[EP 011] Understanding Commonly Used Contract Terms

I think it's really important for anyone who deals with contracts to understand everything that's in the contracts. Once you understand these areas it becomes easier for you to pick up any issues that might be relevant to your situation or how the contract applies to you or your business. So today what we're going to do is run through some common boilerplate terms and explain what they mean. And I'll give you a little tip in relation to when they may or may not be appropriate for you to consider including in your agreement.

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EPISODE HIGHLIGHTS

00:47 What is a boilerplate?

01:09 Importance of boilerplates terms

03:22 Entire Agreement Clause

03:46 Why use an entire agreement clause?

07:11 No Assignment Clause

10:34 No Waiver or Waiver Clause

13:43 Variation or Amendment Clause

16:58 Jurisdiction and Governing Law

18:22 Jurisdiction vs Governing Law

20:08 From an international perspective

21:54 Quick Recap

EPISODE TRANSCRIPT

What is a boilerplate?

Boilerplate terms are commonly used terms that often appear at the end of a contract and often under the heading General, but not always. Often they're considered to be clauses that don't usually change much from one contract to another.

Why is it important?

I think that it's really important for anyone who deals with contracts to understand everything that's in the contracts. Once you understand these areas it becomes easier for you to pick up any issues that might be relevant to your situation or how the contract applies to you or your business. With boilerplates, even though they can be quite standard from contract to contract, understanding what they mean is important because sometimes the way they are used is not appropriate for your situation or the situation of the contract that they're being related to. There can be traps held within these clauses that make it important for you to at least understand.

What often happens is that people, when they review your contract, will often review the deal terms. That's the initial terms of the contract that really get into the detail of who is doing what by when and the other obligations and rights that are created under the contract. But often when you get to the end of the boilerplate clauses, because they look so similar to contracts you may have seen in the past and because the headings look often quite similar to other contracts that you've seen, people stop reading in a detailed way. The problem with this is sometimes the things that are in those clauses are something that you really should be considering. Also, the mere fact that they're placed at the end of the contract also means that often people, particularly people who aren't used to reading contracts a lot, get a little bit over reading the contract by that point. They're happy to take an easy way out saying "Oh yeah, there's the usual entire agreement clause," or whatever the other boilerplate clauses are in their contract and not pay attention to them.

So today what we're going to do is run through some common boilerplate terms and explain what they mean. And I'll just give you a little tip in relation to when they may or may not be appropriate for you to consider including in your agreement. We'll run through just a few today so that we are not making this too boring. In a future podcast we'll keep running through some more.

Entire Agreement Clause

Usually, you'll see it sitting under the heading of something like Entire Agreement or it may not have a heading at all. But it's usually a clause that says something like this:

"This agreement contains all of the terms agreed between the parties and supersedes all prior agreements and representations between the parties."

Why use an entire agreement clause?

Essentially, it's used so that it's clear that all of the terms that are in this contract contain all of the agreement that you've come to in relation to the subject matter of the contract to try and rule out the possibility of one party later arguing that there were more things that had been discussed but hadn't been included in the contract.

This can be a double edged sword if you are, for example purchasing supplies or services from another organization and they have made another a number of representations that you've relied on. Say for example a hosting agreement for a website and you've negotiated the level of up time that you require, say you've negotiated a 99 percent level up time but that isn't recorded in the contract. This sort of entire agreement clause can be a little bit of a trap because essentially you may have difficulty proving later that the 99 percent up time was something that you relied on that should have been or was part of the agreement between both of the parties. Because of this little entire agreement clause that essentially says because that wasn't in the contract, you therefore can't rely on it in future as being something that's involved in the contract or related to the contract.

There might be arguments on both sides but obviously the action plan for you in relation to any contract is making sure that any of the key terms that you've negotiated are indeed in that contract and if you have an entire agreement clause it's even more important to ensure that everything that you had discussed or that you may require out of this contract that you're dealing with is included in an express form in the contract itself.

One other trip with an entire agreement clause is when you have executed contracts other than this contract that you might still want to rely on. Because this entire agreement clause says that this is the entire agreement of the parties and that this agreement supersedes all other agreements or representations between the parties that relate to the subject matter of the agreement – this means, for example, if you've signed a nondisclosure agreement or a confidentiality agreement before the execution of this current agreement, this agreement might indeed override the provisions of that previously signed confidentiality agreement.

If there is an entire agreement clause in an agreement you're signing you need to think about whether or not you have any other agreements on foot that you want to remain in place. And if you want them to remain in place, then the entire agreement clause needs to be amended so that you refer to those other agreements that you want to stay in place. Or alternatively you can just make sure you import the clauses of those other agreements into this agreement. In our example of a confidentiality agreement, you would then make sure that confidentiality terms that were sitting in the confidentiality agreement now sit in this agreement between the parties.

No Assignment Clause

This might be under a heading No Assignment or it might be under a heading Assignment or it might have no heading at all. But essentially what the clause will say is something like:

"Neither party may assign this agreement without the authority of the other party."

Why would you want this in the agreement?

