What is a Boilerplate clause?
They're types or classes of clauses which are commonly found in business to business contracts.
They may look the same if you are unfamiliar with them. Slight differences in wording can make all the difference in to their legal effect.
They're usually inserted at the end of a commercial contract. But they can appear anywhere in a contract. Anywhere.
Why are boilerplate clauses used?
They establish legal relationships in contracts with more certainty. They change the way the general law would apply to the contract.
Whether all or some are necessary in a particular contract, depends on the type of contract. For instance, where all parties to a contract are located in the same country, there is little need for a choice of law clause or jurisdiction clause, unless they want to agree the law of a foreign country to govern the contract.
Are Boilerplate clauses Standard Clauses?
Boilerplate clauses are often referred to as “standard” clauses, and a bit boring. To an extent, they are.
They’re not, if you want to the contract to do what you intend it do and have the legal effect that you want it to have.
Boilerplate clauses are interpreted using the precise words chosen by the parties and used in the contract. Although different boilerplate clauses may look the same, they can have a significantly different legal effect. One word is all it takes to change the legal meaning.
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 – and the clause - would give it that counts. This is consistent with the well-entrenched principles of interpretation of contracts:
- Each clause 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
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 appropriate for the agreement reached.
Rarely will every boilerplate clause be required for a commercial or business contract. Often it won’t make sense. In some cases, boilerplate clauses remove legal rights which a party would expect to have.
A software developer has several different projects on the go for a customer. The work of each project is governed by a separate contract.
The software developer and customer change the form of the contract. They use an entire agreement clause.
If the entire agreement clause has not been prepared to preserve the previous contracts, those contracts may inadvertently be brought to an end.
That may not be what was intended. As we say, the legal is decided objectively - through the eyes of a reasonable reader.
Why are boilerplate clauses important?
Boilerplate Clauses vary the application of the general law as it would operate on a contract.
They can be drafted for the benefit – or disadvantage – of one or both parties.
Boilerplate clauses have one or more purposes or affects. Here's some examples of what they can do.
- Extinguish or exclude legal claims where claims would otherwise exist:
- Entire Agreement clause
- Third Party Rights clause
- No-reliance clause
- Grant rights unknown to the general law
- Termination clause
- Consequences of Termination clause
- Enable or disable default legal entitlements
- Assignment clause
- Subcontracting clause
- Variation clause
- Preserve rights that might or would otherwise be lost
- Waiver clause
- Survival clause
- Cumulative Remedies clause
- Modify the application of general rules of law
- Notices clause
- Interpretation clause
- Variation clause
It depends how they're worded.
Common Boilerplate Clauses
Before you can properly decide whether your contract needs them, you need to know what they're usually intended to do. Then you can work out the difference and change them to your requirements.
List of Boilerplate Clauses
The more commonly encountered boilerplate clauses include:
- Assignment Clause
Transfer the contractual responsibility for part of a contract to a third party to the contract
- Audit Clause
Provide a right to inspect materials in the possession or control of the other party
- Change of Control Clause
On a change of ownership or control, the other party is entitled to terminate the contract
- Choice of Law clause:
Sets the law which will be used to read and interpret a contract.
- Confidentiality Clause
Maintain secrecy of confidential information
- Conclusive Evidence Clause
Minimise or avoid disputes in respect of calculations of sums due by the paying party
- Consequences of Termination Clause
Specify rights and obligations - or extinguish them - when a contract ends
- Contractual Lien Clause
Establish a contractual right to withhold possession of property as 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 it beyond doubt that parties may sign separate copies of a contract and be legally bound
- Cumulative Rights Clause
Preserve legal rights at termination which exist(ed) before termination
- Currency Clause:
Designate the currency of payment of sums under a contract
- Entire Agreement Clause:
Negate any previous contractual arrangements preceding the current contract being agreed, other than where specified
- Force Majeure Clause:
Suspend performance of contracts during an intervening 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
- Joint and Several Liability Clause:
Renders two or more persons liable to perform a single promise
- Jurisdiction Clause:
Fixes the courts of a country in which disputes arising from the contract will be resolved.
