India: Status Check – Boilerplate Clauses

Last Updated: 7 March 2013

By Pratyush Khurana, an Associate with Vaish Associates, Advocates1

"Fixed or standardized contractual language that the proposing party views as relatively non-negotiable" is how the Black's Law Dictionary defines "boilerplate" (in addition to "ready-made or all-purpose language that will fit in variety of documents").

"Miscellaneous" or "General" clauses at the end of an agreement are often treated as boilerplate thereby inviting limited or no attention. The boilerplate clauses are generally perceived as non-substantive provisions and are diverse from other transaction specific clauses which form the essence of the agreement. Many of the boilerplate clauses in the commercial contracts often go without negotiations and modifications irrespective of the fact that a court ruling or any subsequent amendment in law has created doubts with respect to the enforceability or validity of said clauses or the clause may not at all be relevant in the context of the transaction. There are times when the drafting party inadvertently retains such boilerplate clauses in the first draft circulated to the counterparty even though some of these clauses may be adverse to their own interests.

"Its standard" is every lawyer's preferred explanation while negotiating an agreement. Another aspect for not negotiating or examining said clauses is based on the presumption that whenever one party attempts to review or revise or amend a boilerplate clause, the opposite party to the negotiation get skeptical that this might result into it losing something relevant. The contentious issue arises especially when a clause has been around for long and when so many of the earlier transactions have been concluded with the similarly worded clauses.

Some common boilerplate clauses generally appearing in commercial contracts are:

  • Entire Agreement;
  • Notice;
  • Force Majeure;
  • Severability;
  • Further Assurances;
  • No set-off or counterclaim;
  • Reliance or No reliance;
  • No waiver;
  • Governing Law and Jurisdiction.

It is said that why tinker, when the going is good; however, boilerplate clauses comes into play when things actually go wrong. The recent global credit crunch witnessed a paradigm shift in the perspective of lawyers with respect to the ways in which some of the above stated "boilerplate" provisions were worded and negotiated.

Earlier, certain clauses that were considered inconsequential to even discuss suddenly became essential when stakes were high. The importance and implications of the said standard clauses are briefly discussed hereunder:

Entire Agreement clause provides that the agreement in question together with all annexures, schedules, exhibits and attachments constitutes the entire agreement and understanding between the parties with regard to the subject matter, and supersedes any previous agreements, discussions and understanding between the parties to the agreement. The purpose of the said clause is to exclude liability for any pre-contractual statements exchanged between the parties which do not form part of the executed agreement. This enables the parties to provide certainty to the agreed terms and also limiting possible claims from dealings outside the agreement. However, it is important to ensure that all the terms of any previous agreements and understanding are captured accurately and completely in the agreements.

Notice clause provides the mechanism in which the notices and other communications are to be served and exchanged between the parties. Essentially, the Notice clause provides that all notices are to be in writing.

Reference and compliance to such Notice provisions is fundamental when making any communication with the other party or serving any form of Notice, as any error and defects can be fatal to the validity of the Notice.  It is quite possible that the address of parties may change specially in the case of long term contracts. Notwithstanding the presence of this clause, it is always advisable that the sender ensures that the notice is addressed to the current address of the party especially in the case of any contentious issues.

Force Majeure clause prevents the parties from any liability to perform contractual obligations when performance is not possible owing to an event or circumstance beyond the performing parties' reasonable control. The force majeure events mainly include an act of war, invasion, armed conflict, strikes or lockouts, flood, cyclone, lightning, earthquake, act of God etc. The exact scope, nature and application have to be specific and clear. A standard clause may not fit in all transactions.

Given the possible uses and misuses of force majeure clause, this clause should be discussed extensively in contract negotiations. The law does not define 'force majeure', therefore, to avoid any diverse interpretation the parties should detail out the events (basically events that are unforeseeable) which may prevent its performance and result into triggering the operation of this clause. Furthermore, it is also pertinent to understand that an affected party before triggering the said clause must have taken reasonable endeavours to mitigate the outcome of the event.

Severability clause provides that if any provision of the agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of prohibition or unenforceability but that shall not invalidate the remaining provisions of such agreement or affect such provision in any other jurisdiction. The basic objective of the said clause is to keep the validity and legality of the provisions of the agreement less interdependent on each other.

In other words, the provisions of the agreement shall remain intact or unaffected in the event any provision of the agreement becomes unenforceable or invalid or prohibited due to any changes brought in any applicable law by way of amendments or if the implications are determined otherwise by a judicial authority.

In the absence of a Severability clause, it is likely that if a single provision of the agreement is held invalid, there could be a case to argue that the entire agreement will also be rendered invalid, and therefore unenforceable. For example this apprehension loomed largely in respect to absence of Severability clause in "Share Purchase Agreement" when recently the Indian securities market regulator i.e. Securities Exchange Board of India adopted the view that put/call options and rights of first refusal are illegal and therefore not enforceable.

