What are Boilerplate Clauses in Contracts?
Boilerplate contract clauses are types or classes of contract provisions commonly found in contracts.
They may look the same if you're unfamiliar with them.
Slight differences in wording can make all the difference in the legal meaning and legal effect in a contract.
They're usually inserted at the end of a commercial contract. But they can appear anywhere in a contract.
Are Boilerplate Clauses Standard?
Are they standard provisions of a contract?
Boilerplate clauses are often referred to as “standard” clauses, and a bit boring.
They’re not, if you want the contract to do what you intend it do and have the legal effect that you want it to have.
The only way boilerplate clauses are standard, is that it's a common practice to include clauses of that description, especially in business contracts.
Like all contract clauses, boilerplate clauses are interpreted using the precise words used in the clause.
Although some boilerplate clauses may look the same, they can have a significantly different legal effect.
One word in the right place is all it takes to completely change the legal meaning. Like use of the word "not", or removing it where you'd ordinarily expect to see it.
When it comes to interpretation of contracts, it’s not what the parties might have intended the boilerplate clause to mean.
It’s what a reasonable reader of the contract would give it that counts. This is consistent with the well-entrenched principles of interpretation of contracts:
- Each clause of a contract needs to be interpreted within the context of the whole contract
- Each boilerplate clause has its own legal effect on its own terms
- The effect it will have within the entire contract will depend on the other clauses of the contract, along with the background in the lead up to signing the contract
Does a Contract really need Boilerplate clauses?
There's no legal requirement to include boilerplate clauses in commercial contracts. Contracts can operate perfectly well without them. Trainee solicitors know the real value in boilerplate clauses is increasing contractual certainty.
Whether or not it’s appropriate to include any one (or another) boilerplate clause will depend upon the contract and what you're trying to do in the contract.
Then it's a matter of making sure the wording of the clause is suitable.
Small changes in wording to a standard boilerplate clauses can make a dramatic difference to the legal effect of the contract, as you can see from the list of examples below.
And then rarely will every boilerplate clause be required for a commercial or business contract. Often it won’t make sense to include all of them.
In some cases, boilerplate clauses remove legal rights which a party would expect to have.
Knowing what they do changes the way you read contracts to work out things such as:
- the legal effect of the contract and how it's likely to be interpreted
- whether you have the rights you thought you have - or don't
- whether there a breach of contract
- whether there are rights to terminate the contract, and how they must be exercised
- whether rights to damages are limited.
They establish legal relationships in contracts with more certainty, whether for or against you.
Boilerplate clauses often appear at the end of a contract, but they don’t have to. They could be anywhere in the contract, come disguised or embedded in a long tract of text and easy to miss.
Boilerplate Clauses Meanings
Here are the meaning of boilerplate contract clauses and what they're intended to do:
- Assignment Clause / Novation: transfer/novate a contract or part of a contract to another legal entity
- Audit Clause: provide a right to inspect materials in the possession or control of the other contracting party
- Change of Control Clause: On a change of ownership or control of a party, the other party is entitled to terminate
- Choice of Law / Applicable / Governing Law Clause: sets the law which will be used to interpret a contract
- Confidentiality Clause: maintain secrecy of confidential information without a separate non-disclosure agreement
- Conclusive Evidence Clause: minimise or avoid disputes in respect of calculation(s) of sums due to be paid by the paying party
- Conditions Precedent: make commencement of (1) contracts, (2) contractual obligations, or (3) benefits received under a contract, conditional on an event or state of affairs
- Conditions Subsequent: termination of a contractual duty or right, or the entire contract dependant upon a state of affairs or an event
- Consequences of Termination Clause: expressly specifies rights and obligations - or extinguish them - when a contract ends
- Contractual Lien Clause: Establish a contractual right to withhold possession of property as possessory security for a debt
- Costs Clause: fix rights of recovery for costs and expenses of the other party for the preparation of the agreement
- Counterparts Clause: puts beyond doubt that parties may sign separate copies of a contract and be legally bound, and avoid signing the same document. They facilitate settlement when the parties are not in the same place at the same time
- Cumulative Rights Clause: expressly preserve legal rights at termination of a contract which existed before termination
- Currency Clause: designate the currency of payment of amounts under a contract
- Entire Agreement Clause: negate contractual arrangements and understandings preceding the current contract being agreed, other than where specified
- Force Majeure Clause: suspend performance of a contract during an intervening force majeure event outside the control of the parties, and/or terminate the contract
- Further Assurance Clause: promise to do things not specifically stated in the contract to support the principal performance obligations
- Independent Contractor Clause: makes clear the intended legal relationship between two contracting parties to avoid the application of the Partnership Act
- Joint and Several Liability Clause: renders two or more persons jointly and severally liable to perform a single promise
- Jurisdiction Clause: fixes the courts of a recognised country in which disputes arising from or connected to the contract will be resolved
- Language Clause: sets the language for interpretation of a contract where it is prepared in 2 or more languages and/or the language for delivery of services
- Non-Reliance Clause: minimise or exclude potential liability for precontractual (mis)representations for the purposes of the law of misrepresentation
- Notices Clause: specified agreed methods to serve of contractual notices on other contracting parties
- Partnership and Agency Clause: prevent other contracting parties having authority to legally bind the other parties
- Precedence Clause: prioritise importance of contract terms in different parts of contracts when a conflict or inconsistency arises
- Publicity Clause / Announcements Clause: set ground rules for public statements about the contract and/or the contractual relationship between the parties
- Set-Off Clause: reduce the sum payable (or not) by a debtor arising from sums owed by the other party
- Severance Clause: delete unlawful clauses and/or parts of clauses from contracts
- Subcontracting Clause: prohibit contracting parties using subcontractors to perform contract works
- Successors and Assigns Clause: parties' assigned rights are bound by the same terms of the contract
- Survival of Terms Clause: list which clauses continue in effect after termination, and allow for continuation of other terms in the circumstances of termination
- Suspension Clause: suspend performance of a contract under specified circumstances, such as failures to pay sums due or other specified circumstances
- Term of Contract Clause / Duration: fix the time that a contract remains in force, subject to earlier termination
- Termination Clause / Break Clause: express rights for one or more parties to bring a contract to an end, such as repudiatory or material breach
- Third Party Rights Clause: prevents (or permits) the contract being enforced by third parties to the contract, to preserve privity of contract
- Time of the Essence Clause: time for performance made a condition of the contract
- Variation Clause: prevents amendments to a contract other than by an agreed method
- Waiver Clause: preserve rights for breach of contract, after an election not to exercise a contractual right
Boilerplate contracts and agreements on the other hand are pre-prepared contracts. You might call them templates.
