‘Boilerplate’ is the term often used to describe clauses, such as governing law and entire agreement clauses, that are so commonly found in commercial contracts that they often seem to have become standardised. Given that boilerplate clauses are so often in what looks like a standard form, how much attention do you really need to pay to them? Some recent cases have emphasised the importance of the boilerplate and other ‘standard’ contract provisions and phrases.
Choosing the governing law
A governing law clause lets the parties specify the system of law which will apply both to the interpretation of the contract and the resolution of any disputes that might arise from it. The Rome Convention on the Law Applicable to Contractual Obligations 1980 (Rome Convention) applies to contractual obligations in any situation involving a choice between the laws of different countries. It states that a contract will be governed by the law chosen by the parties. Such choice must be express or be able to be demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. If there is no express governing law in the contract the conflict of law rules will determine which applies.
In Halpern v Halpern (2007), the Court of Appeal considered whether it is possible to apply Halakha (Jewish law) under the provisions of the Rome Convention and held that when deciding the governing law of a contract the law chosen must be that of a country. However, it went on to note that other bodies of rules (such as Halakha) can be incorporated as a term, or terms, of the contract itself. For example, the Arbitration Act 1996 states that, if the parties have so agreed, an arbitral tribunal is entitled to determine disputes in accordance with principles which are not the law of a country. In addition, matters of interpretation can be assisted by rules/laws other than the contract’s applicable law, but matters affecting the contract as a whole must be dealt with by the applicable law only.
The starting principle is the common law 'parol evidence rule' that outside evidence cannot be admitted to vary a written contract. However, entire agreement clauses are still used as there is an exception to the parol evidence rule if it can be shown that the written contract was not intended to capture the entire agreement between the parties. Entire agreement clauses are used to make sure this exception does not apply.
If an entire agreement clause is limited to this simple point, in other words stating that the written contract constitutes the entire agreement between the parties, the clause will not prevent one party from claiming that it has been misled into entering the contract. Therefore a non-reliance clause will often be used as this clause will typically go further than an entire agreement clause and state that not only does the contract contain the entire agreement between the parties, but also each party acknowledges that it has not relied on any representations other than those set out in the written contract and excludes liability and remedies for any other misrepresentations other than as set out in the contract.
Against that background, a look at some of the recent Entire Agreement cases:
In ProForce Recruit –v- Rugby Group in February 2006, ProForce contracted to provide cleaning services to Rugby Group and was granted "preferred supplier status" but that expression was not defined in the contract. Rugby Group then started using some other agencies and ProForce claimed for breach of contract.
The parties disputed the meaning of the term "preferred supplier status". ProForce argued that the words should have the meaning which the parties placed on those words when they were negotiating the agreement. Rugby Group claimed that the entire agreement clause prevented ProForce from relying on prior representations, negotiations and understandings to establish a claim for breach of contract.
The Court held that the entire agreement clause was designed to preclude the use of extrinsic evidence to incorporate further terms or representations into the contract which the parties had not themselves included but that it did not preclude the use of evidence relevant to the meaning of the written terms of the contract. There was a distinction between ascertaining what the terms of contract were by reference to prior representations, agreements, negotiations and understandings and ascertaining the meaning of a term already contained in a written contract by reference to pre-contract materials.
Two months later, in April 2006, the case of Ravennavi –v- New Century Shipbuilding concerned an option agreement between the parties for NCS to build two oil tankers for Ravennavi. The option agreement specified the delivery dates and other key commercial terms. It also said that if NCS could find "any possibility" to achieve earlier delivery dates then it was to offer Ravennavi the earlier delivery position.
Ravennavi exercised its option and the parties entered into 2 full-length and relatively standard form shipbuilding contracts, one for each tanker. Neither contract referred to the possibility of an earlier delivery position and both contained an entire agreement clause.
Ravennavi discovered that NCS had subsequently offered an earlier delivery date than its own to another customer and therefore it claimed damages for breach of contract. Ravennavi argued that its earlier delivery right under the option agreement was not affected by the entire agreement clause in the shipbuilding contracts because the option agreement was an overarching agreement dealing with a separate subject matter.
The Court disagreed with this and pointed to the delivery dates and similar provisions in the shipbuilding contracts to show that those contracts were clearly dealing with the same subject matter as that contained in the option agreement. The Court held that when the parties entered into a contract which said: "This Contract contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this Contract prior to the signing of the Contract" then that was indeed its effect and it had superseded the earlier option agreement.
The most recent case was in March this year, Lloyd –v- Sutcliffe, where the Court did support an argument similar to the one run by Ravennavi. In this case Lloyd had an option to acquire two former petrol station sites for residential development. He verbally agreed terms with Sutcliffe under which Lloyd would buy the sites, Sutcliffe would develop them, and they would share the profits equally.
One project then lagged behind the other, so that when the parties entered into their written contract they dealt in detail with the first site but only by reference and inference to the second site. The written contract included an entire agreement clause: "This Agreement supersedes any previous agreement between the parties in relation to the matters dealt with herein and represents the entire understanding between the parties in relation thereto".
Plans for the second site proceeded, but the relationship between the parties broke down, and Sutcliffe sought an equitable interest in the second site owned by Lloyd.
