Business Contract Boilerplate – Ignore it at Your Own Risk
When it comes to the fine print in contracts, many are too busy to read it or assume that they already know what it’s going to say. Some believe that boilerplate provisions are unenforceable anyway. Regardless of the reason for skipping all that black ink, you ignore boilerplate at your own risk, particularly in the case of commercial contracts.
In olden days, unless a contract was ambiguous or there was a serious defect in the making of it, contracts were generally enforced as written. The theory was that people were free to negotiate a deal and either reach an agreement or walk away. If a dispute arose, courts would often say that it was not for them to rewrite the contract to make it fairer.
Over time, states have passed various legislation to level the playing field between parties with a gross difference in bargaining power, most typically as a form of consumer protection. Legislation of this type now affects consumer industries including retail, finance, and home construction and remodeling. Another example are laws affecting the enforceability of restrictive covenants in employment agreements. In addition, court decisions have expanded the theories upon which contracts may be held unenforceable.
However, most of these laws do not apply to contracts between businesses. In commercial contracts, the parties are considered to be “sophisticated,” meaning capable of reading and understanding the terms of a contract, negotiating those terms, and reducing them to writing. Businesses are also assumed to have the resources to hire a lawyer to negotiate and review a contract. Absent any gross defects or laws rendering provisions unenforceable, courts will tend to enforce commercial contracts as written.
Carefully reviewing a proposed business-to-business contract, while tedious and time-consuming, is critically important, even when a contract is difficult to read and edit, like a form contract with blanks for the deal details followed by paragraphs of densely written boilerplate. While it is tempting to ignore the boilerplate provisions, they often address a number of very important issues, some that may become critical should a dispute arise between the parties.
Some common boilerplate provisions include:
- Limitation on damages. This will limit the damages a party can claim if things go wrong. For example, in a service contract, the vendor may limit the damages to the annual amount paid for the service, and not allow the other party to claim its additional losses caused by the failure of the contracted for service or product.
- Limitation on when claims can be made. In Wisconsin, the statute of limitations for breach of contract is six years. This provision may reduce that period to a year or even less, or require that notice of a claim be provided within a certain number of days of the event giving rise to the claim or a suit cannot be filed.
- Limitation on where claims can be brought. This provision may require that any legal proceedings regarding the contract be brought in a particular state. You may assume that you can sue for breach of contract in Wisconsin only to learn that you agreed to litigate all disputes in New York.
- Indemnification. This provision may narrow or completely eliminate the vendor’s duty to indemnify you for claims arising from the acts of its own agents and employees, even when they are performing work on your premises. Meanwhile, you may find that you are expected to indemnify the vendor for any possible claim, even those arising from the vendor’s own negligence.
- Late payment interest and penalties and/or liquidated damages. The contract may provide for heavy interest, late payment penalties or a fixed damage amount that is more than the actual loss to the other party arising from a default.
- Right to Cure. This may require that a party give the defaulting party a right to cure any failure of the product or service before a suit can be brought.
- Automatic Renewal. The contract may require 90 days advance written notice of the intent to cancel or the contract will automatically renew for another annual term.
Some businesses may take the position that their contract is non-negotiable. However, in most cases, a business will agree to reasonable modifications of some terms. The type of service or goods and the relative bargaining power of the parties will also affect how much a party may negotiate, but it is usually worth a try. The effort can pay big dividends if troubles arise down the road. A business’s response to a reasonable request to modify contract terms is often a good predictor of how reasonable that business is likely to be when other issues arise. If a company refuses even a few reasonable modifications to a contract, you may want to consider taking your business elsewhere.
The bottom line — take the time to read and understand contracts. Challenge one-sided provisions and suggest language where needed. When in doubt, get an attorney involved. Attorneys who regularly negotiate and draft contracts can efficiently identify problem provisions and offer suggestions for more balanced ones. A good attorney will go beyond merely finding what is wrong with the contract; he or she will help you navigate your way to a fair deal.