They’re not standard terms of contract or business.
Boilerplate contracts are prepared to serve as a starting point for preparation of contract for a specific transaction. They’re edited before they’re ready for use.
That’s because very rarely are two contracts the same. Even standard terms may be prepared from a boilerplate agreement.
Boilerplate contracts are a bit like stock photography: made to meet the most popular market requirements of contracts of that sort, to sell as many as possible.
The leading providers give warnings and legal disclaimers in their own terms of business. You use them at your own risk. If something goes wrong, it's not their problem.
Boilerplate clauses on the other hand are clauses which serve as a general starting point to be used in a contract.
With many of them, it can be risky editing them without knowing what the legal effect is without knowing the reason why they’re there in the first place.
Legal Effect of Boilerplate Contract Clauses
Boilerplate clauses may have one or more purposes or effects, such as:
- extinguish or exclude claims under the contract where claims might ordinarily exist at law
- Entire Agreement clause
- Third Party Rights clause
- Non reliance clause
- grant rights to a contracting party which are unknown or not recognised by the general law
- Termination clause
- Suspension clause
- Conclusive Evidence clause
- Force majeure clause
- enable or disable entitlements which would otherwise be granted by law, by default
- Assignment clauses
- Subcontracting clause
- Audit clause
- Conclusive Evidence clause
- Contractual Lien clause
- confirm, restate, or modify the application of general rules of law to the contract
- Severance clause
- Interpretation clause
- Time of the Essence clause
- Variation clause
- Survival clauses
- Cumulative Remedies clause
- Partnership and Agency clause
- avoid the application of undesirable laws
- Choice of law clause
- Jurisdiction clause
- Variation clause
- Conditions Precedent and Conditions Subsequent
- Cumulative Rights Clause
- preserve rights that would otherwise be lost
- Variation clause
- Waiver clause
- Set-Off clause
Expert Contract Law Lawyers
The boilerplate clauses above are straightforward examples. These sorts of clauses can get complicated in their own right. We often find ourselves looking up decided case law to make sure the interpretation of boilerplate clauses like these hasn't changed.
There was one relatively recent change to the way Variation Clauses were read in the Supreme Court in Rock Advertising, in 2018.
So the way these clauses are read isn't static: and then they appear in different contracts with different terms, and they can have a different meaning again. How they're read depends upon the terms of the particular contract and the background facts of the case.
And the longer a contract gets, the more complicated they can become. Different parts of the contract can relate to one another in ways that you can't see clearly.
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In a variety of types of contracts one party - usually involving a supplier, agent or licensee - may hold records required to properly and accurately calculate amounts to be paid under a contract.
Without access to the records, the customer (or principal or licensor) has no objective or independent method of verifying whether issued invoices have been calculated in consistently with the contractual rights granted to the supplier.
The parties may agree that the customer has the right to inspect the underlying documentation to satisfy itself that the sums charged are correct, and in accordance with the contract terms.
Example: Audit Clause
The Customer may appoint a certified accountant to inspect and audit all records relating to the sale of goods and grants of licences, calculation of invoices, and the books and accounts of the Supplier at the Customer's expense at all reasonable times and on reasonable notice.
More sophisticated versions of Audit clauses contain provisions to recoup the expense of audits where the payment calculations are more than (say) 10% or more than what they should be.
When contracts are made, it can be important to a customer that those in control of the supplier are part of the delivery of the solution. It’s a testament that people do business with people, not companies.
But customers can’t directly control the internal affairs of the supplier (legally speaking, anyway). But they can reserve a right to terminate the contract if those in control of a company change during the term.
In addition, a customer or a supplier may which to have an option to end the contract if the other company is sold during the term of the contract.
To do so, the contract could include a Change of Control clause.
Change of Control: means a change in the direct or indirect ownership of more than 50% of the voting power on the board or members of the named entity.[…]
The Customer shall have the right, without prejudice to its other rights or remedies, to terminate this Agreement by 3 months’ written notice to the Supplier, if there is a Change of Control of the Supplier.
Notice of termination under this clause must be given within three calendar months of notice in writing that such events have or will take place.
There is no universal law of contract.
Although the law of contact may be similar across many countries, it is a different law. Different rules apply. They may be small differences, but they can make monumental differences to the way a contract is interpreted.
Enter Choice of Law clauses, otherwise known as "Governing Law clauses".
Choice of Law of a Country
Choice of Law clauses designate the law of a country to read and interpret the legal obligations and the benefits to be received under a contract.
Country in this context means a country which has its own system of contract law.
There is no contract law of the "United States", "the United Kingdom" or the "European Union". When a contract designates, say "the United Kingdom" as the law of the contract, it creates doubt as to the system of law which is to be used.
Choice of law clauses have most value when the parties to the contract are located in different countries.
When the contracting parties are all located in one country, it could be said that the clause adds nothing to the contract.
Choice of law clauses can get quite complicated. In law, simplicity promotes certainty. Here's a basic form:
Example: Choice of Law clause
This agreement shall be interpreted in accordance with the laws of England.
The law of confidentiality preserves the secrecy in information.
