How to draft an effective M&A dispute resolution clause

This article has been written by Harshita Choudhary pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho. 

This article has been edited by Shashwat Kaushik.

Introduction

Boilerplate clauses, often ignored parts, hiding within the legal maze of any contract, are those monotonous, nondescript general clauses that can be seen in the fine print of terms and conditions you hastily agree to, oblivious to the potential convolutions they may set you on a course for. Guilty as we are of dismissing these as mere jargon, boilerplate clauses, my dear unassuming reader, are far more significant aspects of contract formulations than you may fathom. These clauses lay the solidly nondiscriminatory groundwork for all modern contractual frameworks, and each party is bound by the legal standards set by these clauses. So, let this serve as an introduction to the world of boilerplate clauses—the often overlooked part of contracts.

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What is a boilerplate clause

Before starting the explanation of the boilerplate clause, let’s see an example of what it is first.

Imagine you are signing up for a new social media app. We have to agree to terms and conditions before we can create an account. Well, those terms and conditions contain a lot of standard rules (clauses) and statements that can apply to any app or anyone using that app. These are boilerplate clauses. Boilerplate clauses, colloquially referred to as fine-print terms, constitute core principles of mainstream modern contract preparations.

Boilerplate clauses, often referred to as “standard” or “form” clauses, play a crucial role in commercial contracts. These clauses are not directly related to the primary commercial objectives of the contract but are of paramount importance due to their long-term legal implications. They serve as the backbone of many contracts, providing a foundation for the rights, responsibilities, and obligations of the parties involved.

The term “boilerplate” is derived from its similarity to steel plates used in constructing steam boilers. Just like steel plates, boilerplate clauses are reliable and generally remain consistent across different contracts. They are designed to address common legal issues that arise in a particular type of contract, ensuring that essential matters are addressed without the need for extensive negotiation each time a new contract is drafted.

While boilerplate clauses offer convenience and efficiency, it is crucial for parties to carefully review and understand them before signing a contract. These clauses can have significant legal ramifications, and it is essential to ensure that they align with the specific needs and objectives of the parties involved. Failure to do so could lead to unintended consequences and potential disputes down the road.

Boilerplate clauses usually include:

Force majeure

This clause essentially frees both parties from liability when an event beyond the control of either party prevents one or both from fulfilling the contract.

In legal agreements, a force majeure clause is a type of boilerplate clause, like a safety net for when things go unexpectedly wrong. For example, there is a planning of a big outdoor concert. The host has booked the band, set up the stage, and sold tickets. But then, a huge hurricane hits the city on the concert day. No one can control the weather. The force majeure clause kicks in here. It says that if something major and unexpected—like a natural disaster, war, or other “acts of God”—happens, and it makes it impossible to fulfil the agreement, then the parties involved aren’t held responsible for not being able to perform their duties.

In simpler terms, it’s like an official “get out of jail free” card for those uncontrollable events that stop everyone in their tracks. This clause ensures that if the unforeseen happens, the parties can pause or cancel their obligations without facing penalties. It’s an essential part of any robust contract because it acknowledges that, sometimes, nature throws curveballs that no one can predict or dodge.

Severability 

This clause typically says if one term of the contract becomes legally unenforceable, the rest of the contract will nonetheless remain in force. In the world of contracts, a severability clause is a type of boilerplate clause that acts like a safety feature. It is like a big, gourmet meal, which includes many things to eat. Each thing represents a different part of the contract. So, if one thing has something wrong with it—maybe it’s made with an ingredient that’s not allowed—instead of throwing the whole meal away, one has to just remove the bad thing and keep enjoying the rest.

A severability clause works the same way. It says that if one part (or “provision”) of the contract is found to be invalid or unenforceable for some reason, that part can be removed or fixed without affecting the rest of the agreement. The remaining parts of the contract stay intact and continue to be effective.

This clause is crucial because it ensures that one mistake or issue doesn’t ruin the entire agreement. It maintains the stability and enforceability of the contract, even if some parts need to be adjusted or eliminated. Think of it as a built-in resilience feature that helps contracts survive and stay useful, even when they encounter bumps in the road.

A severability clause allows unenforceable terms to be removed from a contract without affecting the validity of the remaining terms. However, it’s necessary to draw from the case of World Programming Ltd vs. SAS Institute Inc. (2010), which highlighted that severability only applies if what is left of the agreement is intelligible, sensible, and effective.

Entire agreement

This clause states that the contract represents the complete agreement of the parties and that no previous oral or written agreement can change that agreement or its terms.  The Entire Agreement Clause (also known as a merger clause) ensures parties understand that the written contract is the final, complete expression of their agreement, meaning an oral agreement will not override the written contract.