- Non-Reliance clause: Minimise or exclude potential liability for precontractual (mis)representations for the purposes of the law of misrepresentation
- Notices clause: Ensure an agreed method exists to deem service of contractual notices on contracting parties
- Partnership and Agency clause: Prevent inadvertent creation of fiduciary duties between contracting parties
- Precedence Clause: Prioritise importance of contract terms in different parts of contracts when a conflict or inconsistency arises
- Publicity Clause / Announcements clause: Set the ground rules for public statements about the contract or the contractual relationship between the parties
- Set-Off clause: Reduce the sum payable by a debtor to a creditor due to a cross-claim
- 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 which clauses continue in effect after termination
- Suspension clause: Suspend performance of the contract
- Termination Clause: Express rights for one or more parties to bring a contract to an end
- Third Party Rights clause: Prevents (or permits) the contract being enforced by third parties to the contract
- Time of the Essence clause: Compliance with times for performance a condition of the contract
- Variation clause: Preventing 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
Despite the common title, there is no such thing as an assignment of a contract. It was held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd 1993 UKHL 4 (22 July 1993):
It is trite law that it is, in any event, impossible to assign "the contract" as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation.
Although it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned.
In short, contracts are not assigned. Assets are assigned. Contractual rights are transferred.
So when it comes to “assigning” (transferring) contracts, there are 3 possibilities:
- Transfer all or part of the burden of the contract to another person. This is novation
- Assign all or part of the benefit of the contract to another person
- Transfer the whole of the benefit and the burden to another person. Also novation.
The general law does not require any particular formality to novation. Where a contracting party is notified that a supplier will be replaced by another supplier, does and say nothing to object, and then commences to receive supply from the new supplier, it is likely to have been novated.
When businesses enter administration or liquidation, potential purchasers might express an interest in “acquiring the contracts”. This requires novation of each contract, individually.
There's more than what you'd like to know about novation here.
What do Assignment Clauses do then?
Assignment clauses either:
- confirm the general operation of the law - ie no transfers of contractual rights. It expressly prohibits or enables transfers of the burden or the benefit of the contract.
- displace or override the general rule of law of novation, in favour of one party or both parties.
Do you need one or not? That depends.
Context of Assignment Clauses
Contracts impose strict liability on the contracting parties to perform their legal obligations. It means this: if a seller does not perform what they are required to do under the contract, they’re in breach of contract. Likewise, if a buyer does not do what they are legally required to do, they’re in breach of contract.
- SaaS Services: A commercial open source software company (the seller) provides hosting to its buyers.
But the seller subcontracts the hosting of the SaaS services to dedicated hosting company, such as RackSpace.
That subcontracting does not relieve the seller from its obligations to perform to SLAs to the buyer.
It’s just a delegation of the contractual duty of the seller to provide services to the buyer.
If the hosting fails, the seller is liable to the buyer.
In contracts that don’t contain assignment clauses, the default rules apply: if the seller party fails to perform, they are strictly liable for the breach of contract.
Assignment clauses permit transfer of contractual obligations to perform the burden to third parties under contracts. So, where the obligation is assigned it will be the party that has taken over the burden that will be liable to the buyer. Not the seller.
The end result is that one of the original contracting parties is no longer a party to the contract: that’s novation.
Example: Assignment Clause
A boilerplate provision to prevent assignment of the benefit and burden in a contract might be:
Neither party may without the prior written consent of the other party assign a benefit or obligation imposed in this Agreement.
The reference to “obligation” is usually redundant, because it can't be transferred without consent in the first place.
Contract assignment: comparison with Subcontracting
Assignment clauses should not be confused with Subcontracting Clauses.
The general law provides that a contracting party is entitled to subcontract works to a third person, unless there is a contractual restriction preventing it. That isn't a transfer of the contract, or any part of the burden of the contract.
It's a delegation.
Subcontracting performance of contractual obligations:
- is permitted where personal performance is not required to produce the result
- means performance by the subcontractor will discharge the principal's contracting party's obligations
- principal's contracting party remains liable if the subcontractor does not performance is rendered.
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 the 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.
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 a contract.
Why do I say country? There is no contract law of the "United States", "the United Kingdom" or the "Europe Union". When a contract designates, say "the United Kingdom" as the law of the contract, then 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. Here is basic form:
Example: Choice of Law clause
This agreement shall be interpreted in accordance with the law 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 is 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) is required by law to be disclosed upon production.
We talk about non-disclosure agreements over here.