We discuss the law of confidentiality in more depth here.
Where the main purpose of a contract is to preserve confidentiality, it’s usually referred to as an “NDA”, “NDA agreement”, “Non-Disclosure Agreement” or simply “Confidentiality Agreement”.
As with all contracts, it's less of matter of what they are called, and entirely a matter of the legal effect of the words used. Substance over form.
Clauses preserving confidentiality don't need to be in standalone, dedicated contracts. They can be a single clause in a larger contract, and often are.
Most commercial contracts contain confidentiality clauses of one type or another, such as distribution and re-seller agreements, sponsorship agreements, commission agreements, to name a few.
Two types of Confidentiality Clause
In NDAs, generally speaking, there are two types of secrecy obligation that can be imposed:
- One-way Confidentiality: Communications, information and documents which may come into the possession of the recipient is considered confidential.
But the confidentiality provisions do not apply the other way around.
The duties owed by one party to the other are not mirrored towards the other party.
Anything that is told to the other party – whether considered to be confidential or not – is not likely to be protected.
- Mutual Confidentiality: Each party owes the other the same or similar duties to keep each other's confidential information secret.
There are many variations on these two themes. When read carefully, some confidentiality clauses said to be mutual, aren't mutual at all.
This one is.
Example: Confidentiality Clause
None of the parties shall disclose to any person or use for any purpose any confidential information of the other as a result of entering into this Agreement.
This restriction shall continue to apply after the expiration or termination of this agreement without limit of time. These obligations shall cease to apply to knowledge or information which may properly come into the public domain (through no fault of the party concerned) or is required by law to be disclosed upon production.
In common with Survival of Terms clauses, Consequences of Termination Clauses can be included in contracts to state the rights which are intended to continue at termination, or end.
Survival of Terms clauses often form part of Consequences of Term Clauses, when a Consequences of Term Clause is used.
Consequences of Termination Clauses are useful when more tasks need to be completed after termination. More sophisticated types of post-contractual obligations are gathered together in one place in the agreement.
Consequences of Termination Clauses can also be used to:
- make clear what rights end at termination, such as:
- intellectual property licences
- rights to use software as a service
- specify tapering off rights, such as:
- a limited period to sell goods remaining in stock of a distributor at the time of termination
- complete help desk or service desk tickets which were in motion at the time of termination
- obligations to cooperate to hand-over management of services to a new service provider
- transfer of data or return of data
- create new rights and obligations, such as:
- rights to buy back stock which has been sold to a distributor by a supplier for a fixed time
- create rights to use intellectual property into the future indefinitely
It’s a common mistake to create fresh new legal rights at termination that do not have a definite end date. It defeats the purpose of ending the contract and winding down the relationship between the parties. It can also create mind-blowing legal complexity, because the contract is meant to end at termination. Not continue forever.
Example: Consequences of Termination Clause
- Upon termination of this agreement, howsoever caused:
- All licences and permissions granted in this agreement shall terminate;
- The following licences shall be granted, on the following terms:
- Each of the parties will promptly return to the other the Confidential Information of the other.
- [Cumulative Rights Clause]
A lien is a security device.
A person in possession of another person's property may be retained by a person until such time as the debt has been paid. That doesn't give a right to sell the property (see tort of conversion), but simply retain it pending payment of outstanding sums.
There are established categories of liens. Outside these classes of relationship, there are no such rights recognised by law. The terms of a lien can however be established by contract.
Example: Contractual Lien Clause
The contractor shall be entitled to retain possession and control of any materials supplied by the customer before or during the term until such time as the invoices of the supplier are paid in full.
By default, the costs and expenses of a party preparing a contract are payable by the party incurring them.
If precontractual statements have been made that a party will pay the costs of the other, and a provision does not appear in the contract - it's more than likely that the precontractual promise to pay will not be enforceable. Especially when a Non-reliance Clause appears in the contract.
Where there is pre-existing agreement to pay the costs or expenses leading up to signing a contract, a costs clause puts the situation beyond doubt.
The example below says that neither party will be liable for the costs or expenses of the other. It simply confirms the default position at law. And the normal practice.
Example: Costs Clause
Each party shall pay the costs and expenses incurred by it or it in connection with the entering into and completion of this agreement.
Traditionally, when contracts were signed:
- the same copy of the document was signed with wet ink, and
- multiple originals may have been signed so that each party could retain an original.
Or, a signed original was posted to other party, signed and returned to the other party.
Face to face meetings to sign contracts are long gone. More often, the people signing contracts are not in the same room. Or the same city.
Now, each person signs a copy, scans it, and emails it to the other. Each person retains their own original, or they may agree to post one another an original signed copy.
Status of copies of signed originals
These days, copies of signed contracts (scanned or not) are just as good as an original signed contract in all but a small number of cases. For legal purposes, there is no difference.
It's just as enforceable.
Purpose of Counterparts clause
A Counterparts clause expressly states that the parties agree that they may only receive a copy signed by the other party. Receipt of a signed copy by party constitutes acceptance of the offer which is represented by the written contract.
For that reason, inclusion of the clause is probably redundant. But that feeling for safety can be overwhelming.
If a party wants the original contract notarised, the counterparts clause still assists. It means that there does not need to one single signed original contract.
A Public Notary would need to be in attendance at the signing of each contract.
Example: Counterparts Clause
This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall constitute an original of this Agreement, but all the counterparts shall together constitute the same Agreement.
When an innocent party finds themselves at the hands of a defaulting party in breach of contract, legal remedies might be specified in the contract for that breach.
For instance, a failure to pay on time may give rise to the right to terminate the contract.
Where there are specified remedies for specified breach, it is arguable that:
- the specified remedy is intended to be the sole and exclusive remedy for that breach.
- other remedies which otherwise might be available will not be available to the innocent party.
They tend to be absent from contracts presented by suppliers, because they are the more likely party to have a claim made against them. They would usually prefer not to be exposed to rights over and above the minimum liability possible.
