Matter of Law
Business contracts
Don’t underestimate the boilerplate
Legal terms you need to know By Sheila J. Baran
ave you ever wished you could write
your own laws? Generally, when a
business negotiates a contract, it is
analogous to writing its own laws. In many
instances, a business can negotiate contractual terms that will supersede the law
that would be imposed if the contract were
silent. However, in contract negotiations,
many businesses will only focus on certain
contract provisions, setting the other provisions aside as simply legal jargon or contract boilerplate.
Businesses focus on the business terms,
such as exactly what services or products
are going to be provided, when they will be
provided and how they will be delivered.
These essential terms and conditions are
then placed in a contract cushioned with
various legal terms, which are meant to
protect the parties if something goes
wrong in the performance of the agreement.
In negotiating the business terms, the
parties may review thoroughly certain
legal terms that have an important effect
on the business of a party.
For example, a provider of a consulting
service would strongly negotiate to retain
the ownership rights to services and advice
it provides to clients. If it does not protect
its ownership rights in its services, it will be
forestalled from providing that same service to another client.
Clients hire consultants based on their
experience and know-how. Giving one
client ownership rights in such know-how
could be fatal to a consulting business.
As another example, a company might
negotiate strongly the confidentiality provisions of an agreement if it is bidding to provide low-cost services to a client for a project. That company will not want its proposal, containing its prices and services, to
be copied by a competitor, which would
give that competitor an advantage in the
bidding process.
Even thought these business and legal
terms are the focal point and essence of
the contract, the miscellaneous legal boilerplate terms can be just as important —
sometimes more important — should
something go awry.
This article will focus on the effect under
H
Georgia law of several boilerplate terms
that may be overlooked in contract negotiations — severability, assignment and successors and assigns provisions.
These are just a few provisions that may
impact the parties in an agreement. It is
important to review the entire contract,
even the seemingly insignificant boilerplate terms, to ensure that the parties have
truly reached an agreement and understand their risks under that agreement.
Severability
Despite the great power a business has to
create the law that will govern its agreements, it comes with limits; not all contract
provisions are enforceable. Even though a
business may negotiate a provision, such a
provision might be unenforceable if it violates a statute or is otherwise illegal, violates public policy or was later modified by
the parties.
Faulty provisions in a contract can make
the whole contract fail. To protect against
failure of the entire contract, most will contain a severability clause such as the following: “In the event that any part or provision of this agreement is declared fully or
partially invalid, unlawful or unenforceable
by a court of competent jurisdiction, the
remainder of the part or provision and the
agreement will remain in full force and
effect, if the essential terms and conditions
of this agreement for each party remain
valid, binding and enforceable.”
In Circle Appliance Leasing Inc. v.
Appliance Warehouse Inc., the Georgia
Court of Appeals held that a covenant not
to compete was severable from the
remainder of the agreement because the
agreement also contained a severability
clause. The severability clause specifically
provided that if any provision of the agreement was unenforceable, such unenforceable clause would be severed without
invalidating the remainder of the agreement.
It did not contain the language from the
sample severability provision above.
Because of the severability clause, the
court held the remainder of the contract
enforceable, even though the consultants
admitted that the consideration for their
promise to render consulting services consisted not only of monetary payments but
also the covenant not to compete.
This case substantiates the impact a contract boilerplate provision may have on a
party to an agreement. Had the parties
evaluated in negotiations the effect of the
agreement’s severability clause, they might
have realized that even if an essential term
of the contract was declared unenforceable, the parties would still be bound to the
remainder of the agreement.
If the parties had negotiated to include in
the severability clause in the sample provision above, the court might have reached a
different conclusion if it found the
covenant not to compete an essential condition of the agreement.
Assignment
Another boilerplate provision which may
trump the law is in the “assignment of
rights and delegation of obligations” provision. In Georgia, if an agreement is silent
with regard to assignment and delegation,
a party may assign its rights under the
agreement and, as long as personal skill is
not required, may delegate its obligations
under the agreement. However, once an
agreement contains a provision regarding
assignment or delegation, that provision
will likely control.
Just as with other boilerplate provisions,
“no assignment” provisions should be carefully drafted to ensure a party has the
opportunity to consent to the assignment
of the other party’s rights or obligations
under the contract. In order to fully protect
a party, the provisions must preclude
assigning rights under the agreement, not
just assigning the agreement.
Furthermore, it is important for the provision to void the contract if a party assigns
any obligation or right.
In addition, the contracting parties may
want to preclude transfers by operation of
law in the agreement. The Supreme Court
of Georgia recently decided in Ward v.
City of Cairo that the transfer of a business’s rights to a successor business is not
encompassed in the definition of assignment.
Therefore, without a specifically drafted
assignment provision, a party may still be
bound to an agreement with a different
party should the original party to the agreement be sold or merged with another company. The following is an effective standard
nonassignability clause, which takes into
account transfers by operation of law, as
well as voluntary transfers: “ (a) No party
may assign any of its rights under this
agreement, voluntarily or involuntarily,
whether by merger, consolidation, dissolution, operation of law or any other manner,
without the written consent of the other
party. (b) Any purported assignment of
rights in violation of subsection (a) is void.”
Nonassignability clauses can have a
major effect on a party’s rights under an
agreement. For example, in Forest
Commodity Corp. v. Lone Star Industries
Inc., an agreement between a mining company and a storage company contained a
standard clause prohibiting assignment
unless the other party consented.
The storage company assigned its interests and obligations to another company
without the consent of the mining company.
The court found this to be a repudiation
of the contract and a material breach.
Because the storage company in effect
repudiated the agreement, the court found
that it was stopped from enforcing other
provisions of the agreement. The storage
company’s rights to recover under the
agreement were extinguished.
successors and assigns clause simply
states, “This agreement is binding upon,
and inures to the benefit of, the parties and
their respective successors and assigns.”
The purpose of a successors clause is to
bind a business’ successors or assigns to
the terms of the agreement in the event of
a transfer. The Georgia Court of Appeals,
however, has interpreted the successors
and assigns clause to also be an advance
consent to the assignment or delegation of
the agreement.
In order to avoid this interpretation, a
better drafting of the successors and
assigns clause, taking into account the
existence of an assignment and delegation
provision, is as follows: “This agreement
inures to the benefit of and is binding upon
the parties, their respective successors in
interest by way of merger, acquisition, or
otherwise, and their permitted assigns.
This section does not address, directly or
indirectly, whether a party may assign its
rights or delegate its performance under
this agreement. Section [insert cross reference to the assignment and delegation provision] addresses these matters.”
The severability, assignment, and successors and assigns provisions are just a few
of the boilerplate provisions found in most
contracts that are often overlooked. If not
reviewed carefully during the negotiations,
a business may find itself out of a contract
that was crucial to its business or obligated
to perform under conditions that are not
agreeable to it.
Each provision should be reviewed and
tailored to the specific needs and expectations of the parties. Businesses should take
the opportunity to review and negotiate
these boilerplate provisions because it is a
time when they can proactively override
the law, instead of simply being governed
by it.
Successors and assigns
SHEILA J. BARAN is a construction
Another boilerplate provision that correlates with the assignment provision is the
“successors and assigns” clause. A typical
and procurement associate at King &
Spalding LLP. Reach her at (404) 5722707 or sbaran@kslaw.com.
Matter of Law is brought to you by King & Spalding
© 2004 Smart Business Network Inc. Reprinted from the February 2004 issue of Smart Business Atlanta.