The reason for this is that you may wish that the other party that you're dealing with can't be in that position of transferring the rights and obligations under this agreement to someone else without you getting a veto over that. You might say, once again if you're dealing with a particular supplier, I only want to deal with that supplier. I don't want to deal with anyone that they might assign this contract to so I don't want to deal with anyone else other than this supplier. And if they're trying to assign the contract to someone else, then I want them to come back to me and get permission. That's a reason why you might want a no assignment clause in the agreement.

Why would you NOT want this in the agreement?

A reason why you may not want the no assignment clause in the agreement is if you might be in the position where you might want to assign the agreement. Say for example, if you are in the situation where you might be likely to sell the business or contracts under the business in the future, you might say well I don't want to have to go back to this party and get their authority at that point or their authority for me to assign certain rights that I have under the agreement. In that case, you might find that a no assignment clause is not beneficial to you and you might want to get rid of that out of the agreement.

Sometimes these clauses are drafted in such a way that they might say that one party has the ability to assign but another party doesn't. That can work for you if you're the one who's being given the flexibility and it may not work for you if it's the other party that is giving themselves the flexibility in this agreement and you're not getting the flexibility.

Indeed, one thing to bear in mind if you were based in Australia and your contracts have a Jurisdiction and a Governing Law clause of Australia, which we'll talk about in just a minute about what that means because that's another commonly used boilerplate term, if you're in that situation where you're in Australia and your contract jurisdiction is Australia, then just be aware that the new unfair contracts legislation laws might apply in this area if one party has said that they have the right to assign without authority of the other party but the other party doesn't have the right to assign. This could, in some certain situations, be seen as an unfair contract term. If the organisations that deal with this contract is a small business, it complies with the requirements of that new legislation.

If you're interested to find out about that legislation and what the relevance is to this kind of clause in a contract then pop back and have a listen to our past episode on this matter (link to episode 3) so that you understand what the impact of the legislation is in relation to these sorts of clauses.

No Waiver or Waiver Clause

What this clause usually says, the words that are usually used, is that:

"Any failure by a party to remedy a breach or to notify breach under this agreement won't be considered a waiver of their rights."

What this means is that if you identify a situation where the other party has been in breach of the agreement and you don't pick them up on that breach immediately, that won't be seen to be a waiver of your rights to enforce that breach later on down the track.

This is a really important concept because I think it's extremely important for you, when you're dealing with your contracts, to be really proactive if you identify times when the other party is not complying with their obligations under the contract. This sort of no waiver clause is really helpful to make sure you have an argument as to why your failure to bring up the issue of their breach doesn't then absolve them of the right that you have into the future to go back and pick them up on that breach. But I think as a matter of practice it's super important that we're really on top of these contracts. From a practical sense, our being clear, when we identify a breach with the other party, that there is a breach, that we noticed the breached, that we haven't and we're not waiving our ongoing rights to pick them up on this breach or to have them remedy the breach.

But if it's not a massive issue to you at this point, you could perhaps just nicely suggest a workaround for them that works for you as well. But I have seen organizations in the past just let breaches ride through because the relationship has been good and they've not wanted to disturb the relationship. The problem is once you allow things to occur once or twice it can be very easy for that to fall into a habit and it practically can be very hard to remedy and pull back later on after the event. So whilst I think this is an extremely important clause to having the agreement to say that the fact that you haven't enforced the terms at a particular point doesn't mean that you waive your right to enforce them, I think that it's important to include in your contract but it's even more important from a practical perspective that you are really on top of any of these areas where you identify breaches and make sure, nicely if you want, in a way that doesn't harm the relationship, but just make sure you're proactive about managing it.

Now the last two areas that I want to talk about today are variations and jurisdiction and governing law. And then in future episodes we'll talk about other boilerplates like subcontracting, severance, force majeure and conflict clauses within these boilerplates.

Variation or Amendment Clause

What this clause usually says is something along the lines of:

"This party can't be amended unless agreed by both parties in writing" or it might say, "This agreement can't be amended or varied unless agreed in writing by the authorized representatives of each party."

What this essentially means or the point of this clause is that if in an organisation certain people have certain authority levels have entered into an agreement, it's protecting against that situation where other people inadvertently might, within the organizations who are dealing with each other in relation to the contract, might inadvertently agree to something that is different to the terms of the contract and therefore inadvertently create a situation where their organisation is bound to some sort of varied terms that are varied from those written in terms of the contract. It introduces more of a formality in relation to how the parties can then vary or amend the terms of the agreement.

In the first example I posed, where the clause simply says neither party can amend the agreement or vary the agreement other than in writing, then essentially what it's saying is both parties have to write and sign a document that they exchanged with each other to confirm any amendment to the terms that are already set out in this agreement.

On the other hand, if you have a clause like the example that I gave as the second example where the clause says this agreement may only be varied in writing by that authorized representatives of each of the parties, then this means that what is trying to happen here is a locking down of who it is that can actually sign that document that authorizes a departure from the terms and conditions that are set out in the contract.

