Five important clauses that can be found in all commercial contracts

This article has been written by Gargi Sharma, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution.

This article has been edited and published by Shashwat Kaushik.

Introduction

Today, in the industrial and corporate worlds, we daily create a contract. In a contract, two parties come together and agree to certain terms and conditions that are mentioned in it, but there are some uncertain situations that may arise in the future and are unpredictable, which may become a reason for a dispute between the parties. To avoid such disputes, some standard clauses are inserted in the contract; these clauses are called boilerplate clauses. Typically, these clauses are short and are added to the contract.

Download Now

Meaning

Boilerplate clauses are pervasive and standardised provisions commonly found in various types of contracts. These clauses have a well-established and consistent meaning, eliminating the need for tailored modifications to suit a specific agreement. Their widespread use across different contracts ensures a level of uniformity and efficiency in the contracting process.

While most boilerplate clauses share similarities, there are certain clauses that may vary depending on the nature and circumstances of the contract. For instance, clauses related to force majeure (unforeseen events beyond the control of the parties), waiver of rights, governing law, and venue (jurisdiction for resolving disputes) often require customisation to address the specific needs of the parties involved.

When drafting boilerplate clauses, it is crucial to ensure coherence and alignment with the overall purpose and intent of the contract. These clauses should not stand in isolation but rather complement and reinforce the other provisions of the agreement. It is also essential to ensure that the boilerplate clauses accurately interpret and reflect the meaning and objectives of the contract.

Some common examples of boilerplate clauses include confidentiality clauses, which protect sensitive information shared during the course of the contract; dispute resolution clauses, which outline the process for resolving disagreements or disputes that may arise between the parties; warranties, which provide assurances regarding the quality or performance of goods or services; and force majeure clauses, which address the impact of unforeseen events on the parties’ obligations.

By incorporating well-drafted boilerplate clauses into contracts, parties can streamline the negotiation process, enhance clarity and predictability, and reduce the risk of misunderstandings or disputes. However, it is important to balance the use of boilerplate clauses with the need for customisation to ensure that the contract effectively addresses the unique circumstances and requirements of the parties involved.

Background

The term “boilerplate” originated in the 19th century in the United States and was first used by United States journalists to refer to standard text slotted into newspapers. The word “boilerplate” has its roots in the printing industry, where it referred to a metal drum used in newspaper offices to send news items to locations outside the newspaper’s office. This metal drum, called a boilerplate, contained news that was already ready for printing. Once the newspaper office received the boilerplate, they would include it with the preset newspaper. The continued practice of using this newspaper slot led to the term “boilerplate text.”

Boilerplate text is a pre-written, standardised text that is used in a variety of documents, such as contracts, legal agreements, and business forms. It is often used to save time and ensure that all necessary information is included in the document. Boilerplate text can include standard clauses, such as disclaimers, warranties, and limitations of liability.

Boilerplate text can also be used in a negative sense to refer to text that is generic and unoriginal. In this sense, boilerplate text is often seen as a way to avoid having to write new and creative content. However, when used effectively, boilerplate text can be a useful tool for streamlining the document creation process and ensuring that all necessary information is included.

Overall, the term “boilerplate” has a long history in the United States and continues to be used in various contexts, both positive and negative.

Some common and important boilerplate clauses

Some important and common boilerplate clauses are as follows:

Confidentiality/data protection clause

In commercial contracts, mainly those that are made between parties related to new products and items, a confidentiality or data protection clause is needed because a little disclosure of any data related to the product makes a big loss to the companies.

The General Data Protection Regulation Act [GDPR] made a recent development in this field. Article 6 of GDPR provided the conditions for the lawful processing of data. The conditions provided under Article 6 are as follows:

  1. According to the first condition, the party whose data is the subject of the contract must give his consent for the processing of data for a specific purpose;
  2. According to the second condition, the processing of data is lawful if it is necessary for the performance of a contract;
  3. The processing is lawful if it is required to be disclosed under law or an order by a court of law;
  4. According to the fourth condition, the processing is lawful if it is necessary for the protection of interest of the contract or other individual;
  5. And lastly, processing is lawful if it is necessary to be disclosed for the public interest.

If the above-defined conditions are not present, the parties are restricted from disclosing the data. It is also to be noted that the commercial contract strictly abides by the GDPR, especially where organisations engage third parties. Furthermore, Article 32 of the GDPR provided a precautionary provision, i.e., who can and when the data may be accessed and processed.

The Indian Information Technology Act, 2000, also provides a provision for punishment and compensation for wrongful disclosure of data and information. Section 43 and Section 72 of this act led to the liability to the party for negligent disclosure of personal data and breach of confidentiality clause.  

Recently, the Indian government made changes in the law of data protection and enforced a bill, The Personal Data Protection Bill 2018. This bill led to the changes in the boilerplate clause.