Further Assurances clause provides that each of the parties to the agreement shall at the demand or request of the other execute and deliver any and all additional information, papers, copies, documents and other assurances, and shall do any and all acts and things as reasonably necessary in connection with the performance of its obligations.

While including this clause in the agreement the parties believe that they will cooperate with each other and facilitate the smooth flow of the transaction; however, drafting the said clause in a broad manner could lead to unreasonable and recurring demand of documents. This may result into variety of administrative difficulties in case the parties to the agreement have unequal bargaining power.

Therefore, the said clause should be conditional upon the request being reasonable.

No set-off or counterclaim clause as generally used in the standard loan documents provides that borrower must make all its payments without setting-off any amount. The impact of such a clause is to basically prevent the borrower from raising a counterclaim; however, in the event of actual dispute it remains at the discretion of Court as to whether or not to decide the counterclaim of the borrower on merits before directing the borrower to make payment to the lender.

 The inclusion of this clause in the agreement is intended to protect the interest of the lending party in the event the borrower tries to set off amounts due to lending party against any amounts allegedly claimed by the borrower from the lending party.  In practice it is very common to see borrowers claiming set offs and counter claims against alleged damages for delays in disbursement and the consequent adverse effects on operations of the borrower.

Reliance or No reliance clause operates in their respective fields, depending on the circumstances and nature of the agreement.

In loan documents the 'Reliance' clause is included to specify that the reliance has been placed by the lending/ secured parties on the validity, effectiveness or genuineness of any documents or any statement, warranty or representation made by the borrower or its authorized representatives.

On the other hand, 'No reliance' clause is included in an agreement wherein the parties do not intend to bind each other for any advice rendered by one party to the other. The purpose is to generally provide that the parties have not made any pre-contractual promises or representations but, just in case they have, then neither party has relied on any such representation made by the other that is not reproduced in the agreement itself.

Legally speaking the intention of this clause is similar to that of Entire Agreement clause. The basic objective being that the parties agree not to rely on anything other than what is specifically stated in the agreement. This clause is found quite often in consortium lending documents where each lender indemnifies the other and confirms that it has not relied on the appraisal by any other co-lender or the consortium leader.

No waiverclause generally provides that no failure or delay in exercising a right will constitute a waiver of that right.

For example: In case of any material breach of the terms of the agreement the non-defaulting party is entitled to terminate the agreement, however in practice, it is not expected that the non-defaulting party shall immediately take steps for termination. Quite often, the non-defaulting party may want to grant some additional time beyond the contractual cure period to the defaulting party to remedy the situation. However, if the non-defaulting party does not take any action within reasonable period of time and continues to perform its obligations under the agreement then it may stand to lose its right. Hence, this clause needs to be drafted to provide that any subsequent performance shall not result into redundancy of the 'No waiver' clause.

Governing Law and Jurisdiction clause provides that the agreement shall be governed by, and construed in accordance with, the laws of ..... (say India) and courts/ tribunals in ....  (say Delhi, India) shall have exclusive jurisdiction to settle any disputes which may arise out of or in connection with this agreement and the parties irrevocably submit themselves to the exclusive jurisdiction of such courts/ tribunals.

Generally, if the parties to the agreement are persons resident in India and the agreement do not pertain to a cross-border transaction, then the agreement should be governed by laws of India and the Indian courts shall have exclusive jurisdiction over the transaction by default. However, in the event the transaction has a cross-border effect or if one of the party to the agreement in not an Indian resident then the parties are at liberty to choose the governing law and the jurisdiction in which either of the parties resides or of a neutral third country law which is commercially viable.

It is seen in various loan syndication deals between the Indian Borrowers and Southeast Asian or European Lenders wherein English law is taken as the governing law and Courts of England are given the exclusive jurisdiction to decide the disputes between the parties. Section 13 of the (Indian) Civil Procedure Code, 1908 provides that foreign judgments shall be conclusive regarding any matter directly adjudicated upon, except on the grounds mentioned there under.

Though the loan agreement may be governed by English law, quite often, many of the security documents for the same transaction are governed by Indian laws.

CONCLUSION

It cannot be denied that the boilerplate clauses can be drafted to benefit either of the parties involved. Therefore, it is essential to carefully examine the clauses provided at the fag end of the agreements before signing on the dotted lines.

Transplantation of clauses from one agreement to another without independently considering the operational mechanics of each agreement will be at the peril of parties involved and the consequences of the same would be anyone's guess.

Footnote

1 The views are that of the Author and not of the Firm.

© 2013, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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