This is a good approach to use if, for example, you want to make sure that there is no one else in your organisation that can agree to an amendment of the terms. You might make sure that you make it clear that only the authorized representative, which you might then put details of in the schedule, so that might be a manager of a certain level, has the right to amend the document.

There's actually quite a lot that I could talk about in relation to that issue for contracts because amendments and variations, in some circumstances, can create a lot of problems for parties. There are ways that you can use the contract to lock down how variations will be calculated or how the parties would deal with the situation if there are variations in relation to the original goods or services that are being provided under the contract that were originally envisaged. But that, I think, is probably the topic for another podcast into the future some time.

Jurisdiction and Governing Law

This is a clause that is caught quite usually right at the end of the document. Quite often this will be the very last clause that you'll see in an agreement. The reason it is so important is because you're essentially setting out what the jurisdiction is and the governing law that relate to the agreement so that you know which courts have the right to hear any argument in relation to the contract and which laws will apply to the contract because the laws of different jurisdictions and different countries differ sometimes quite dramatically. What might be interpreted or how a contract might be viewed in one jurisdiction might be completely different to how it would be viewed or dealt with in another jurisdiction. This is relevant particularly if you were dealing with offshore suppliers or clients and can also be relevant from state to state within Australia.

The usual course of events is usually whoever drafts the contract or has the contract template and sends it out to the other side will usually start with a governing law and a jurisdiction that is their jurisdiction and their governing law.

Jurisdiction vs Governing Law

I guess it's relevant for me to talk about what the difference is between the words jurisdiction and governing law. Governing law is exactly as it sounds, the law that will govern the terms of the contract, the law that will be used to interpret the terms of the contract. Whereas jurisdiction means the jurisdiction under which the courts have the right to hear any argument.

Usually, jurisdiction and governing law are the same. In fact, almost always they're the same. This is pretty obvious because you don't want courts from one jurisdiction being forced to consider an action in relation to a contract that has a governing law from another jurisdiction so it makes sense that your governing law is the same as your jurisdiction. As I said, the game that's often played is whoever drafts the contract, whoever provides the contract will usually have the governing law and jurisdiction as their jurisdiction and governing law.

But it might well be that if you feel that if you're in a different jurisdiction to what that is and you feel that it is appropriate for you to get protection in your jurisdiction and you think the goods or services are being provided more predominantly in your jurisdiction, then you might try and get the jurisdiction clause changed. The benefits for you in having it changed are often that it's easier 1) for you to understand for your lawyers who operate in your own jurisdiction to understand what the laws are in that area and 2) it's easier and often more cost effective for you if you have to bring an action against the other party to bring that action in your own jurisdiction so you don't need to travel and you don't need to go and get lawyers that are based in a different jurisdiction.

From an International Perspective

On the flip side, some of the downsides of the approach, particularly from an international perspective, is if you have the jurisdiction as your own jurisdiction. So let's say you're an Australian company and you're contracting with an overseas based supplier. One of the issues with this jurisdiction concept is that if you make the jurisdiction Australia, it will probably be easier for you to bring an action to litigate. It will probably be cheaper for you and it will probably be more certain for you than if you're trying to litigate in another country. But the issue becomes if there is no representative or no assets of that other organisation here back in Australia then you might sue the other company but it might be very difficult for you to recover under any action that you've brought (i.e. to go and actually get money from them to recover under the action, the result that you've received.) So jurisdiction and governing law can be a little bit tricky. These are the sorts of areas that you know change depending on each of the situations, the level of risk involved, and what it is that you're doing under the contract. That's the sort of thing that you probably really need to go and speak to someone about on a contract by contract basis.

Today we covered quite a few boilerplates. Hopefully I helped in terms of giving you a bit of an idea of what to look out for in each of these clauses and hopefully the next time you get a contract on your desk and you need to look through it, each of these clauses will make a little bit more sense to you. So when you're reading them you're more readily able to identify why they're there and what the elements are that you potentially should be thinking of changing into the future.

Quick Recap

So once again just to recap these sorts of clauses we talked about are:

  • Entire Agreement clauses,
  • Assignment clauses,
  • No Waiver clauses,
  • Partnership or Agency clauses,
  • Variations and Amendments clause; and
  • Jurisdiction and Governing law.

Now if all of this has been a little overwhelming for you and you're in the position where you don't want to be thinking about any of these clauses yourself just jump on to our website at talkinglaw.com.au and there you can make contact with our lawyers who would be happy to have a chat with you in the first instance for free to talk about the types of contracts you deal with and the types of ways our lawyers over at Aspect Legal can help to assist.

All right. Well that's it for today. Thank you so much for tuning in. If you enjoyed what you heard today please pop over to tunes and leave us a review. We'd be really grateful. And if you're interested in hearing about a particular topic that you deal with in your business and you'd like some legal answers to just head over to our podcast website at talkinglaw.com.au and leave a message on one of our episode pages. You'll find a recorder there that you can leave your questions in. We'll be answering listener questions in future episodes. Thanks again for listening in and see you next time.