The Basics of a Boilerplate Contract
A boilerplate contract refers to the standard clauses that are included in most business agreements. Generally located at the end of contracts, these clauses are relatively non-negotiable in a transaction. They cover a variety of aspects that are meant to provide some uniformity to agreements so the parties involved can be assured of some level of standardization.
A boilerplate provision might be provisions for renewal, choice of law, indemnification, record-keeping and confidentiality, and limitation of liability. For example, "This Agreement shall be governed by the laws of the State of California in the United States . "
However, even if boilerplate contract provisions are uniform, they may not be applicable to any particular business transaction. Businesses should carefully review these provisions to ensure their proper use within the transaction. For example, sometimes a contract will have a limitation of liability provision which limits the scope of liability of one party to the other and the maximum amount that the aggrieved party may recover under the contract.
Such clause may actually contradict the provisions of the contract in the event of a breach. Or the provisions may not be in compliance with the contract laws or the public policy of the jurisdiction where the contract will be performed.
Core Features of a Boilerplate Contract
The key elements that one can expect to find in boilerplate contracts include:
1. Governing Law
One of the most important provisions in any contract is the governing law clause. This provision will often have a significant impact on the rights and obligations of the contracting parties.
2. Dispute Resolution
It is common for contracting parties to agree to resolve disputes in any one of a number of ways, including litigation, arbitration or even by way of mediation. In addition, the jurisdictions in which any litigation or dispute resolution proceedings may be brought can be limited to a particular region or country.
3. Confidentiality
Many contracts impose confidentiality obligations on the parties. These obligations are often fairly broad, but they are usually limited to a prescribed period. A reasonable period of time for the purpose of these obligations will often be considered to be five (5) years from the effective date of the contract.
4. Non-Solicitation/Non-Circumvention
The purpose of these provisions is to prevent the contracting parties from the solicitation of each other’s officers, directors, employees and agents after the termination of the contract.
5. Assignment
An assignment clause determines whether a party may transfer its contractual rights to another party in prescribed circumstances. Such clauses are common in orders of any type and assist in removing the necessity for further negotiations in respect of the agreement.
6. Entire Agreement
It is a common practice to include a clause that provides that the contract represents the entire agreement between the parties with respect to any matters contained in the contract. This clause prevents either party from arguing that there were other agreements between them in respect of the subject matter of the contract that may not be included in the contract itself.
Advantages of Using Boilerplate Contract Templates
The biggest challenge with contracts is drafting them. Once the hard work is done, contracts that work in your favor are extremely effective, whether a purchase agreement to buy a home or a hefty 250 page credit agreement. The difficulty is drafting them. Many of my clients do not need a customized contract to accomplish their goals. Sometimes it is clear what a company needs. Other times an acquisition has been done before, and a similar set of issues persist. Let’s say, for example, that an American-based manufacturer is looking to do business in Brazil. They want to license their manufacturing technology to a Brazilian manufacturer. Imports into Brazil, with the 60% tax, and ports, visas, and travel costs make manufacturing in Brazil a 20% cost saver over the US, with the potential for 20% growth in Brazil. With a Brazilian manufacturer on board, our client wants to protect its technology as much as reasonably possible, while structuring a fixed per-unit license fee that would double the licensee’s margin from a comparable Chinese manufacturer. It would take ages to negotiate a full contract. And yet, there are numerous examples of American companies who have licensed their medical technology to Brazil under the same circumstances. There is a precedent for this type of license agreement: AlphaDog obtains a fixed per-unit fee from its Brazilian licensee, and gives it rights to fix the design problems. In facts, I save about 50% of my time using a well-drafted boilerplate template, and in some cases much more. It still takes plenty of time to find the right precedent and clean it up and get rid of provisions that will not apply. But, 100-150 pages gone in half a day is not unusual. A boilerplate contract template allows me to build from the ashes of the old contract a new contract. I was once asked to create a credit agreement for a company that had just overpaid their creditors by $1.2 million. They were in need of a new credit agreement. Almost as a joke, I reviewed my credit agreement library to see if I had a loan package that could be used. I did. I used it as a boilerplate contract template. The client had given me the names of all their bank lenders. I typed in their cell numbers, and then listed the email addresses I found for each banker. I googled the general location of each lender. I did this on the plane on the way to Brazil. We were able to send them all drafts of the credit agreement 24 hours after we first met the client. They were amazed. We kicked off the most efficient meeting process imaginable. Instead of clarifying the points that needed to be made, we agreed them all and worked through what expressions would work best. In the end, we were able to email all the documents, including the nearly 200 page master loan agreement, by the end of the flight back to the US. Boilerplate contract templates save money and time. The time is spent in the first drafts, and rarely thereafter. They are a robust effort that gives you the language that works, even in negotiations.