Allowing cumulative remedies does just that – preserve the maximum available rights, having regard for the terms of the contract.
But then, the other terms of the contract need to be looked at: including a Cumulative Remedies Clause may be redundant altogether, and add nothing to the contract.
Example: Cumulative Remedies Clause
Except as expressly provided in this Agreement, the rights and remedies provided under this Agreement are in addition to any rights or remedies accrued as at the date of termination.
In international trade and commerce, quotes, estimates and payments can be made in any currency. Fixing a contractual currency and the method for resolving differences when different currencies are used reduces the prospect of disputes.
Example: Currency Clause
Unless otherwise stated, all quotes and estimates are made in Sterling and all estimates and payments in foreign currencies shall be deemed to be in Sterling at the exchange rate published by Reuters at the close of business on the day that the said quote or estimate was supplied or payment made.
Force majeure clauses provide an opportunity for contracting parties to either terminate a contract or suspend its performance when an unexpected event takes place which prevents the contract from being performed.
The modern trend for these clauses relieves parties from performance for "any event outside the reasonable control of the parties".
It's difficult at the best of times to persuade a court that a force majeure event has taken place.
The wording above suggests that the relevant event (which is outside the reasonable control), must be an event outside the control of both parties, rather than the party that must perform the obligation.
Which doesn't make sense for most contracts.
If you're a party that can't perform an obligation under a contract, you're not too concerned if the event prevents the other party from performing the obligation. It's your ability to perform the contract that you are primarily concerned about.
There's also the matter of the list of force majeure events. When there is no list of events, one cannot point with certainty to an instance of an event that qualifies, other than in a clear case.
You could call an "Act of God clause" is part of a force majeure clause: it specifies the force majeure events.
Example: Force Majeure Clause
- Neither party shall be liable for any failure to perform or delay in performance of any of its obligations under this Agreement caused by circumstances beyond the reasonable control of that party, including but not limited to adverse weather conditions, natural disasters, fires, floods, explosions, earthquakes, nuclear disasters, insurrection, riots, acts of terrorism, war, and acts of Government (a “Force Majeure Event”).
- In the event of a Force Majeure Event, the affected party's performance under this Agreement shall be suspended for the period that the Force Majeure Event continues and the party will have a reasonable extension of time for performance of its obligations in the circumstances.
- If the Force Majeure Event continues for more than [number] consecutive days, the unaffected party may terminate this Agreement with immediate effect.
By the way. See the space for the "[number]" above?
A trick we often see is to make this period so long - typically by the customer - say 30 days.
It usually will never be satisfied. Even in situations where it would be genuinely needed, and justified.
Suppose the contract was for delivery of organs for heart transplants to hospitals.
The sort of urgency which would be required for those sorts of deliveries could be cast a contract for deliveries of iron ore from mine over the course of a 3 year contract.
There's no comparison. 30 days would more than likely be completely inappropriate for a contract for the delivery of organs, but reasonable for a long term mining contract where delays of all sorts could be expected, including industrial disputes, vehicle breakdowns, road blockages and flooding.
Further assurance clauses are intended to create legal obligations requiring one or more of the parties to a contract to do unspecified acts to reassure the other party will do what is reasonable or necessary to bring home the full benefit of the contract.
For the clause to create a binding obligation to perform, another legal obligation in the contract must exist for it to attach to.
When Further Assurances won’t work
In other words, broadly expressed, conceptual legal obligations not connected to a specific legal right are unlikely to be enforceable.
For instance, a further assurance clause probably will not have the legal effect upon a party to produce unspecified documentation, if there is no obligation to produce documentation in the contract in the first place.
In this way, the effect of the further assurance clauses rely upon the other provisions of the contract for their legal effect.
Attempts to use a further assurance clause to catch shortfalls in what they would hope to gain from the contract which remain unspecified can be expected to fail.
Contracting parties would be better served to:
- think through what is required to obtain the full benefit of the contract
- provide specific obligations to that effect in the contract
- leave reliance on Further Assurance clauses as a distant last resort.
Example: Further Assurance clause
Each party shall, from time to time on being reasonably required to so by any other party, now or at any time in the future, do all such acts which are reasonable or necessary to give full effect to this Agreement.
These clauses serve a similar purpose to Partnership and Agency Clauses to express the intended nature of the legal relationship.
Independent Contractor clauses are frequently used in consultancy agreements to make it clear that the contractor is not intended to be an employee. Whether an employment relationship exists depends largely on the relationship and level of integration of the person within the business itself - regardless of what a contract declares to be the case.
Example: Independent Contractor Clause
The Consultant is an independent contractor and nothing in this Agreement shall render it an employee, agent or partner of the Customer and the Consultant shall not hold itself out as such.
Joint and several liability usually arises in the context of civil wrongs – that is, tort law. Conspiracy by unlawful means and tort of conversion are examples of torts.
Joint and several liability applies in its own way to contracts. It applies in contract law when two or more people make the same promise to provide the contractual consideration.
The "joint" in "joint and several" means that two or more persons together promise to perform the same promise. There is only one promise. Performance by one of them discharges both.
The "several" means that two people make separate promises under the same contract or different contracts. The promises to perform are separate and freestanding from another.
The contracting party obtains a “win” when they obtain a promise from two or more people.
That’s because if the promise is not performed, the innocent party can:
- sue one of them (several liability)
- sue both of them (joint liability; several liability)
- sue one of them and then if unsuccessful, sue the other one (several liability).
They appear more frequently in contracts:
- containing a promise to pay money
- of guarantee
- of indemnity
- for the sale of shares.
Example: Joint and Several Liability
Any obligation in this agreement made by the Guarantors, the Guarantors they shall be jointly and severally liable to perform it.
Jurisdiction clauses fix the venue that disputes between the parties to a contract must be decided. That venue will be the courts of the specified country.