Conclusive evidence clauses provide that a determination of an amount payable by a debtor is a final determination of the sum payable. The contractual obligation to make the calculation usually lies with the paying party. They’re most often used in loan agreements, contracts of guarantee, factoring agreements and construction contracts.
These clauses sidestep extensive investigation of outstanding debts and having to trawl through financial records to find errors in calculations.
In more sophisticated versions, a certificate produced by one party or agent for the party, and served on the other. Again, the amount due to to be paid will be stated to be conclusive evidence of that amount to be paid.
Approach of Courts
Courts tend not to interfere with the legal effect of clauses such as these. Court support these sorts of clauses because they avoid a detailed investigation and reconciliation process at trial - and all the expense it causes to the parties litigating and the court's time. Clauses such as these also narrow the scope of potential disputes.
The case law says that courts are prevented from determining the true amount of any monies due to be paid under the Agreement, in the absence of manifest error. The reference to “manifest error” is to allow a comeback if there is a material mistake in the calculations.
What is manifest error?
There are 3 steps to determine with a manifest error exists:
- ascertain what it is that was contractually agreed to be paid;
- the scope of the power to make a the decision which is conclusive evidence.
For example, there cannot be conclusive evidence of all sums due and payable under a contract, were the power to conclusively determine a sum is limited to only part of the contractual sums payable.
- Was there a manifest error?
- A manifest error will exist where:
- an error exists which " is obvious or easily demonstrable without extensive investigation": IIG Capital LLC v Van Der Merwe (2008)
- fraud has tainted the calculations or the background to the calculations
- there is a mistake on the face of the calculations.
Errors should be obvious or readily demonstrated without extensive investigation. Extensive investigation of each outstanding debt was precisely what the conclusive evidence clause was designed to prevent. And the parties agreed to it: so courts are unlikely to intervene.
Note though, that calculations may be made at one moment in time based on a set of facts which the receiving party can’t verify. There is no reason in principle why the verification (and detection of a manifest error) cannot be conducted by the prejudiced party after subsequent events take place that puts them in a position to verify the numbers.
In the end, there needs to be parity between what the contract says, and the amount conclusively determined.
Provided that the calculation does not contain manifest error, the determination is legally enforceable.
Any formalities required by the contract also need to be complied with, such as:
- format of any required notice
- service of notice of the decision or certificate
There may be others in the contract.
Example: Conclusive Evidence clause
Any decision made by the [Customer / Creditor] in respect of the Supplier’s entitlement to payment under this agreement or upon any calculation by the [Customer / Creditor] of sums due and payable under the payment clauses shall, save for manifest error, be final and conclusive and binding.
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 handover 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 then 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 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 a preexisting 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 contracts 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.
Entire agreement clauses are sometimes also referred to as “whole agreement” clauses.
They’re incorporated into business contracts to establish a position to ensure that previous agreements and arrangements between the parties are discharged, and have no legal effect.
Entire agreement clauses do this by providing that the agreement between the parties is limited to the terms and conditions contained in the contractual documentation.
The background to a contract may involve a series of events which could form the basis of a legal claim down the line, such as:
- heads of terms or letters of intent
- documents signed by the parties
- documents referred to in letters and emails
- oral statements.
An entire agreement clause provides that the agreement is limited to material referred to in the contract and excludes material which is not referred to, thus excluding prior:
- informal or formal arrangements
- understandings, and
- methods or practices which at law would form a contract
If there are pre-existing contracts that are intended to remain in force at the time of the new agreement, using them can be quite dangerous.
Pre-contractual representations made by one party to the other to induce them to enter into a contract, are excluded by another type of clause, the non-reliance clause. Entire agreement clauses and non-reliance clauses are typically used together to wipe the legal slate clean as at the date to new contract is agreed.
Purpose of Entire Agreement Clauses
They’re generally designed – or intended - to increase certainty of the terms of contract agreed between the parties.
They’re intended to do so by:
- nullifying legal causes of action.
- limiting the contract to the words in the contract, and no more.
They have a fatal effect on legal claims when they are effective.
But are they effective?
Entire agreement clauses have received close judicial scrutiny over many, many years. There’s an excellent history of them and the changes of public policy over time here.