No waiver clause

When you have a contract, there’s also rights and obligations in it. Now sometimes, in the course of doing business with a customer or client for a long time, you tend to kind of get lost on something, your payment terms may be 15 days but with this particular client, you let them go 30 days routinely. At some point, the customer or client will be able to argue that you have waived the 15-day payment terms and can no longer enforce them and now in the course of dealing, you’ve created a 30-day turn. A waiver provision in your boilerplate will prevent this.

 A waiver clause is a provision that states that just because one party does not always enforce a writer obligation does not mean that they have waived the ability to do so in the future. One party’s rights and obligations are only waived when they are in writing and executed by an authorised person of that party.

Section 63 of the Indian Contract Act 1872 provided the provision related to this clause. Section 63 holds that “every promisee may dispense with or remit, wholly or in part, the performance of the promises made to him, or may accept instead of it any satisfaction which he thinks fit.” Regarding this, the Supreme Court also said that if the question related to the waiver clause arises, Section 63 of the Indian Contract Act is applicable.

It is also noted that for the sake of data protection, the courts of the US and India make the No Waiver clause mandatory in every commercial contract.

Right to assign

Assigning a contract means you’re taking your legal rights and obligations and handing them fully over to another party. There are a number of times where this comes up but the most common is a merger or an acquisition, so if your company is either merging or being acquired by another company, you want the right to assign your contracts to that new company so that they can then take them over and continue to provide service to your customers. That’s a lot of the value of your company in their client base, but not all clients always want to hire you because they like you.

Governing law and venue

Governing law and venue are really two different provisions that get kind of slammed into one. Governing law means which state’s law will control in the case of a conflict under the contract, even though in India we have federal laws under the federalist system. The states can have all kinds of different laws depending on the area of law; sometimes it’s subtle differences, sometimes it’s huge and so knowing which state’s law is going to control is really important. And venue means where the contract disputes will be held so if there are any disputes in a contract between the parties, then the venue provision tells us where those disputes are going to be resolved. For example, in case you have a contract with a foreign party or client, they may want the governing law and venue in their country where they stay. In that case, you should take the advice of a legal expert from that country regarding the interpretation of the contract and your ability to implement its terms.

Force majeure

Force majeure is essentially the recognition that there are forces so far outside of the control of each party that they might affect the party’s ability to perform the contract but there’s nothing the party can do. Some Force majeures are very short and some are extensive and list out a number of different things. Inclusive lists of things that can apply so it’s really important to read the force majeure, know what events apply, what don’t apply and then to also make sure that if this is a contract with a customer, you’re not allowing them to waive their obligation to pay just because there is a force majeure event. The most common examples of force majeure are floods, earthquakes, epidemics, etc.

It is also to be noted that, if one party of a contract claims the force majeure, the other party’s obligations in a contract also suspend. For example, if you are the supplier of the wheat and your customer applies force majeure, your obligation to supply is also suspended under a contract. And if the force majeure event continues, both parties to the contract have the right to terminate the contract.

There are also many other boilerplate clauses, like the third-party clause, variation clause, definition and interpretation clause, amendment clause, etc.

Importance of boilerplate clause

Boilerplate clauses, often found in legal contracts, are standardised terms and conditions that are incorporated into an agreement without negotiation. They serve several essential purposes:

  1. Time-saving and efficiency: Boilerplate clauses streamline the contract creation process by providing pre-written language for common provisions. This eliminates the need for lengthy negotiations over every detail, saving time and resources for both parties.
  2. Clarity and consistency: By using standardised language, boilerplate clauses ensure that the terms of the agreement are clear and consistent. They help to avoid ambiguity and misinterpretation, reducing the risk of disputes.
  3. Legal compliance: Boilerplate clauses often include provisions that ensure compliance with applicable laws and regulations. This can be especially important in contracts involving complex legal requirements.
  4. Protection of rights: Boilerplate clauses typically include provisions that protect the rights and interests of both parties. For example, they may include disclaimers of liability, limitations of warranties, and dispute resolution procedures.
  5. Risk mitigation: Boilerplate clauses can help to mitigate risks by addressing potential issues that may arise during the performance of the contract. For example, they may include provisions relating to termination, default, and indemnification.
  6. Industry standards: In many industries, certain boilerplate clauses have become standard practice. Using these clauses can signal to the other party that the agreement is fair and reasonable.
  7. Customisation: While boilerplate clauses are standardised, they can often be customised to some extent to fit the specific needs of the parties. This allows for a balance between efficiency and personalisation.
  8. Legal review: Despite the benefits of boilerplate clauses, it’s crucial to have an attorney review any contract before signing. An attorney can ensure that the clauses are appropriate for the specific circumstances and that the agreement protects your interests.
  9. Negotiation: Even though boilerplate clauses are standardised, they can still be subject to negotiation. If there are specific provisions that are not acceptable, it’s possible to discuss modifications with the other party.
  10. Alternative Dispute Resolution (ADR): Boilerplate clauses often include provisions for alternative dispute resolution (ADR) methods, such as mediation or arbitration. This can help to resolve disputes efficiently and avoid costly litigation.