Drawbacks and Dangers of Boilerplate Contracts
Despite the convenience of boilerplate agreements, they are not without their risk. Inherent in any "form contract" is the tendency to, say, unwittingly "accept more than bargained for" in any given transaction. That is to say, it’s difficult if not impossible to accurately predict how exactly boilerplate language (in an agreement) will be construed and enforced against you (in court) in the future.
The pitfalls of a "form" contract are thus compounded by the fact that the task of contract drafting forces the lawyer to make choices about what terms and conditions, rights and obligations, must be included to satisfy the transactional goal – including the "what if" scenarios. Only then will the final document be satisfactory as a "custom" agreement which accurately reflects the intentions of the parties.
A good example of this is the standard bill of lading used for shipping goods internationally by air (IATA), by ocean (B/L), or inland transportation (CIM). It typically contains an arbitration clause which, under certain circumstances, is superseded by public law, but not in all cases. Which circumstances does the supplier prefer? Which does the customer prefer? The answer may well depend on which party is preparing the draft.
Even in simple agreements, boilerplate may include terms that have unwanted or unexpected consequences. For example, many suppliers incorporate terms relating to late payment in boilerplate terms, such as interest or late fees. Rarely do customers seek to pay late. And yet such terms and conditions can lead to counter-intuitive results when applying basic principles of offer acceptance and consideration in contract law. For example, in the event of late payment, the supplier then seeks to add interest – effectively changing the contract terms every time payment is late. In order to get paid, the supplier is effectively forced to agree to a new contract every year, using the customer’s letter (applying the first, agreed interest rate) as its acceptance. This could lead to an infinite number of one year agreements, each with different terms and conditions.
An even clearer example is when the contract contains an express right to use the trademarks (or any other intellectual property) of the owner. Originally provided as a favor to customers; it later morphed into an option to create derivative works, which belonged to the supplier – fully assignable without notice or consent. When challenged in court, the judge was asked to sever the offending clause, and those that naturally went with it to insure the contract made sense as a whole. Oddly, the result was that the trademark clause was allowed to remain, but only the derivative rights clause was severed, with no right of assignment.
Editing Boilerplate Contract Templates
Of course, boilerplate provisions can be modified for their specific context and intended purpose. When it comes to clauses or provisions that are typically included (and therefore considered "boilerplate"), there are many options for customizing them.
But when you try to change a boilerplate provision in a contract, what do you actually change? How do you know what to change and how much to do? Do you create new contract language by just changing a few words here and there, or do you go out and get a clause that has been drafted (and redrafted many times) by a professional contract lawyer, and insert that revised language into your agreement as a replacement for the old language? What happens if you change your mind and want the old language back in your contract, or maybe you need to insert the revised language into the new contract you are drafting?
These are the quandaries with which I have wrestled over the years. In my experience, here’s what works best:
If possible, replace the boilerplate provision with a new clause that has been professionally drafted. While it’s tempting to stick with the "old" language, often the new clause just says it all better than the old one. Take the risk and use a new, professionally drafted clause , as long as you have carefully reviewed the new clause for unnecessary clauses (that may have changed the meaning of your intended clause), and understand how the new clause is interrelated with other clauses in your agreement. If there are no overlapping provisions, then use the new clause.
But in those instances where you cannot replace a boilerplate clause with a new, professionally drafted clause or if you just really want to use the old clause because it suits your needs, then don’t try to rewrite the old clause from memory – locate a copy of the old clause in another agreement and reinsert it into your contract document. Don’t try to change the old language to suit your new needs. In other words, don’t try to hawg and cobra your way through it. Don’t even cut and paste without the previous review of the old clause (see my previous advice). And just leave the replaced clause in the contract even when you draft a new provision or clause for the new contract. You never know when you’ll need it again.
Finally, if you change your mind after inserting the new clause or provision, locate the old, insert it into your contract and remove the new clause or provision. Yes, it’s that simple. Again, don’t try to change the old provision. Just leave that clause alone.
Boilerplate Contracts by Sector
While boilerplate contracts are a general tool intended to simplify the legal process, each industry tends to have its own specification for them.
Real Estate
For the real estate industry, boilerplate contracts may offer templates for deeds, tenancy agreements, and partnership agreements. These agreements may contain clauses for co-ownership and any agreements or guarantees. They may also feature sublet clauses, lease term duration, and lending terms. The boilerplate for real estate also tends to include specifics about what would happen in the event of a sale.