The long line of cases which show that, despite best intentions – that entire agreement clauses:
- come in all shapes and sizes
- often they are ineffective to exclude all types of claims to which they are directed by the parties
- depend upon the facts and circumstances in each case to be effective. The facts and circumstances includes:
- the background to the contract
- the terms of the contract as a whole
- the precise terms of the entire agreement clause, within the context of the rest of the contract
No entire agreement clause is fool proof.
Why are they used?
These sorts of clauses are especially popular in industries where sales methods are designed to induce one party to enter the contract:
- features and capabilities of a product or service
- quality of products
- capabilities to customise solutions to suit particular needs of the customer
There’re also used where there is an informal relationship preceding signing of formal contracts – such as after a letter of intent has been commercially agreed.
When drafted in the broadest possible way, they extinguish claims based on:
- any and all previous contracts
- informal working arrangements which have given rise to a legal relationship intentionally or unintentionally before the contract
- collateral warranties
- collateral contracts
- implied contracts.
In one of the classic cases on entire agreements, Inntrepreneur Pub Co v East Crown Ltd (2000) , Lightman J considered an entire agreement clause in its stripped down form:
[T]his Agreement…constitutes the entire Agreement between the parties.
The judge said the purpose of these types of clauses is to:
preclude a party to a written agreement threshing the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty[...]
For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document.
More importantly, the judge went on to say
An entire agreement provision does not preclude a claim in misrepresentation, for the denial of contractual force to a statement cannot affect the status of the statement as a misrepresentation. The same clause in an agreement may contain both an entire agreement provision and a further provision designed to exclude liability for misrepresentation and breach of duty.
So entire agreement clauses are designed to counter matters relating to contractual agreement: not misrepresentation. Something further is need for that: a non-reliance clause.
A reference to “representations” in an entire agreement clause may well end up being interpreted as a matter relating the contractual obligations and not misrepresentation. That’s because they are different areas of law.
And that’s what happened in Axa Sun Life Services plc v Campbell Martin Ltd and others (2011). The Court of Appeal found that entire agreement clause was not effective to exclude the very things that it was intended to be drafted for.
That’s because references to "representations" (rather than misrepresentation) in a contract don’t amount to an agreement that representations are withdrawn, overridden or of no legal effect so far as any liability for the law of misrepresentation is concerned.
Also, a typically drafted entire agreement won’t affect terms implied into a contract. That’s because implied terms are not "prior" to the contract. They are part of the contract itself.
Legal Effect of Entire of Agreement Clauses
In the course of the judgment, in Axa Sun Life Services the court held:
Since this is a question of construction, it depends on the precise words of the clause and indeed of the Agreement as a whole, and it is not necessarily helpful to rely on judgments on differently worded provisions.”
Collateral contracts are also more difficult to assert. The parol evidence rule operates to exclude a range of evidence in respect of the agreement reached by the parties; the rule is not limited to excluding oral evidence, but extends to documentary evidence.
Example: Entire Agreement Clause
A simple boilerplate entire agreement clause might read as follows in appropriate circumstances:
This Agreement constitutes the entire agreement between the Parties and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written. There are no warranties, covenants, conditions or other agreements, express or implied, collateral, statutory or otherwise, between the parties in connection with the subject matter of this Agreement except as specifically set out herein.
Enhancements of clauses such as these are made where, say:
- the parties may intend for some prior agreement(s) to remain in force (and the circumstances may require it), and/or
- important conversations or proposals are intended to form part of the contractual relationship.
In complex or higher value transactions, an unqualified entire agreement clause may be unwarranted, as it may cause more problems than it solves for one or both of the parties: it may terminate all previous contracts between the parties.
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 is 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 appear to make sense.
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.
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 - that it will never be satisfied, even in situations where it would be genuinely needed, and justified.
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.
The law of misrepresentation applies to representations – that is, statements – made before a contract is formed where the representation:
- is false, and
- is relied upon by a party, and
- induces the other party to enter the contract.
When a representation is false, it is known as a “misrepresentation”.
Non-reliance clauses operate to:
- exclude reliance on precontractual representations altogether, and
- establish that the parties have not relied on any matter other than what appears in the contract itself
Without “reliance” there can be no “inducement” to enter the contract - and therefore no misrepresentation.
Thus, non-reliance clauses attempt to exclude liability for misrepresentation by stating that the parties do not rely on any representation made other than those set out in the contract.
