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Did You Know Your Contract’s Boilerplate Can Leave You In Hot Water?

Your small company just landed a huge contract to develop a new software product for a startup based on the west coast.  You are proud of having negotiated the deal yourself without incurring huge legal fees.  (Lawyers just over-complicate things, don’t they?)

The startup, however, misses one payment, then two.  Disagreements over your company’s work product mount.  You threaten to stop work until payments are made.  Then, you threaten to sue here in Virginia, your home state.  The startup, however, starts making noises about governing law and venue, mandatory arbitration and attorneys’ fees.  What are they talking about?  That wasn’t part of the deal, was it?  “They can’t force me to arbitrate before three random people in California, can they?” you ask yourself.  The answer is probably “yes” because your contract included “boilerplate” that addressed such issues.

“Boilerplate” can be described as a set of provisions that were not critical components of the deal you negotiated, but contain terms that govern the relationship between the parties and the interpretation of your written contract.  Boilerplate provisions are sometimes attached to a contract as an exhibit (called something like “Standard Terms and Conditions”) or slipped into a section at the end of a contract with a general, innocuous sounding heading, like “General” or “Miscellaneous.”   Some call them “legalese” or “fine print.”

Whatever you call them, ignore them at your own peril.   While they do not typically contain payment terms or performance standards that are essential terms of your deal, they often have great impact on the outcome of a contractual dispute.  Take this example from Google’s Terms of Service (“TOS”).  Under the heading “About these terms,” the TOS state:

The laws of California, U.S.A., excluding California’s conflict of laws rules, will apply to any disputes arising out of or relating to these terms or the Services. All claims arising out of or relating to these terms or the Services will be litigated exclusively in the federal or state courts of Santa Clara County, California, USA, and you and Google consent to personal jurisdiction in those courts.

This is a governing law and venue selection provision.  If your contract with the startup contains a clause like this, the law of California would be applied to your dispute with the startup and, if you were going to sue the startup (or you were being sued by it), that case would be filed and litigated in California.

Although the provision is tucked into what seems like a throwaway section, for a small or mid-sized company in Virginia, the prospect of litigating a case against a company three time zones away carries enormous expense and a risk of never recouping its losses. Does that risk outweigh what you can expect to recover?

Depending on its size and need for your company’s services (among other factors, perhaps), the startup may be unwilling to negotiate over a venue selection provision like the one above.  However, it may consider discussing changes to an attorneys’ fees provision that is originally drafted and presented to you by the startup as follows:

In the event of Developer’s breach of this Agreement, the Startup shall be entitled to recovery of all reasonable costs incurred to enforce its rights hereunder, including, without limitation, court costs, attorneys’ fees and other related costs and expenses.

You may be able to secure changes to this provision that allows “the substantially prevailing party” (whomever it may be) to recover its attorneys fees “in the event of any dispute arising from or related to the Agreement.”  If the startup agrees to a revision along these lines, the resulting provision more equitably allocates risk between the parties, at least as to the costs of litigation, and could change your analysis of whether a claim is worth litigating in California.

Other examples of boilerplate provisions include: confidentiality; limitations on damages; arbitration/mediation; indemnification; integration/entire agreement; and notice.

Before you sign any contract, carefully read the entire document, including its boilerplate provisions.  Even better, consult with a business attorney who can help you interpret them, identify the risks they pose to you or your business, and, if possible, negotiate changes to them so the contract can more appropriately allocate risk among the parties.

For more information, contact:

 

Disclaimer:  This firm only offers legal advice to clients, and the facts of a particular situation usually drive the legal advice we give to clients.  This message is not intended to be legal advice appropriate for all situations.