The general rule is that the named courts will be used for resolution of disputes. That said though, certain categories of disputes must be resolved by a specific court.
Those categories exist because courts in any given country have limited power to decisions about the affairs in foreign countries - such as the ownership of land, validity of entries in public registers (such as Registers of Companies, Trade Mark Registers), validity of a grant of a patent.
Other than where there is a specific exception exists, the jurisdiction chosen by the parties is likely to be enforced.
Example: Jurisdiction Clause
The parties irrevocably submit to the courts of England and Wales to resolve disputes arising under this agreement, including non-contractual claims.
When contracts are made and governed by English law, the language of the contract is usually English.
One Contract, Two Languages
Sometimes a contract may be prepared in a foreign language, in language which is familiar to a native speaker of another language.
The parties are able to select the authoritative language version. The subtleties of languages and technical meanings of words may be lost or not be able to be expressed concisely in one language or another.
A master copy of a contract might be prepared and then translated for use in many different countries. Although the parties may agree that the local version of the contract applies from country to country, the parties might also choose to apply a single law to every translation. This involved two provisions:
- Clause that the English (or other language version) prevails; and
- The contract is governed by English law in any event.
Language of Services and Documents
In other situations, the contract could be written in English, and:
- performance of services may need to be in another language, such as:
- applications to regulatory authorities such as trade mark applications
- regulatory approvals in countries
- specifications for construction works
- powers of attorney
- assignments of rights
where English is not an official language of the country.
- services, such as support desk services may need to be performed under the contract with end users located in non-English speaking countries. Leaving it open may give rise to an implied term that support services must be provided in all of the languages spoken in the countries served.
In cases such as these, it can be important to know which version of the contract prevails or the languages in which the services must be provided.
The parties may prefer:
- a single language documents to prevail over others
- support services to be conducted in one or more specified languages
Example: Language Clause
- This contract is made in the English language. Where the is any conflict in meaning between the English language version of this agreement and any version or translation of this agreement in any other language, the English language version shall prevail.
- The services shall be performed in English and [no other language | French]
Partnership and Agency clauses (or "No Agency Clause") deny the existence of a partnership or agency between the contracting parties, rather than admit them.
Commonly, businesses refer to “partnering up” with other businesses to indicate cooperation of some form.
That not the kind of partnership we’re talking about.
In the vast majority cases, different businesses will want to avoid being partners within the legal meaning of the word. At all costs.
Partnerships at Law
Partnership law and the law of agency imports a whole lot of legal luggage to business relationships. It’s the sort of luggage you don’t want to carry, if you don’t mean to.
At law, partnerships are formed automatically when the requirements of the Partnership Act are satisfied. If parties behave in a way which establishes a partnership, then all of the consequences of being a partnership flow from that.
Here’s some of the consequences of a legal partnership:
- Partners have legal authority to bind other partners in the partnership.
- Every partner in a firm is liable jointly with the other partners for the debts and legal obligations of the partnership.
So, when one partner enters a contract on behalf of the partnership, all partners in the partnership are liable on the contract.
- All members of a partnership are jointly and severally liable for the debts of the partnership.
All of the assets of each partner are available to judgment creditors to enforce a judgment.
- Partnerships in the business context defeats the purpose of using separate legal entities to manage the liability of the company.
The same law governs all partnerships at law. Two or more companies can mistakenly form partnerships as easily as individuals might.
An agency relationship includes one whereby one person (an agent) is authorised to act on behalf of another (the principal).
The agent is authorised to create legally binding relationships between the principal and third parties, for acts within the scope of authority of the agent.
Therefore, the principal ends up being is primarily liable for the contracts entered into on its behalf by the agent.
If an agency is intended, it make sense to define the scope – and limits - of authority of the agent.
What are Partnership or Agency Clauses used for?
Most businesses do not want to have partnerships or agency arrangements.
For these reasons, even two or more companies operating in a joint venture not intending to be a partnership take positive steps to avoid being categorised a partnership at law.
A partnership or agency clause records that intention in the contract.
Example: No Partnership or Agency Clause
When businesses want to make it clear in joint ventures and business “partnership” agreements that they do not wish to form a legal partnership or agency, you’ll see contract terms such as this:
This agreement shall not constitute or imply any partnership, joint venture, agency, fiduciary relationship or other relationship between the parties, other than the rights and obligations expressly set out in this agreement.
Neither party shall make or hold itself out as having authority to make any commitments on behalf of the other party.
Example: Agency Clause
The Agent has authority to enter into contracts with companies in [Sector] for [widgets] up to a value of £[amount], with a monthly maximum of £[amount], and not further or otherwise.
The Agent will inform the Principal in writing of all such contracts and prospective contracts in writing within 14 days of the end of each calendar month.
Contracts can be made up of many different and separate documents. The separate documents may be collated into Schedules or Appendices to the contract, or incorporated by reference into the contract by mentioning them within the contract itself.
In any written contract has operative provisions – the main body of terms and conditions which comprise the contract.
Those operative provisions may refer to:
- Schedules, which might include:
- Project plans
- Payment schedules
- Specifications or statements of work
- Terms of EULAs or other licences
- Lists of personal data to be processed
- Service level agreements
- Documents not reproduced in the schedules (due to their size or for convenience), such as:
- Policies, such as a procurement policy, statements of corporate social responsibility, codes of conduct, or information security policy
- Disaster Recovery Plans, procedures of one of the parties
- Again, terms of licences (which might need to be updated during the course of the contract.
When there is more than one document forming part of a contract, (ie from 1 schedule) the potential for a conflict between the multiple documents arises.
And with more schedules, annexures and other documents, the potential for conflict and inconsistencies between the documents increase exponentially.
What happens when a conflict arises?
When a contract has more than on document, all of the documents are considered to form part of a larger single document.
Then the task arises to work out which clause or statement in the document prevails over the other. It’s a matter of considering the contract as a whole. Which can get very complicated, very quickly.
