Canada: Beware the Boilerplate: The "Standard" Clauses in Commercial Contracts

Boilerplate clauses are standard clauses, phrases and concepts that appear in commercial agreements. These clauses are necessary components of a contract. Each clause carries a very specific meaning and serves a particular purpose which has an effect on the rights and obligations of the contracting parties.

Contracting parties beware - many of these "standard" provisions may conceal significant legal and business implications that, if not tailored to the specific circumstances of a transaction, may potentially produce unwanted results. If each provision in a contract is not fully understood by the parties involved, using them in an agreement can unintentionally defeat the contractual intent of the parties. It is important to review each contract provision carefully to consider whether or not the provision is beneficial to include.

Outlined below are several examples of "standard" provisions which are commonly found in commercial agreements. Please note the list of provisions discussed in this article is by no means exhaustive. There are many other provisions that are used in various contracts.

Entire Agreement

The purpose of this clause is to achieve certainty by defining what is and is not part of the agreement. The advantage of using this clause is to ensure that the parties get what they bargained for, as it is contained in the text of the agreement. This clause will likely indicate that the terms of the agreement will be interpreted without reference to extraneous agreements or documents.  It also serves to rule out reliance on representations regarding any statements that may have been made during negotiations. The danger here is that, if a key term of the agreement to a party has been omitted for whatever reason, the party will not be able to rely on it.

Waivers

The waiver clause aims to avoid findings that a party waived their right to enforce provisions of an agreement by prior silence, inaction or conduct, and may also indicate conduct that shall be considered a waiver of rights under the agreement.

Assignments

The purpose of this clause is to place a restriction on a party's right to assign or transfer his or her rights and obligations under the agreement to a third party. If an agreement is non-assignable, this clause may also indicate the consequences of an attempted assignment. There may be situations where one party does not want the other party to have a right to assign their interest in an agreement. The agreement needs to expressly provide for this.

Severability

This clause is intended to preserve the heart of the agreement even if certain provisions fail. A severability clause indicates that generally, if a part of the agreement is found to be invalid or unenforceable, and if it is not vital to the agreement, that part may be severed and the remainder of the agreement will operate as if it were the entire agreement. The failure to include such a clause leaves open an argument that because certain key terms of an agreement are unenforceable, the entire agreement is unenforceable.

Dispute Resolution Procedures

This type of clause is intended to facilitate the resolution of any disputes arising from or related to the contractual relationship between the parties to an agreement. Shareholders may specify the type of mechanism they wish to use to resolve a dispute, disagreement, deadlock, or other controversial matters requiring resolution. The type of dispute resolution mechanism is important because, for example, a party's right to litigate a dispute may be precluded if the agreement provides disputes will be settled by binding arbitration.

Governing Law

This clause allows the parties to choose the law that will apply to resolve disputes arising from the agreement or the relationship between the parties. It is advisable to set out the governing law and suitable venue, and is especially necessary when shareholders are spread across multiple jurisdictions. If the parties are located in the same jurisdiction, the choice of a governing law should be uncontroversial. If a governing law clause is not included, and if parties from multiple jurisdictions are involved in the agreement, litigation surrounding the issue of which jurisdiction's law should apply can be quite costly, involved and unpredictable.

Since boilerplate provisions tend to be more general in nature than other clauses in an agreement, there is a tendency only to give a quick glance at these provisions before signing on the dotted line. However, it is important to ensure that the meaning and purpose of each provision is fully understood in order to verify that the rights of the contracting parties are in fact protected and to avoid the possibility of unexpected, unwanted results.

Originally published April 2016

www.lerners.ca

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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