The Court held that:
- The written contract only represented the entire agreement between the parties "in relation to the matters dealt with" in it. However, the arrangements in relation to the second site were not "dealt with" in the agreement and the entire agreement clause was therefore not engaged. For example, the agreement did not dispose of the important issues relating to its development and profits.
- The entire agreement clause could only preclude reliance on extraneous matters arising before the date of the agreement. The parties had clearly reiterated the terms of their understanding for the development of the second site by their words and conduct after the date of the agreement, and those were matters which were not within the scope of the entire agreement clause.
The scope of an entire agreement clause does therefore remain uncertain. It is a question of judging when the contract has "dealt with" a matter to such an extent that the entire agreement clause will apply and in a sense the entire agreement clause has come full circle because entire agreement clauses were introduced to prevent just such an argument arising. However there does seem to a certain common sense in judging cases such as Ravennavi and Lloyd –v- Sutcliffe on their own facts.
The Contracts (Rights of Third Parties) Act 1999 provides that a person who is not a party to a contract may enforce a term of the contract in his own right if:
- the contract expressly provides that he may; or,
- the term purports to confer a benefit on him (unless, on proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party).
Cases that rely on the Rights of Third Parties Act appear only infrequently. However, a recent case, Prudential Assurance Co Ltd v Ayres (2007), has examined the Act’s application. A limitation clause in an underlease between two parties stated that "consequently any recovery by the Landlord against the Tenant or any previous tenant under the [underlease] for any such default shall be limited…". When the current tenant defaulted, the landlord sought to recover from the defendants, the guarantor of a previous tenant, who sought to rely on this limitation in the underlease.
The High Court found in favour of the defendant, saying that a true construction of the limitation clause had the effect of conferring a benefit on the third party in question within the terms of the Rights of Third Parties Act. It held that there was no requirement that the benefit on the third party should be the predominant purpose or intent behind the clause, and that the Act could apply equally to confer a benefit on someone other than the third party (ie in this case the guarantor could obtain the benefit although the previous tenant was the named third party).
The Court further emphasised that in this case the wording of the clause was not as clear as it could have been, illustrating the need to pay careful attention to the drafting of clauses to ensure that an agreement does not unintentionally create third party rights. If the parties to an agreement do not want any unforeseen rights to arise, it is important that the agreement includes a provision which expressly excludes third party rights including those arising under the Rights of Third Parties Act.
As a general rule, the benefit of a contract may be freely assigned to a third party without the consent of any other party, whereas the burden of a contract cannot be assigned (and will require a novation). Assignment clauses are included in commercial agreements either to clarify or vary this position. (Contracts relating to land have different assignment rules and are beyond the scope of this article.)
The Court of Appeal recently examined restrictions on assignment in Barbados Trust Company v Bank of Zambia (2) Bank of America (2007). A contract provided that a debt could only be assigned to another bank or a financial institution. It also provided that the contract could be assigned with the prior written consent of the other party – but that if a reply to a consent request was not received within 15 days, the consent would be deemed given. In this case the debt had been ‘assigned’ to a third party before the 15-day consent period had expired, and so the Court of Appeal held that the assignment was invalid as consent could only be deemed to have been given after the date of the assignment.
The ability to assign the benefit of a contract can be of commercial importance and this case illustrates very well that the wording of assignment provisions can, therefore, have a serious effect on the value of a contract. Care should be taken when reviewing such provisions in order to establish a legally effective mechanism to transfer the benefit of contracts. It is also worth noting that the three judges in this case all came to different conclusions on the interpretation of the assignment clause, further highlighting the importance of ensuring that an assignment clause is drafted clearly.
‘Best endeavours’ or ‘reasonable endeavours’?
The question of whether a contract should include an obligation of ‘best’ or ‘reasonable’ endeavours is regularly raised during contract negotiations. In Rhodia International Holdings Ltd v Huntsman International LLC (2007) the High Court looked at the underlying considerations and, unsurprisingly, concluded that ‘reasonable endeavours’ is a less stringent obligation than ‘best endeavours’. This is fairly well-established ground, but more usefully the Court went on to refine this view, saying that an obligation to use reasonable endeavours may be discharged by exhausting just one of a number of possible solutions, whereas best endeavours would require all avenues to be explored. Thus, it follows that an obligation to use all reasonable endeavours is likely to equate to using best endeavours.
The Court also held that where a contract specifies steps that have to be taken as part of the exercise of reasonable endeavours, those steps must be taken in order to meet that obligation – even if to do so would be prejudicial to the commercial interests of the party so burdened. However, if the contract lacks such a specified course of action, a party would be unlikely to be required to sacrifice its own commercial interests in pursuing either reasonable or best endeavours.
Parties of equal bargaining power in a commercial context will tend to provide for ‘reasonable endeavours’ rather than ‘best endeavours’. The Rhodia v Huntsman case makes clear that in order to be certain of a particular course of action being followed by the other party it is not possible to rely on the term ‘reasonable endeavours’ but it is necessary to stipulate the specific actions in the contract.
These recent cases all serve to illustrate the importance of boilerplate clauses, not only to the meaning but potentially to the value of the contract, and that it is necessary and important to give them careful consideration when a contract is being negotiated and drafted.
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.