As a result, uncertainty arises.
And then you are less sure about the legal effect of the document.
To take a simple example:
- The operative provisions of a contract say that payments will be made to invoice within 14 days of receipt.
- However the Schedule says that invoices will be paid within 7 days of the date on the invoice.
It’s not as though they can both apply simultaneously: side-by-side. They can’t both be right. The conflict or inconsistency must be resolved, one way or another.
Which payment terms should take precedence?
Precedence clauses aim to reduce, or eliminate ambiguity when conflicts arise. It states the order of precedence between the different clauses.
There are principles of the general law that give precedence to what are known as “Special Conditions”.
That's not to say that those special conditions will be readily identifiable or promote more certainty when interpreting a contract.
Those situations lead to protracted disputes.
Precedence clauses often appear below the definitions at the beginning of the contract, or it may be set out in a freestanding clause of its own amongst other boilerplate clauses.
Such is the dramatic effect that these clauses have on reading a contract, if one is in the contract you want to know about it early.
If there's not one and the contract is comprised of multiple documents, you probably want one.
Example: Precedence Clause
To the extent of any conflict or inconsistency in the terms of this agreement, the, precedence shall be given to the terms to the extent of the conflict or inconsistency in the following order:
a. These Operative Provisions
b. Payment Schedule
c. Project Plan
d. Service Level Agreement
Using a precedence clause also allow you to think more clearly about how the different terms in different parts of the contract relate to one another.
A Publicity clause or Announcements clause set out to regulate what one party may say about the other in public messaging and communications.
When the existence of the contract is to be secret, or the terms of the contract are to be remain confidential, they usually appear with confidentiality clauses.
Example: Publicity clause / Announcements Clause
No announcement or information concerning this agreement or any associated matter shall be released or authorised in any advertising, publicity, promotional or other marketing activities without the prior written consent of the other party. Consent not to be unreasonably withheld or delayed.
A set-off in English law is used by a debtor to diminish the overall liability for a debt claimed by a creditor.
- A supplier claims £100 for services rendered.
- The customer claims that some of the work was defective. A value of £20 is attributed to the defects.
- The customer may have a set-off of £20 to diminish the overall liability to the supplier of £80.
Set off clauses prevent the paying party asserting that they are entitled to a set-off. The paying party must pay the sum properly claimed or invoiced.
Definition of a Set-Off
A set-off is:
something which provides a defence because the nature and quality of the sum so relied upon are such that it is a sum which is proper to be dealt with as diminishing the claim which is made, and against which the sum so demanded may be set-off
Essentially the claimant must give credit to the defendant for the ascertained sum in its action against the defendant. When the debtor has a true set-off it goes to the reduction of the sums owing to the creditor.
Set-offs do not rely any express or implied contract between contracting parties. They are available as a right, unless expressly excluded by the contract terms.
Set-offs may be available for:
- Mutual debts:
The defendant owes £50 to the claimant. The claimant owes £20 to the defendant.
The defendant may set-off the debt of the claimant to him, to diminish the total sum of the claim.
- Sales of Goods
A defendant received defective goods (say they are not of a satisfactory quality, fit for purpose or don’t meet an agreed description).
The defendant may set a sum off against the claim.
The sum would need to be quantified by a court if the value is unascertained (compare mutual debts, where the sum is liquidated).
- Provision of services:
A defendant may diminish the sum owed by the value of defective work owing to poor workmanship.
Types of Set-Off
There are three types of set-off. Each of them has a similar effect:
- Set-off at law or legal set-off:
Both sides in a set of legal proceedings have liquidated debts or money demands against one another.
In this context, liquidated sums that can be quantified or ascertained with certainty into an amount of money.
- Diminution in value:
A claimant sues for an agreed price of a particular asset or services which was to be performed according to a contract.
The defendant claims a reduction in the value of the asset by a failure to comply with a warranty or work performed in accordance with the contract.
The asset has diminished in value as a result.
- Equitable set-off:
Cross-claims of a defendant protect the defendant to some extent against the claimant’s claims.
This is particularly the case where the cross-claim relates to the particular subject matter of the claim.
Differences between Set-offs and Counterclaims
A counterclaim differs from a set-off.
A set-off is claimed in a Defence. It merely diminishes the overall liability (perhaps down to zero, but no further).
A set-off will relieve the defendant from paying a sum of the value of the set-off.
It will not entitle the defendant to obtain an award of that sum.
A counterclaim will.
A counterclaim is an independent, freestanding claim made by the defendant against the claimant - ie: a right to sue. The counterclaim may relate to the claim which is being defended, or it may not.
Both are usually pleaded in court cases.
Example: Set-Off clause
The customer will pay the sums invoiced by the supplier without right of set-off, deduction or withholding in any circumstances.
Courts have power to remove any part of a contract which is:
- unenforceable or
That may be the consequences of the operation of:
- a statute
- principles of public policy, such as an agreement not to sue. Words ousting the Court's jurisdiction are normally assumed to be severable
- simple illegal under the general law, such as a contractual clause amounts to bribery.
Severance clauses set out a procedure which the parties intend to take where a court rejects the bad parts of a contract and leaves the enforceable and valid parts of the contract in place.
There are however limits to the power of the court to sever parts of a contract.
Severing Terms of Contracts
Court will not sever part of a contract where:
- removal of a word, phrase or section would change the kind of contract which was agreed. That would be enforcing something to which the parties had not agreed. Removal only permits changes to the extent of the contract only.
- where it is not possible to simply to strike out the offending word or words. Courts will not re-write the contract
Courts only have the printed words on the page to work with. It can’t introduce new words into the agreement as part of severance.
