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Boilerplate Contract Provisions Can Burn the Inattentive

| Jan 1, 2017 | Company-News

Contracts come in many forms.  And in business, business people sign all kinds of written contracts relating to building leases, employment arrangements, equipment purchases, and customer agreements.

Often when considering a contract, people will focus on the “big ticket” items within the document, for example items relating to pricing or performance.  However, it is often the case that when disputes arise, provisions found in what is often referred to as the “boilerplate” provisions of the contract have a large, and sometimes even determinative, effect.  For that reason, business people need to have these provisions in mind at the front end, during the drafting and execution of written contracts, and at the backend when a breakdown in the relationship between the contracting parties makes litigation more likely.

Before signing a contract, or assessing the prospects for the successful assertion of a claim or defense against another party to a contract, people should obviously read the entire contract at issue and understand all of its component parts, with the help of experienced counsel.  This short piece will touch briefly upon just three types of provisions that often appear in less conspicuous parts of contracts that are often overlooked but worth serious consideration.  These three relate to choice of law, choice of forum, and limitation of liability type provisions.

If a business person enters into a contract with another person or entity right across the street, the issue of what law would apply in any dispute between them will generally be simple.  However, most contracts do not involve neighbors like that, but instead involve people or entities residing in different towns, states, or countries.  A “choice of law” provision will often be found in contracts involving parties from different states or countries and, as its name implies, amounts to the parties agreeing at the outset on which jurisdiction’s legal rules will apply in the event of a dispute between the parties.  Often, laws on an issue will be similar state to state, so these choice of law provisions may not have a great impact in the event of litigation.  However in some circumstances, the law in one state can differ importantly from that of another.  For example, non-compete agreements are still enforceable to some extent in many states, including Ohio, while in some states, like California, they have been made unenforceable.

A related concept, often embodied in a provision accompanying the choice of law provision, relates to the forum or venue within which any dispute between contracting parties will be heard.  There are two variations of this theme, one being based upon geography and the other relating to the nature of the tribunal that will choose the winner and the loser.  The first type simply provides that any dispute will be heard in a given country, state, or town, generally wherever the drafter or better positioned party resides.  The benefits of litigating in one’s “own backyard” are obvious: the “home” party can rely on counsel with which it is familiar and can save money and time if proceedings occur a short drive away as opposed to a long flight.  Also, that party and its counsel may be familiar with the local courts enough to have a sense for how long matters will take and likely best or worst case scenarios.  Accordingly, parties will often attempt to include in their contracts a forum selection clause that will make them the home team in the event of litigation.  Parties need to be aware of such clauses when entering into their contracts and later, if litigation becomes a consideration or a reality.

Though not typically referred to as a forum selection clause, an arbitration clause is another type of provision that attempts to nail down at the time of contracting a specific venue for the hearing of any dispute rather than leaving that question an open one that may only get decided after a lawsuit is commenced.  These provisions may go so far as to set time limits on the arbitration and specify the particular set of rules or panel of arbitrators for the proceedings.

A third, very general type of provision sometimes found “out of the way” in a contract though potentially very important relates to limitations placed on any possible recovery in the event one party successfully asserts a claim against another.  These provisions may limit the amount of any recovery to the amount the prevailing party had paid over to the other or limit damages to compensatory only.  These provisions might also include jury waivers or provide that a party asserting a claim unsuccessfully be responsible for the attorney fees and cost of the other.

Provisions like those outlined here can seem less important at the time of contracting but can become very important and even determinative when disputes arise.  For example, parties in litigation have spent years and large amounts of money litigating the issue of where an underlying lawsuit has to occur or whether it must be submitted to arbitration rather than remaining in a court.  Accordingly, when business people draft contracts or consider those contracts put to them by others, they need to be sure to review all of these provisions with the help of experienced counsel.  Similarly, if the time comes when a dispute arises with the other party to their contract, they need to assess their prospects with these “boilerplate” provisions, and all others, in mind or risk getting burned.

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