Boilerplate in contracts - Construction & Administration

David Lowe: Hello everybody and welcome to our boilerplate series. This is an occasional series about boilerplate and contracts. I am David Lowe I lead our Commercial Contracts team, and I focus on the non-contentious side reviewing and negotiating contracts and therefore of course of part of that making sure I have got the boilerplate right.

Sean Adams: And I am Sean Adams, I am a partner in our Commercial Disputes team. I often see contracts from the other end of the telescope and by the time something is going wrong, somebody is looking to terminate, dispute has kicked off. Some of that boilerplate that you have carefully put into your contract with David three to five years before can come in really useful, so that is the perspective I am here to add.

David: And of course part of today is about giving you a bit of guide to why boilerplates are there, when is it important, when is it useful, so that you can make the judgment about whether to include it. If you are trying to draft a very short contract and the other party is not willing to add in some boilerplates, does it really matter.

In today's session we are going to concentrate on a batch of issues around construction and administration of the contract, so we are going to cover things like the recitals, entire agreement clause, the severance waiver, variation, notices and further assurance policies. So the boring bit of the boilerplate really, deep in the back of the contract is what we are going to look at today.

So Sean I think we are going to start with recitals. Having talked about the back of the contract actually we are going to start with something at the beginning.

Sean: We are. We are going to start right at the front. Usually the first thing we are going to follow is the parties in most contracts. You normally get the names of who is involved and then you go straight into recitals.

I think probably the overarching to say, picking up on your comments around sometimes you will want a short contract and you do not want a wealth of boilerplate in there, you do not need recitals in a contract. I think quite often people put them in as a matter of course these days, but you certainly do not need them to be in there.

They can be really helpful, particularly in sort of wider relationships or relationships that are changing over time or agreements that have been entered into in specific contexts. Having a recitals clause in there that just in one or two paragraphs or sentences explains why the parties are entering into this agreement can be really handy. But there are a couple of sort of techie pitfalls that you can fall into which is why we have got this clause on the slide because sometimes you end up with recitals and operative clauses that conflict with each other or are not clear or you see definitions tucked away in the recitals that nobody has then thought about properly and so it is about how they track through.

So we just wanted to very quickly mention that if you are going to use recitals, I think a couple of top tips, make sure they are accurate, first. I think if you are going to put any defined terms in those recitals that are then used through the operative part of the agreement and that does quite often happen because by virtue of where these recitals appear in the agreement is usually the first time you have started talking about something and therefore the natural instinct is for the lawyer to define something as soon as they see it.

A technical argument about the fact that that might not necessarily make them part of the operative contract, those definitions and say best practice is probably to repeat those within a defined or definitions section of your contract, which you probably also have. I think it would be a pretty harsh result when you have got a clear defined term in a recital, which is not redefined elsewhere in the agreement, to say that that does not apply.

And also just be very careful around clarity. Obviously the litigator in me would say make sure the entire contract is crystal clear and so that you do not end up with any problems at all but as you can see from the slide there, where you have a very clear recital and an unclear operative term, it might be the recital that you fall back on as being the binding obligation which a Court will look at and say is the clear basis of the agreement. Otherwise, generally, the operative terms of the agreement, so everything that is not in the recitals, is going to be preferred by the Court and that is particularly the case in that last scenario that you have got on the slide there where you have got a very clear recital a very clear operative provision but unfortunately they are saying two separate things. I think a Court's impetus is going to be on the operative provision there.

Anything you wanted to add on recitals David before we move on?

David: Just to add to say I see a lot of contracts with recitals that add nothing and therefore they risk confusion and certainly take up space and time. So do think about deleting recitals from really routine contracts because there is no point to them. But having said that as Sean said where you have got a complex scenario recitals are really useful. I was looking at a contract recently which the recital told me that there was another separate contract which was going to be really relevant. If the recital had not mentioned it, because it is not mentioned in the operative aspects of the contract, I would not have known there was another contract out there that I also needed to look at which was relevant to the relationship between the parties. So that is an example when the recital is really useful capturing that memory.