- the severance would alter entirely the scope and intention of the agreement
- the only consideration in the contract would be removed. The contract will be upheld unless the invalid restraint forms "the real consideration" or "the main consideration" or "the whole or substantially the whole consideration" for the promise
- the contract contains deliberate illegality
- a contract or deed is made contrary to the provisions of a statute. The entire contract is void. Severance will not save it, unless the good parts are not dependant on the bad parts.
But it is often and perhaps usually the case that the promise would not have been given but for the invalid restraint. This does not prevent the contract from being enforced without the invalid provision.
Saving the Document
If the contract is able to be saved by removing the unlawful parts of the contract, the remaining parts of the contract constitutes the contract between the parties, which is then read for its legal effect.
The process of severance therefore attempts to avoid rendering the entire contract totally invalid.
The minimum amount is deleted from the contract to render it lawful. If that end result can’t be achieved, then the contract is void ab initio.
In order to provide that this is what the parties intend, severance clauses are inserted into many business contracts.
Blue Pencil Test
The blue pencil test is a structured approach to severance. As is the case with the general principles of severance, the minimum words are removed from the contract. First, at the phrase level, then at the clause level. If a substantial part of the contract is removed so as to offend the principles set out above, the entire contract is declared void.
Purpose of Severance clauses
Severance clauses usually appear in commercial contracts which contain restrictive covenants, which are:
- franchise agreements
- contracts for the sale of businesses
- consultancy agreements
- employment contracts
Restrictive covenants are contractual clauses where one party agrees not to do something: such as an employee working with a competitor for a limited period when the contract ends.
Because restrictive covenants must protect the legitimate interests of the party relying on them and go no further, they are frequently challenged.
Example of Severance in Action
Supposing a restrictive covenant in a consultancy agreement or services agreement provides that the contractor will
“not compete in the fields of IT services or sale of paper cups with the Company in the UK, European Union or Australia for 12 months” in respect to specified goods or services.
Suppose a court was to find that inclusion of Australia in the non-compete clause (which is a type of restrictive covenant) above made it too broad, and therefore unenforceable.
Principles of severance could be applied to remove parts of the clause with the following result:
“compete in the fields of IT services or sale of paper cups with the Company in the UK, European Union or Australia”.
The severance has not changed the meaning of the clause. What is left is a reasonable restrictive covenant which is able to be enforced.
Example: Severance clause
If any provision of this contract is found by a court to be invalid, unenforceable or illegal, the remaining provisions shall remain in force. If any invalid, unenforceable or illegal provision would be valid, enforceable or legal if some part of it were deleted, the provision shall apply with whatever modification is necessary to give effect to the commercial intention of the parties.
Severance clauses tend to restate the general law. When they do, they are redundant.
They mostly do.
The default rule is that contractual obligations cannot be assigned without the consent of the other party.
When they are, Successors and Assigns Clauses are intended to make clear that if the obligations are novated to another person, the obligations will apply to that person.
In contracts governed by English law, these clauses put it beyond doubt that the party to whom the contract is transferred will be bound by the contract.
For example, when shares are transferred to a new shareholder, the shareholder's agreement might contain a Successors and Assigns Clause, so that the new shareholder is bound by the shareholders agreement. (Note that a deed of adherence would usually be insisted upon prior to receiving an assignment of shares)
Example: Successors and Assigns clause
This agreement shall operate for the benefit of and be binding on the respective successors in title and permitted assigns of each party.
When used, it makes sense to group it with an Assignment Clause.
When contracts terminate, the parties’ primary legal obligations under the contract end. They are no longer legally required to perform them.
Survival of Terms Clauses (or "Survival Clause" for short) sets out legal obligations which are to apply after termination.
Commercial contracts are likely to contain legal obligations - such as confidentiality clauses – which are intended to continue after the contract has ended. These continuing legal obligations are technically known as “secondary obligations”. They do not end with the contract.
The usual rule applied in the absence of a Survival of Terms Clause is that the provisions which may reasonably be expected to continue after the contract ends, continue. For instance, if a contract contains restrictive covenants with post-termination effect, they continue in force after termination as a matter of course.
Consistent with the principle of freedom of contract, contracting parties are also entitled to specify which clauses they wish to continue in force post termination.
That is the role that survival of terms clauses perform.
Example: Survival of Terms Clause
Broadly there are two types:
The type which is inserted into the context of another clause, such as:
15.1 [Confidentiality contractual clauses]
15.X The provisions of this Clause shall continue to apply notwithstanding the termination or expiry of this Agreement for any reason.”
The other type is a standalone clause. It is often headed “Consequences of Termination”:
The following provisions shall continue in force after termination [clause A: Indemnities, clause B: Limitations of Liability, clause C: Confidentiality], and any other clause required to give effect to the intention of the parties shall continue in effect and be binding upon the parties.
If Survival of Terms clauses are made to apply to primarily obligations set out under the contract, it can create real confusion as to what has been agreed to apply post termination.
Parties are not entitled to suspend a performance of a contract. That's the general law.
Exceptions though may be may by statute. One is s 112 of the Housing Grants, Construction and Regeneration Act 1996. (aka the Construction Act 1996). That doesn't apply to most industries.
When a party suspends work without an entitlement to do so, it's likely to amount to a breach of contract, even if the other party is in breach of contract themselves.
Rights to suspend may be established in the contract itself.
Example: Suspension Clause
Should the Customer not pay sums properly due and payable under this Agreement by the due date, the Supplier may suspend such part or parts of the Services as it sees fit on 14 days’ notice in writing to the Customer.
Termination clauses set out the express grounds upon which a contract may be brought to an end. They're also known as break clauses in some circles.
In the business environment, termination clauses specify rights to bring a contract to an end for specified reasons in English law. These usually include by:
- breach of contract, and naming the standard of breach required to terminate the contract, whether “repudiatory breach”, “material breach”, “substantial breach” or “any breach”
- one of the parties becoming insolvent
- an event force majeure arising
Notice of Termination
An important distinction operates between:
- Notice of termination, and
Notice of termination is not termination. Notice of termination is a warning that the contract will terminate on some future date.
