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"It's Just Boilerplate...

“I just want the agreement simple…leave out the boilerplate”…or “I’m not worried about that part of the contract, it’s just boilerplate”.

If I had a nickel for every time I’ve heard these statements from a client…well, I’d have a lot of nickels. The problem is that the boilerplate is, more often than not, the part of the contract that resolves disputes between the parties, and the part of the contract that becomes the most important if there is ever litigation between the parties.

Asking an attorney to leave out the boilerplate in a contract, or to not spend any time negotiating the boilerplate in a contract, is like asking a surgeon not to sanitize the instruments. The job can get done without that step, but the aftermath may be very painful, or fatal.

Boilerplate is all the “legal mumbo-jumbo” in a contract that has nothing to do with the basic terms of the transaction. This includes things such as severability clauses, choice of law/forum clauses, representations and warranties, indemnification provisions, damages provisions, acceleration clauses in loan documents, etc.

Most parties to a contract (who have never been involved with a contract that has gone bad) think that this language is meaningless filler to make the contract appear more complicated or to justify the legal fees being paid for the drafting and negotiation of the contract. But, in reality, the boilerplate is what is typically at issue when something goes wrong with the transaction and a party feels the other has breached.

To use perhaps the simplest example, take the acceleration clause in a Promissory Note. A Promissory Note is often a fairly straightforward contract. The creditor (or lender) agrees to provide the debtor (or borrower) with funds, and the debtor agrees to repay those funds over some duration of time, with a specified rate of interest. If the debtor stops making scheduled payments on the Promissory Note, there is little doubt that the debtor has breached. Actually, without boilerplate language specifying that late payments constitute a breach by the debtor, it is arguable that there has been no breach, but I digress from the acceleration clause here to point out the basic need for boilerplate…so, let us just assume that the non-payment is a breach by the debtor.

Now that the debtor has breached by missing payments, what is the remedy of the creditor? That is, if the creditor needs to bring a lawsuit against the debtor, what can the creditor recover through its lawsuit? If the contract (via the boilerplate) does not state that the creditor is entitled to accelerate the entire debt upon a breach (which should be defined within the boilerplate to include late payments), the creditor is likely only entitled to recover the payments which are already past due. If the Promissory Note is a 60 month installment loan, with 50 monthly payments left, and the debtor has missed 3 payments, the creditor can arguably only recovery the value of those 3 missed payments in a lawsuit. The creditor can only recover the remaining 47 payments by waiting until each payment becomes late, constituting a new breach and then suing on that breach. That is a very poor result for the creditor. Had the creditor, or its legal counsel, paid attention to the boilerplate and included a proper acceleration clause in the Promissory Note, the remedy upon the first missed payment (the first breach), would be to recover the entire outstanding principal balance of the loan immediately.

What if the creditor is a resident of Ohio and the debtor is a resident of Michigan? Does Michigan law govern the dispute between the parties? Ohio? Can the laws of some other state control? If the boilerplate provisions have been carefully drafted, the answer to this question should be found within the text of the Promissory Note. If the boilerplate has not been properly drafted and negotiated, there will probably be additional costs associated with the litigation between the parties to determine which jurisdiction’s laws control, and which court is the proper venue for the litigation.

These issues become even more important and complex when the contract is an agreement to buy or sell a privately held business. These agreements often involve parties from different states, some sort of debt or hold back, escrowed funds, representations about various facts, caps or floors on damages for a breach of the agreement, obligations of the parties to perform after the closing, time limits to bring lawsuits for an alleged breach, and other matters that are better resolved before the deal closes than after a party decides it does not like the deal it agreed to and starts looking for ways to reverse the deal or make it more favorable to that party.

The bottom line is that, while boilerplate language may seem mundane and lull the average person to sleep, most disputes between contracting parties are resolved by the boilerplate language, and the majority of commercial litigation involves disputes over the issues addressed within in the boilerplate.