Overall, boilerplate clauses play a vital role in modern contracting by streamlining the process, providing clarity, and protecting the interests of the parties involved.

Case laws related to boilerplate clauses

Hind Construction Co. vs. State of Maharashtra (1959)

The fact of the case is that the appellate plaintiff company created a contract with the state of Maharashtra [the defendant] regarding the construction of an aqueduct across the Alandi River at Mile 2 of the Nasik left Bank canal. Under a contract term, the period for completion of work was fixed as 12 months from the commencement date (5 July 1955) of the work; it is expected to be completed on or before 4 July 1956. But the plaintiff failed to complete the work within a time period of 12 months, and the executive engineer, by his letter on August 27, 1956, rescinded the said contract.

On August 28, 1959, in the court of the joint civil judge, senior division, Nasik made a claim of ₹65000 and alleging that the defendant rescinded the contract illegally and wrongfully. The plaintiff claims that his/her company is not able to complete the work for the reason of heavy rainfall and it is impossible for them to carry out the work from July to November [monsoon period] in that area. Plaintiff said that he already informed the defendant about this and started the work with the hope that the period July to November was exempted from the 12-month period of completion of work.

The court held that the plaintiff provides orally and written evidence but in contract terms it is not mentioned about the exemption of the July to November period, and the plaintiff is the first to breach the contract. The court granted the plaintiff Rs. 10,901 compensation with 6% interest per annum from the date of rescission and said that this amount is correct for the plaintiff’s damages and for the work done by him. The court also said that the rescission of contract by the defendant is lawful.

Sumitomo Heavy Industries Limited vs. Oil And Natural Gas Corporation Limited

The fact of the case are that the appellate, Sumitomo Heavy Industries Limited, entered into a contract with respondent, ONGC Ltd., for installing and commissioning of a well-cum-production platform deck and connected system, including submarine pipelines, on a turnkey basis at its Bombay High [south] offshore site for the extraction of oil. The respondent appointed M/s McDermott International Inc. [MII] as the subcontractor for the completion of work by a back-to-back contract with the knowledge of the respondent. After completion of the bid, there is the change in the Indian law, added section 44-BB in the Income Tax Act, 1961. According to this section, MII is required to pay the tax. The amount paid by MII as the tax given by the appellant, the appellant sought from the respondent the amount of income tax that is paid by MII in tax. The respondent declined to pay the tax amount. The appellant enforced the arbitration clause in the agreement between the parties, and the matter was referred to Sir Michael Kerr as umpire, who gave his decision in favour of the appellant on 27-6-1995 and said the tax liability of MII paid by the appellant is necessary and reasonable and this situation arises due to the change in the law, and it is also mentioned in the contract general clause. And the defendant is bound to pay the appellant.

But the respondent challenged the award given by the umpire before the Bombay High Court. The Bombay High Court has set aside the award given by the umpire on the basis that the umpire gave the award out of his jurisdiction and said that the umpire gave the decision placing the wide and huge interpretation on the general clause of the contract.

But the Supreme Court held that the decision of award given by the umpire on the basis of wide interpretation of clause 17.3 general clause is right and valid. The arbitration petition filed by the respondent against the umpire decision is dismissed by the Supreme Court.

United India Insurance Company Limited vs. Orient Treasures Private Limited (2007)

The fact of the case is that the appellant is an insurance company listed under the Companies Act with its registered office in Chennai. The respondent alleged a burglary in their jewellery shop and submitted a claim for competition under the insurance policy. The appellant rejected the claim and said that the stolen articles are not covered under the policy. The respondent claimed a sum of Rs. 1,32,06,786.30 as compensation, of which only Rs. 36,10,211 was awarded by the commission. The appellant filed the suit against the commission’s order in further court. The appellant said that the claim was not valid under the policy and should be dismissed. The court held that the claim made by the respondent was not valid under insurance policy as the stolen articles are not included in the policy. The court also said that the “contra proferentem rule” did not apply in this case as there was no ambiguity in the language or wording used in the policy. The court dismissed the appellant’s file and upheld the commission’s decision.

Conclusion

It is clear to define points and case laws that the boilerplate clauses are very important in contracts, mainly commercial contracts but sometimes parties ignored these clauses, which created a significant impact on the agreement and sometimes are the reason for litigation. If litigation and disputes arise, the court uses these clauses to interpret the contract.

References

RELATED ARTICLESMORE FROM AUTHOR

LEAVE A REPLY

Please enter your comment!
Please enter your name here