Alright, so imagine you’re reading through a contract, and you come across something called the “entire agreement” clause. Basically, this clause is like a big stamp that says, “Hey, everything we agreed on is right here in this document—nothing else counts.”

For example, when someone makes a deal with someone and then writes down all the details so everyone knows what’s what. The entire agreement clause makes sure that only what’s written in the contract matters. So, if there were any promises or talks before the contract that aren’t written down, they don’t count unless they’re added to the contract later.

This clause is important because it keeps things clear and avoids confusion. It means he/she can’t argue about things that were said but not written down. It’s like having a rulebook that everyone agrees to follow so there are no surprises later on.

Confidentiality clause

For example, someone is developing a unique new product, like a revolutionary app. A confidentiality clause in his contract is like a formal agreement that ensures any sensitive information shared—like the app’s unique features or marketing strategy—remains strictly confidential.

This clause is necessary for protecting intellectual property and business secrets. It says that parties involved must keep confidential information private and not disclose it to anyone else without permission. Whether it’s trade secrets, customer data, or proprietary technology, this clause is a protection against unauthorised disclosure.

The inclusion of confidentiality clauses establishes trust and legal protection, meaning that anyone’s unique ideas and competitive advantages are secure. It’s a main part of contracts that helps maintain confidentiality and fosters a secure environment for collaboration and innovation.

Importance of boilerplate clause

Efficiency

Boilerplate clauses save time as the parties do not need to negotiate on essentials in every new contract. In simple terms, it is like instead of writing every single rule every time you draft a new contract, we use a set of standard rules that cover common situations. This way you don’t have to think of and write down all these rules each time. It would reduce the time wasted as well as reduce the chances of making errors in important statements.

Providing certainty

They provide certainty to businesses in their dealings with other parties.

These clauses tell us what we could expect from each other as parties to the contract. Both parties can dodge the future fight between parties. This is like having a rulebook that both needs to understand and accept.

Uniformity

They bring about a sense of uniformity as similar provisions are included in all agreements. The uniformity provided by boilerplate clauses is one of their key benefits. This refers to the consistency they bring to transactions by establishing the same provisions across multiple agreements (Shavell, 2006). By including the same terms and conditions in all agreements, these clauses provide uniformity and fairness, ensuring that all parties are on the same legal footing.

Further, boilerplate clauses allow for uniform interpretation of contract terms, which promotes efficiency and reduces the possibility of contentious litigation. In AT&T Mobility LLC vs. Concepcion, (2011), the Supreme Court emphasised the importance of uniformity in arbitration agreements provided by boilerplate clauses, holding that such uniformity enhances predictability and performance of contracts.

AT&T Mobility LLC vs. Concepcion, (2011): This case highlights the importance of uniformity provided by boilerplate clauses in arbitration agreements.

Risk management

They help in risk management by clearly setting out the responsibilities of each party.

Risk management is an obligatory component of contracts that clearly spells out the responsibilities of each party to ensure that both parties are protected from unpredictable risks. According to Wolaver (2002), boilerplate clauses are one of the critical devices for managing and distributing risks in contractual relationships. Their potency lies in their ability to set out the duties, rights, and expectations of each party to a deal.

Reducing uncertainties

They can reduce uncertainties since they clearly mention the rights and duties of the parties involved.

The boilerplate clause reduces uncertainties in business transactions by deeply detailing the framework under which the contract operates, hence able to enable smoother transactions. Careful stipulation of the rights and obligations of the parties helps each party understand their role, obligations, and expectations within the contract.

In most of the cases, a boilerplate clause was vital in spelling out the parameters of an agreement between the parties. This cleared all the uncertainties about aspects such as warranties, limitations of liability, and dispute resolution methods. The court favours the right of the seller to specify the terms of the contract since these were well stipulated in the given boilerplate clauses.

Conflict resolution

They can settle procedures for the resolution of disputes, therefore eliminating the need for expensive litigation. The existence of conflict resolution clauses in boilerplate contracts, therefore, greatly affects the settlement of disputes, hence eliminating the need and cost for litigation. Their absence may result in the contract ending in court with huge costs for both parties.

Providing flexibility

They offer flexibility to parties, allowing them to make additions or alterations according to their business needs.

Cost effective

They are cost-effective as parties do not have to hire legal professionals to draft every clause in every contract.

Protection of interest

They provide protection to parties’ interests under the contract. “Protection of Interest” is a term often found in these clauses. This typically ensures that each party’s interests are protected under the contract. It structures obligations in a way that allows each party to enforce their rights under the contract and provides for legal recourse in the event those rights are infringed. It provides parties with the sense of security necessary to engage in business transactions.