Shall we go onto entire agreements?

Sean: I think so.

David: So at the back somewhere at the back of the agreement there is often an entire clause. The reason it is there is to try and make it clear that the entirely of the relationship between the parties in set out in the contract and to try and stop litigation coming up where allegations are made about representations, perhaps a supplier had made in a tender, or other promises that were made in the negotiation. The contractor's contract, that is what we have all spent a lot of time on, that is king and nothing else applies. And obviously for those of you drafting negotiating contracts that makes a lot of sense because normally if we have gone to the trouble of negotiating and drafting a contract we want the contract to be king.

So therefore it is very common to say the entire agreement is this contract and nothing else applies. The problem is that actually by doing that you are then excluding liability. Excluding responsibility for misrepresentations for example that may have been made in the negotiation and therefore the Court looks at the entire agreement clause as an exclusion clause and therefore might read it against the person seems rely upon it. They will try working around the entire agreement clause when it suits the Courts where they feel that would serve justice, it risks the application of the Unfair Contract Terms Act etc. etc. And so therefore I have seen quite a lot of case law around entire agreement clauses over the last 30 years.

Contracts typically started off with something very much like the first paragraph here, just simply saying this is the entire agreement. But then cases came along saying ah well what you have not said though is that you cannot rely upon any representations and so if you did not say it does not exclude those representations, it obviously undermines the whole point of the entire agreement clause.

So that is why you have then got very much a clause added in, like the second paragraph which talks about being in reliance on and representation just to make it clear that we are excluding each parties reliance upon those representations that have been made and therefore the remedies for misrepresentation do not apply.

Then you have cases saying oh well it looks like you are excluding liability even for fraudulent misrepresentation and that is not enforceable and therefore the whole clause falls down. So that was why in the late 90s you started seeing introduced the third paragraph about making it clear we are not excluding liability for fraudulent misrepresentation and therefore to try and ensure that the clause stands.

So that is already getting quite long and then there was yet more case law and this is when we ran out of space on the slide is that there was then case law saying ah but you have not expressly excluded the right under the mis-representation act to rescind the contract in certain types of misrepresentation. So you then add another bit to this clause that says and the parties exclude their right to rescind the contract.

So that means unfortunately for an entire agreement clause to have a good chance of being enforceable it ends up having to be quite long. I am not saying do not use short entire agreement clauses. You can do a short entire agreement clause it is just the first paragraph here. But if you do that then you are taking quite a risk that a Court presented with arguments about representations that are made in a tender or in the negotiations might feel that actually because you have not got everything else entire agreement clause is unenforceable and then you are going to be fending off somebody like Sean pursuing you on a misrepresentation claim saying "ah ha the entire agreement clause does not work". And so for, at least for substantial contracts, that is quite a risk and one not to be recommended.

Sean: Yeah. I'd agree with that David, I think unlike some of the clauses we're going to talk about where we, where we're going to say if you don't have those new contracts then so be it and the law will step in, in some ways anyway. I think this is a particularly important area, as particularly in those big contracts where you're negotiating drafting and if you're talking about a very large contract anyway, yes these clauses end up being a bit long and unwieldy, but in the wider scheme of things probably not problematic and then, there really is legal merit behind those extra elements that have been built into these clauses now they really are doing something and so definitely worth looking at carefully at leaving them in and realising that these sorts of clauses really are giving certainty and privacy to the contract, but as you say most of our clients, that'll be precisely what they're looking for, the expense of the time to negotiate them properly.

I wanted to very briefly on two other clauses that you can probably group into the construction category because they go to the question of how this contract is construed should you ever end up in a fight over it. The first is a severance clause and that's the clause you're probably familiar with seeing that says, "in the event that any clause to this contract stands to be unenforceable then it could be struck out and the rest of the contract survives", that as a clause is actually just reflecting the legal position in England and Wales anyway. If you've got one clause in a contract, with some exceptions and provided you're not striking out an absolutely key clause which is going to otherwise completely obliterate the purpose of the contract, generally a Court will look at an unenforceable provision in that contract between two parties and if that provision is unenforceable, there is a blue pencil test that can be applied with a couple of additional conditions to strike out that particular offending provision, without impacting the rest of your 30/50 page contract.

