others, are simple and standard depending on the complexity of the agreement in relation to the transaction.

It is important that these boilerplate clauses are reviewed and drafted with precision and clarity as such clarity, interpretation and instructions could impact either or both parties. Each boilerplate clause has a purpose and can be intended to achieve different desired outcomes depending on how it is drafted. Overlooking boilerplate clauses may cause detrimental and unwanted disputes. It is therefore advisable for such clauses to be drafted or reviewed by legal professionals to suit the operative terms of the agreement and to better reflect the terms and conditions of the agreement between the contracting parties.^[6]

Key terms: Boilerplate clauses, Agreements, Clauses in Agreements, Contracts.