However, parties are not entitled to contract out of liability for fraudulent misrepresentation.
Words in a contract stating that liability for fraud is excluded are likely to be void. Where a contract attempts to do so, it will likely be severed from the contract.
Defences in cases of fraudulent misrepresentation usually hinge on claims that:
- it was not an actionable misrepresentation; or
- the suing party didn’t rely on the statement to enter into the contract.
When are they used?
Typically these clauses appear in contracts for the sale of goods or services, where claims about the goods or services may be … exaggerated. The seller may go over the top and say that the performance, qualities or features or the products or services are not what they said they were.
The buyer cannot really know whether goods or services have those qualities until have used them - which means in most cases entering the contract.
A common form of non-reliance clauses looks to exclude reliance on all representations which are not recited in the contract itself. Each and every representation made is excluded.
In that way, the statement is included in the contract is not excluded by the non-reliance clause.
Are they enforceable?
When they done correctly, they usually are, absolutely.
When a clause acknowledges that no representations have been relied on, is an effective exclusion of any liability for misrepresentation.
Clear words are needed to exclude a liability for negligent misrepresentation: BSkyB Ltd v. HP Enterprise Services UK Ltd 2010 EWHC 86 (TCC).
Example: No-Reliance Clause
- Each party acknowledges that in entering into this Agreement it does not rely on and shall have no remedies in respect of any representation or warranty not set out in this Agreement.
- Each party agrees that it shall have no claim for innocent or negligent misrepresentation or negligent misstatement based on any statement in this agreement.
- Nothing in this agreement shall affect the parties’ liability for fraudulent misrepresentation.
Because non-reliance clauses are intended to deal with misrepresentation, they serve a different and distinct purpose to Entire Agreement Clauses. Trying to combine the two can be a health hazard.
In many situations, a business contract requires that the other party be notified of the exercise of legal rights under a contract. That is, be given fair warning in advance.
Notices clauses set out the means by which one party can bring to the attention of another party matters which must be brought to their attention under the contract, by giving "notice".
Designated Methods of Service
Notices clauses designate methods to bring notices issued under a contract to the attention of the other parties. They fix a method and means to deliver documents required to be formally served, in compliance with the terms of the contract.
In other words, where a contract requires a recipient to be made aware of the facts and matters in question, a notices clause defines the way it may be brought to their attention.
Just because a contracting party knows about a notice doesn’t mean that they have been properly served under a contract. The difference between the two can make all the difference.
Agreed Method to serve Notices
A notices clause sets up agreed methods by which the other party can be served under a contract. If that method has been adopted, it doesn’t matter if the notice actually comes to the attention of the party or not.
Failures to adhere to Notices Clauses
When serving documents under a contract which contains a notices clause failure to comply with its terms can cause real problems. If the parties have agreed to a specific method of service in a notices clause, and the method of service is not adhered to:
- service of the notice may not be effective, and
- may place the party issuing the notice in repudiatory breach of contract.
Actual notice and Constructive notice
When a notice is sent the recipient in accordance with the terms of the clause, the party should receive actual notice of the notice communicated.
Including a notices clause:
- limits scope for objections by the party that they have not been properly served with documents issued under the contract
- means that the recipient will have constructive notice of the matters set out in it, whether it was actually received or not
Types of Contractual Notices
Depending on the type of contract, the types of contractual notices which may need to be sent include:
- formal notice that performance of an obligation under a contract is required
- requiring a party to remedy a breach of contract within a relatively short period
- notice of termination of a contract, where the right exists
- exercising rights under the contract. such as a right to exercise an option
- update a register of secured interests, where transmission of a security interest has taken place
- make a demand for payment of a debt due under a contract or interest
- a demand for delivery of documents required to be delivered.
Are they necessary?
Strictly speaking, no.
But they promote certainty of bringing notices to the attention of the other party. They save the hassle of a small problem turning into a large problem.
Provisions of a Notices Clause
A notices clause may designate:
- the mode of delivery of communications, such as
- hand delivered
- first class prepaid post
- email (not recommended).
- the address required to transmit the notice, such as the registered office of the party
- the person(s) to which the notice must be sent
- when the notice is deemed to be received
- the language which must be used in the notice, such as English. The language is specified where there is an international dimension to the contract.