You do sometimes still see people drafting those clauses in and they can be helpful because they can help a Court in having to come to that conclusion to say hey you know what, the parties always envisaged that this might happen and that, you know, a couple of these provisions that were may be over the line or just a bit too far or the parties pushing their luck a little bit, they can come out, but the rest of the contract survives. So, it can be a helpful clause because it will give the Court that extra basis upon which to say I can do this, in order to come to the conclusion that the parties were really trying to breach, but I would say not essential if you're trying to do one of those short form contracts.

David: Yeah definitely I find doing a short form letter agreement, severance clause is one of the first ones going into the bin basically because I'm trying to keep my agreement to two sides. I haven't got time and space for something that's nice to have.

Sean: And I suspect you're probably coming to the same conclusion on that no waiver clause which is the clause in those agreements that says, "if I have a right and I delay in exercising it, or there's a breach and I delay in calling you on it or exercising the termination right", I'm not waiving my right to do so. Again, I think they can be helpful, they can give the litigators something to argue off the back of, where you've got a bit of a longer gap than you might like between something occurring and you electing to do something about it. The ability to point to a clause that says look we did agree between us that we didn't have to act immediately to ensure we weren't waiving our rights. It can be a helpful argument point. It's only going to help you so far if you, if you know, a breach occurs and a right arises and then you sit on it and wait for 18 months, trying to turn around and say well I had a no waiver clause judge say I shouldn't be taking to waive my rights and any action I can take here. I think you're unlikely to succeed on that, so nice to have in a contract and in a big supply agreement for example, the long term relationship, it can be useful because it can pick and put a few parameters around how the parties are going to act, but certainly not a watertight bullet proof clause in terms of getting you out of jail free I don't think if you don't take any action.

David: There's a nice example of a Post Office tenurial case where there was an obligation to provide a parent company guarantee by the supplier. At the time of execution, the Post Office didn't ask for the parent company guarantee, didn't issue the supply of the parent company guarantee for some time, it took 11 months before the Post Office woke up and said "Ooh, where's our parent company guarantee". The supplier said, "well you've waived that right, 11 months is far too long". The Post Office points to the no waiver, but also when we didn't do that right, so we haven't waived it, it went to Court and the Court said "11 months, come on. Of course you've waived it, whatever your contract says isn't going to rescue you from this" and so therefore really emphasises nice to have clause, but not as good as excellent contract management.

Sean: Absolutely right and contract management is probably nice to take away on to some of the points we wanted to touch on, on contract administration.

David: Yeah, so we've put this as administration because they're about running the contract, the day to day stuff, so how do you vary it. What about notices clause? What about further assurances clause? What does that mean? Now I'm going to start with variation, now variation used to be a quite a nice to have clause, you know, you used to just say, you know, the parties can't vary it, except in writing and it needs to be signed by may be two directors or authorised signatory, but the case law go back in time, just saw that as a sort of signpost really to how people can vary a contract and accepted that people could vary it in other ways, so they might do it in writing, but not sign it or they might do it orally or over the phone or whatever and then there was a really important Supreme Court case, Rock Advertising, which said no. If you've got a clause that says the contract can only be varied in a certain way, it means it, it means you can't vary it in another way and therefore we're going to stop all these arguments going on where people are saying "well I'll just ignore the clause and varied it anyway", that doesn't work and so what that means is that if you are to vary a contract and the variation is to be enforceable, you must comply with the variation clause and so if the variation clause says it must be signed in purple ink in triplicate and by two directors, both whom names begin with the letter "D", then you must comply with that otherwise it won't be effective.

Now of course in the real world usually the contract for sale must be in writing and then it will say "signed" and it might then be signed by a director and authorised signatory, but you need to tick all those boxes if the variation is to be effective.