Technology
In the technology sector, boilerplate contracts serve for many purposes. A few of the most common boilerplates would be those concerning liability waivers, non-disclosure agreements, non-compete clauses, or terms and conditions pertaining to purchases. Examples of technology agreements with boilerplate sections include shared software agreements, programs, or licensing.
Finance
The finance industry has boilerplate agreements lending to loan notes, receipts, accounts receivable forms, investment contracts, or any other type of borrowing or lending agreement imaginable, whether for a business or private sale. There may be additional terms and conditions concerning interest (including increases or decreases) and late fees.
Retail and Other Businesses
Additional boilerplate contracts may exist for your industry, such as retail or food-service. These may be modified to cater to the specific requirements of your industry. For instance, a food-service business may be subject to certain government regulations, while a retail shop may need to contain schedule of operations, warranties, liabilities, and other terms and conditions.
Selecting the Best Boilerplate Contract Template
There are several factors to consider when selecting a boilerplate contract template. The first factor to consider is whether or not you are purchasing a third-party template that is easily downloadable, or if you are hiring a lawyer to draft an appropriate template. Selecting the former can prove costly if important provisions are missing or poorly drafted, whereas hiring a lawyer to assist can be costly as well, at least initially.
In addition to the cost of the template itself, whether you have hired a lawyer or selected a template outside of a lawyer’s assistance, you will need to understand the purpose for which you intend on using the template. While it can be tempting to pick and choose provisions from various templates to form one’s own hybrid contract, it is preferable to use a template that may not contain your preferred provisions, than to select a hybrid contract that may be missing important provisions. This is because it is often quite costly to engage a lawyer to review a hybrid contract, rather than a readily available and readily applicable template. This of course assumes that the template you select contains similar provisions to what you want.
Consulting with a legal professional before selecting a boilerplate contract template is highly advised. While a lawyer cannot predict with certainty the intentions of the parties to a future deal, a lawyer can provide additional guidance to help determine what provisions are preferable to include or exclude.
The Next Era in Boilerplate Contracting
As we stand on the brink of an era of technology-driven legal change, the future of boilerplate contract templates seems poised for an evolution that will leverage the many future-focused tools and methodologies coming our way. From digital contracting to automation, the future holds much promise in the boilerplate space.
The move toward digital contracting was already well underway before 2020. The COVID-19 pandemic accelerated this trend by making physical signature requirements problematic for all but the most urgent contracts. While this acceleration has created uncertainty, policy-wise, around the validity of e-signature (which is extremely common in these days of electronic everything) some organizations have forged ahead with prudent use of digital contracts, as secure, easily accessible documents benefit the organization in the present rather than locking them into inflexible paper templates that are inaccessible for easy redlining.
Additionally, pre-approved contract templates seem to be on the threshold of a significant uptick. The flexibility of templates, though requiring careful working-around if not careful re-doing, allows for the building-out of checklists and calculator tools to be used by sales teams, and so many sales departments now employ these tools to eliminate confusion in the organisation at the outset of contract negotiations. In the face of increasing scepticism of boilerplate, boilerplate templates are becoming increasingly popular. In some places, corporate-risk teams are adopting boilerplate to reduce total review costs. Boiling it down means easier, automated, and faster contract reviews with less need for real human negotiation of terms. It’s almost a disservice to call it negotiation. We’re at the point now where a set of pre-approved templates goes into play and all you’re doing is negotiating in terms of ancillary issues such as pricing or performance. It’s refreshing , really.
Automation will also play a bigger role in boilerplate contracting as suppliers work to find ways to integrate legal tech into their systems and offerings. Boilerplate contract management will absolutely benefit from the rise of AI-driven contract review tools. Thought leaders in the field say that AI-driven contract review will be an essential cost-cutting technology for legal departments in particular. In addition to ensuring compliance with preset contract risk limits, AI-based review tools will help organisations track and manage risk throughout an organization’s contract lifecycles. This technology won’t eliminate the need for human interaction with contracts – organizations will still need people to manually address questions and issues – but the "low-hanging fruit" of reviewing standard boilerplate clauses will soon be handled by machine. Tracking all of this information will be incredibly valuable for companies down the road.
The rise of contract automation can only improve boilerplate contracting. However, the tools that are available have got to get better. As with any new technology, there will be opportunities for misapplication or misunderstanding of the tool and how it can be successfully implemented. More and more, though, these tools that automate the boilerplate review process will be perfected. Ultimately, the quality of these contracting tools will build trust and lessen scepticism of boilerplate itself, making it easier for suppliers to get the pre-agreed-to terms that they need in order to meet their margin targets, while making it simpler for customers to understand their own obligations going forward.