Email addresses should not usually be used as a mode for delivery of notices under a contract. The consequences of contractual notices are usually too serious to leave to the ups and downs of email.
Example: Notices Clause
A simple form of a notices clause might read:
Any notice under this agreement shall:
- be in writing
- marked to the attention of “The Directors”
- be deemed to be received when sent to a party’s registered office by:
- first class prepaid post, 3 days after it is posted;
- by courier or by hand delivery, upon delivery if delivered before 4.00pm on any business day, and the next business day if delivered after 4.00pm.
This clause does not apply to the service of any proceedings or other documents in any legal action or, where applicable, any arbitration or other method of dispute resolution.
For the purposes of this clause, "writing" shall not include e-mail.
There is a material difference between “shall deliver” and “may deliver”. The first is obligatory, the second form is permissive. It becomes open to say that “may deliver” means that the list of methods of service of notices is not exclusive, whereas with the form, “shall serve” is.
Exclusivity of method of service of notices:
- requires clear wording because of the consequences;
- means that, regardless of the actual knowledge of the intended recipient, any mode of service other than those specified in the clause will not be adequate.
Courts will give effect to exclusivity of the method – notwithstanding the consequences – if that is the deal that the parties have made.
Partnership and Agency clauses 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 big 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 says 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.
While there are principles of the general law that give precedence to what are known as “Special Conditions”, that not to say that those special conditions will be readily identifiable or promote more certainty when interpreting a contract. Those situations lead to protected 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 the other boilerplate clauses.
Such is the dramatic effect that these clauses have on reading a contract if one is in the contract you wan tot know about it early. If there's not one and the contract contains 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
- 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.
When a party takes on a contractual obligation, they are legally required to perform the obligation.
That same contracting party is still entitled to subcontract out the work to another service provider, unless the contract:
- is a contract for personal services, such an employment contract
- contains an express term preventing subcontracting out the work, or an implied term
Subcontracting is not the same as an assignment (properly referred to as a "transfer") of contractual rights. Although the end result may be the same from a commercial standpoint:
- an "assignment" transfers the entire legal obligation to perform to the party assigned the obligation;
- Subcontracting leaves the primary obligation to perform the obligation with the contracting party.
Subcontracting is a substitute performance of the contract by another person
Let’s take an example:
- Two parties enter into a contract.
- The contract says the supplier will:
- host its own SaaS software for use by the customer
- maintain the SaaS software in the cloud computing solution to run continuously
- provide consultancy services to examine the requirements of the customer for the purposes of customising the software for the customer
- develop the software to the requirements of the customer, once those consultancy services have defined the deliverables.
There’s 4 different types of services in the contract: hosting, maintenance, consultancy services and software development services.
Most SaaS companies won’t have the resources in-house to:
- host the software on its own equipment, in its own datacentre. Not to mention monitor developments in online security to keep it secure
- have employees perform all of the maintenance on the software required. The supplier may want to contract out that work
- provide highly customised industry specific consultancy services. The supplier might hire in contractors to do those specific tasks, and not use it's own employees
- use their own employees to do the software development.
The general law allows the supplier to subcontract out - or delegate - services which it is contracted to supply to its own customer – without the permission of the customer, unless it falls within one of the narrow exceptions above.
When services are subcontracted out, that doesn’t prevent the supplier from being primarily liable to the customer if the subcontractor does a bad job. When a subcontractor does a bad job, the chain of liability is:
- the customer has a breach of contract claim for damages against the SaaS company, and
- the SaaS Company may have a claim for breach of contract against the subcontractor for substandard work. It depends on the terms of the contract between the SaaS company and the subcontractor.
(a breach of contract on the first contract may not be a breach of contract of the second contract)
The customer has privity of contract with the supplier only – not the subcontractors used by the SaaS company. So the customer can’t sue the subcontractor for a breach of contract (but see Third Party Rights Clauses).
That’s quite different to assigning the benefit or burden or a contract, as is the case with Assignment Clauses.
Subcontracting clauses used in contracts confirm or prevent the legal ability of companies to subcontract out the supply of products or services.
Example Subcontracting Clause
The Supplier shall not without the prior written consent of the Customer subcontract any of the services to be supplied by the Supplier to the Customer.
Using clauses such as this prevent subcontracting out the contract work altogether.