Sean: And I think the only thing I'd add there is that it's really important to make sure that the people running your contract on a day to day basis are fully aware of what they need to do to vary it, if that is something that's likely to occur, the contract sitting in a draw with a very nicely drafted no variation clause is usually great until it turns out that actually the people operating that contract have thought they varied it six times in the last 12 months and you get to a dispute and it turns out you're in a very different place because none of the formalities were followed.

Probably a saving grace in that scenario that Rock Advertising left open estoppel arguments, so we're going to see a lot more of those coming through, but yeah certainly the trend is that those clauses work and the Court is going to enforce them and so if you put one in there, make sure you know what it says and make sure you follow up.

David: I think people drafting and negotiating contracts, we want this kind of clause in there to try and encourage good contract management because arguing over oral variations is pretty messy, its very difficult to prove who said what, when, so although if a contract is badly managed, a variation clause might stop certain arguments and that might be unhelpful in the future, I would say overall, achieving contract certainty and encouraging good contract management is what we should all be aiming for and therefore I would encourage the inclusion of a variation clause.

The other clause you often find at the back of the contracts is something about notices, which says "if you want to give a contractual notice, this is how its going to be done and it can be done in person, it can be done by post, it might be best to do an email".

Two really important points about that, sometimes, well, often the notices clause say certain things must be done in a certain way. So, the normal thing is that notice must be given in writing, and it might then explain whether an email is included or excluded.

If the contract says it must be done in that way then have to comply with it. So often a notice clause starts off with saying what you must do, then it goes to how you may serve the notice, so all it does is create a signpost as to how you could serve notice, but it doesn't exclude you from serving notices in other ways and that Sean is quite important for you isn't it really, is that basically having to serve a difficult notice, having flexibility is quite helpful.

Sean: Yeah, it is and the scenario which you can often see arises around termination and particularly if you have one of those contracts that says, "the term is going to roll for another 12/24 months unless you terminate by a certain date". If somebody has not given a bit of thought to your notice provision at the time when drafting that particular clause and you leave it too late and particularly if it's very difficult to achieve service of a notice, or if there's a deemed receipt provision, that says no matter when you send it, its only deemed to be received by seven days later, it can just create a few headaches, so just give some thought to your notice clause. They're useful to have in most contracts. They're certainly worth including, but just make sure they're accurate, make sure they're thought through as regards the rest of the contract and make sure they're updated.

I've not seen fax for a little while, but you will be amazed how often you still get fax notice clauses and I'm not sure I'd know where our fax machine was.

David: Yeah, so please do scrap the references to fax or even other cases in references to telex, which is even older. That's obviously really unhelpful. Make sure your clause is up-to-date and is realistic.

Sean: And I think just very finally to touch briefly on further assurances clauses, those are the clauses that you find in the contract that say essentially the parties will work together to complete any additional requirements to fulfil the obligations above. Essentially the clause that you can sometimes see people trying to rely on, in order to say well you forgot to do, specify that you had to do X, Y or Z in the contract, but you gave me a further assurances clause and I need this particular notice, or I need this particular certificate or confirmation. I think they fall firmly into the nice to have category and again, they can create some scope for argument, but of course I am not going to use a further assurances clause to create a whole host of freestanding obligations on a party, its going to look to the rest of the contract and where there is specific things you want to need under a contract, much better to spend the time spelling those out higher up in your operative provisions to make sure you get them right.

David: OK, well thank you everyone for listening and watching us do this today. If you've found this useful, then do think about signing up to ThinkHouse, our programme aimed at in-house lawyers. The content we have covered today is typical of the kind of issues we tackle in ThinkHouse but in more depth, so if you're an in-house lawyer, do please sign up to it.

And of course, if you've got any questions, feel free to get in touch with us. We would be very pleased to hear about the contracts you do and the challenges you're facing, and we will do our best to help.

Thank you very much.

Sean: Thank you.