Rather leaving matters of termination to repudiatory breach under the common law (which must be given without notice, if the right subsists at the time), a termination clause sets up a variety of grounds which a party may rely on to end the contract in an orderly manner.
In addition, rights of termination may be:
- mutual to each of the parties or
- different rights granted each party.
Example: Termination Clause
Either Party may terminate this Agreement if:
- the other Party is in repudiatory breach of this Agreement and fails to remedy the breach (if capable of remedy) within 30 days of written notice of the breach being given by the Party not in breach or persistently breaches of any of its obligations under this Agreement;
- the other Party ceases to conduct business in the normal course, becomes unable to pay its debts within the meaning of Section 123 of the Insolvency Act 1986, has a receiver, manager, administrator or administrative receiver appointed over all or any part of its undertaking, assets or income, passes a resolution for its winding up, or the other Party enters into any composition or arrangement (whether formal or informal) with its creditors;
- any invoice of the Supplier is more than 30 days overdue.
Consequences of Termination Clauses are frequently used to expressly state the parties’ intentions after termination of the contract.
One of the fundamental principles of contract law is privity of contract.
The principle says that only parties to a contract may enforce the terms of the contract. A third party to a contract is anyone who is not a party to it. Enforcement might take the form of:
- a claim for damages arising from a breach of contract
- an injunction to prevent an anticipated breach of contract by one of the contracting parties
- specific performance of the contract
The Contracts (Third Party Rights) Act 1999 changed the law of privity of contract.
Third parties may now enforce the terms of a contract where:
- an express right has been granted to do so in the agreement, or
- the contract confers a benefit to a third party.
"Confers" in this context means one of the purposes of the transaction (rather than one of its incidental effects) was to benefit the third party: Dolphin Maritime v Sveriges Angartygs (2009).
The existence of the right to enforce the contract does not make the third party a party to the contract. The third party simply has the right to sue on the contract, claim damages or an injunction as if they were a party to the contract.
This example clause excludes the operation of the Contracts (Third Party Rights) Act altogether. Drafting clauses such as these to grant rights to third parties is a form of art. It depends on the rights to be granted, to whom and the limitations to those rights intended to be granted.
Example: Third Party Rights Clause
No person who is not a party to this Agreement will have any right to enforce it pursuant to the Contracts (Rights of Third Parties) Act 1999.
In most types of contracts, where a time is specified for performance, meeting that time is presumed not to be a critical part of performance of the contract. The deprives the innocent party of the right to terminate for being late.
When time is stated to be “of the essence”, performance to date and times become conditions of the contract, which means:
- slight breaches are repudiatory breach of contract, which
- entitle the other party to terminate the contract, and
- claim damages caused by the breach.
When time is of the essence, compliance with the specified time is essential to performance.
There's no presumption that the time for payment in commercial contracts is of the essence, unless a contrary intention clearly appears from the terms of the contract or the surrounding circumstances.
When Time is of the Essence
Time will not be considered to be of the essence unless:
- the parties expressly stipulate that conditions as to time must be strictly complied with.
The words “time is of the essence” do not need to be used for this to be the case. The phrase has an established legal meaning, and so makes it clear what the intended legal effect is
- the nature of the contract or the surrounding circumstances show that time should be considered to be of the essence.
This is presumed in commercial contracts when timely compliance to an obligation is considered essential to performance, or
- a party who has been subjected to unreasonable delay gives notice to the party in default, making time of the essence.
However, just because time is not of the essence, doesn’t mean that delay cannot repudiate the contract by prolonged delay. The delay must deprive the other party of substantially the “whole benefit which it was intended that he should obtain from the contract”.
Example: Time of the Essence clauses
Time shall be of the essence in this agreement.
Time shall be of the essence respect of payment obligations, and not further or otherwise.
Once contracts are signed and agreed, or finalised orally, they can’t be changed or amended.
Parties aren’t entitled to insist on a different performance of the legal obligations. That would defeat the purpose of the legally binding contract that had just been agreed, and be an anticipatory breach of contract.
Another - new - contract is required to change an existing contract: known as a Variation.
Informal Variations of Contracts
There are no specific requirements to form legally being contract, or vary it (other than in limited cases, such as selling land). Variations it can done informally and inadvertently.
Variation clauses establish an agreed method by which variations are agreed (they're sometimes called "contract modification clauses").
In the absence of a variation clause, a variation to a contract can happen any way that a contract can be made. It can be varied:
- using a method that is different to how the original contract was agreed
- in writing using email, SMS message, WhatsApp, Skype message, LinkedIn Post, Twitter or any other means of communication or passing a note on old fashioned paper
- in a conversation over the telephone, Telegram or Skype
- by conduct or behaviour of the parties
Variation clauses pre-agree the method(s) which the parties may vary the contract.
Even where contracts contain clauses which allows one party to vary the terms of the contract unilaterally, that too has its limits. The variation can’t make a new contract altogether.
"As the parties may agree"
You may have seen clauses in a contract which state that “as the parties may agree”. It is redundant. As a basic principle of law, the parties are able to agree to change their agreement at any time. All the variation clause does is impose a restriction on how it may be amended.
Are variations clauses enforceable?
In the same way that parties may agree to bind themselves to any particular contract, the parties are also entitled to agree methods by which they may not change a contract. The law gives effect to contractual provision requiring specified formalities to be observed for a variation to an existing contract.
The freedom to make contracts on any terms the parties choose operates up to the point when the contract is made. After that it can only be changed to the extent that the contract allows: Rock Advertising Limited v MWB Business Exchange Centres Limited (2018).
Variation Clause: Example
Except as expressly provided in this Agreement, no variation of this Agreement shall be effective unless it is in writing and signed by the parties (or their authorised representatives).
Accordingly modifying the contract in a conversation will not be legally effective. Oral modifications are excluded.