In the context of the SaaS company example above, would mean that the SaaS company would be in instant breach of contract to its customer.
The default rule is that contractual obligations cannot be assigned without the consent of the other party.
When they are, Successors and Assigns Clauses 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 contains 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 set 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.
In the business environment, termination clauses specify rights to bring a contract to an end for specified reasons. These usually include by:
- breach of contract, and naming the standard of breach required to terminate the contract, whether “repudiatory”, “material”, “substantial” or “any”
- 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, selling land). Variations it can done informally and inadvertently.
Variation clauses establish an agreed method by which variations are agreed.
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.
Waiver clauses seek to limit the effect of the general law of waiver.
Doing so is intended to prevent a loss of legal rights. But they are not always successful in doing so.
Whether prevention of a waiver is effective in any particular case depends on:
- the terms of the waiver clause,
- the events giving rise to the waiver
- whether there have been previous waivers
- whether the party seeking to rely on the waiver has done anything to reassert its rights
- whether an express reservations of rights has been communicated
What is waiver?
When a party to a contract has a legal right and chooses not to exercise it, the party makes a legally enforceable choice.
The party is prevented from going back on the choice and changing its mind later.
A waiver of a right usually means that the contracting party loses the right to assert the breach of contract claim. With that, the consequential claim for damages and other remedies which may have been available are lost.
The law views the situation as one where there has been no breach of contract, due to the waiver.
A waiver is not a variation to a contract. Variations:
- are a legally binding agreement in their own right, and
- change the terms of a contract.
Waiver lead to the loss of an entitlement to enforce an existing legal right.
Elements of Waiver
In order for an effective waiver:
- A legal right must be renounced, disclaimed or abandoned by words or conduct.
The words or conduct must be inconsistent with asserting the legal right
- The waiver may be express (spoken or written) or implied.
In the case of implied waiver, the person waiving the right must know of all of the facts relevant to the right being waived
- The statement or conduct waving the right must be unequivocal
- The other party (who would otherwise be in breach of contract) acted on the statement or conduct, and changed their circumstances as a result to their detriment as a result
- It would be inequitable (basically, unfair) for the other person to enforce the legal right.
Also waiver doesn’t need to be supported by contractual consideration.
If there is contractual consideration, then it may also be a variation of the contract. In that case, it can’t be a breach of contract, because there was a contractual right to do what was done.
Also, a party to a contract can’t waive a right that it does not know about.
Example of Waiver
A landlord and tenant have a lease between one another. Rent is payable monthly.
The tenant is required to pay rent on the 1st day of each month. If the rent is not paid at that time, the landlord may terminate the lease.
The tenant is late paying the rent. The tenant says that it will pay rent in instalments over the month. The landlord says, “OK” and says nothing further. The tenant makes instalments to catch up on the late rent.
Rather than terminating the lease for late payment of rent, the landlord accepts instalments.
The landlord has waived its right to terminate the tenancy for late rent.
But then the law of waiver sometimes goes further.
The landlord would want to tell the tenant that if rent was late again, the lease will be terminated. The first waiver may set a precedent for future late payments of rent: that rent will not be insisted upon on the 1st day of the month on future occasions.
The latter warning could be said to correct the previous waiver, and stop the continuing presumption of waiver coming about.
This time with software as a service contracts:
A customer has a right to receive software as a service for a suite of software applications.
The SaaS supplier has a service break down at the beginning of a calendar month. One of the software applications forming part of the suite isn’t working.
The supplier tells the customer it will be fixed soon.
The customer says that they weren’t planning to use the service for 3 months, and tells the supplier not to worry about fixing it in a hurry (the customer had a legal right to receive those services and has waived its right to insist on the services. By not supplying the services for the entire suite, the supplier is in breach of contract).
The SaaS supplier says, well if that’s the case, we won’t prioritise a fix until the end of the month (the SaaS supplier has changed its position).
The waiver prevents the customer coming back at a later date and recovering damages for the breach of contract. The company waived its rights to the remedy of damages.
Example Waiver clause
Any delay, omission, indulgence or forbearance by either party to exercise any of the rights nor any non-compliance by a party under this agreement shall not be construed as a waiver of that right, not shall it impair such right on future occasions.
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 (see above).
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.
UK Contract Lawyers
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