Global recognition

Boilerplate clauses, often found in international contracts, have gained global recognition for enhancing the efficiency of international transactions. These clauses serve as standardised provisions that bridge the gap between diverse legal systems, promoting consistency and predictability in international business dealings. Their widespread acceptance and enforceability across various jurisdictions have further contributed to their utility. Many courts have endorsed the implementation of boilerplate clauses in international contracts, acknowledging their significance in facilitating legal clarity and efficiency.

For instance, in a landmark international case, the court emphasised the role of boilerplate clauses in providing certainty and predictability for businesses operating in the global arena. The court recognised these clauses as standard terms that are universally understood and accepted, thereby eliminating potential ambiguities and disputes. This acknowledgement underscores the importance of boilerplate clauses in fostering legal clarity and minimising the risk of misunderstandings in international business transactions.

The use of boilerplate clauses not only enhances efficiency but also contributes to cost savings and timeliness in international transactions. By incorporating standardised provisions, parties can avoid the need for extensive negotiations and legal consultations, which can be time-consuming and costly. This streamlined approach enables businesses to focus on their core activities and objectives without getting entangled in complex legal matters.

Furthermore, boilerplate clauses promote legal certainty and predictability, which are essential for international business transactions. By establishing clear and uniform contractual terms, these clauses reduce the likelihood of disputes and legal challenges. This not only protects the rights and interests of all parties involved but also encourages foreign investment and economic cooperation.

In summary, the global recognition and endorsement of boilerplate clauses in international contracts have significantly contributed to the efficiency, cost-effectiveness, and legal certainty of international business transactions. These clauses bridge the gap between different legal systems, providing standardised provisions that are universally understood and accepted. As international trade continues to expand, boilerplate clauses will undoubtedly play a vital role in facilitating smooth and successful cross-border transactions.

Although various statutes and regulations do not explicitly cite boilerplate clauses, their inherent importance can be discerned from related legislation. 

Why should we not overlook boilerplate clauses

Boilerplate provisions, also known as standard clauses or form contracts, are pre-written terms and conditions commonly found in various types of agreements. These clauses are often used to establish the basic framework of an agreement and to allocate risk and liabilities between the contracting parties.

One of the main benefits of boilerplate provisions is efficiency. By incorporating these standardised clauses, parties can save time and resources that would otherwise be spent on negotiating and drafting individual provisions for each agreement. Boilerplate clauses provide a consistent and predictable foundation for agreements, making it easier for parties to understand and interpret their rights and obligations.

Another advantage of boilerplate provisions is certainty. By relying on well-established and tested language, parties can reduce the risk of ambiguity and misinterpretation in their agreements. These clauses often address common legal issues and provide a framework for resolving disputes that may arise during the course of the contract.

However, it’s important to note that boilerplate provisions can also pose risks if not carefully reviewed and tailored to the specific circumstances of the agreement. A weak grasp or careless application of these clauses can lead to unintended consequences and potential legal liabilities.

One of the primary risks associated with boilerplate provisions is the potential for unfair or one-sided terms. Standard clauses often favor the party who drafted them, potentially leading to an imbalance of power and a disadvantage for the other party. It’s crucial for both parties to thoroughly review and understand the boilerplate provisions before signing an agreement to ensure that they align with their respective interests and objectives.

Another risk is the possibility of outdated or irrelevant provisions. Boilerplate clauses may not always be updated to reflect changes in the law or industry practices. Using outdated clauses can lead to legal complications and disputes. It’s important for parties to ensure that the boilerplate provisions in their agreements are current and relevant to the subject matter of the contract.

To mitigate these risks, it’s essential for parties to carefully review and negotiate boilerplate provisions before entering into an agreement. This includes seeking legal advice to understand the implications of these clauses and to ensure that they are tailored to the specific needs and circumstances of the transaction.

Overall, while boilerplate provisions can offer efficiency and certainty in agreements, it’s crucial for parties to approach them with caution and to exercise due diligence in reviewing and understanding their content. By doing so, parties can minimise the potential risks associated with these standardised clauses and ensure that their agreements are fair, balanced, and legally sound.

What we can learn from this case is that parties to a contract do not take boilerplate clauses casually but read the same in light of their respective position and legal exposure so as to avoid unnecessary dispute and litigation.

Boilerplate clauses—even if quite generic—it is important to give the correct thought and attention when drafting a contract since they can impact contractual obligations greatly, as well as disputes that may arise amongst parties that are bound by the same.

  • Avoid legal cases: Boilerplates help avoiding the legal issues that may creep up during the implementation of a contract. And this is done in the interest of both parties.
  • Traditional: They have been used for millennia and are based upon ancient practices in the legal community. Ignoring them could be a huge mistake.
  • Standardisation: Forward contracts are standardised, leading to ease of doing business.
  • Uniformity in transactional practice is achieved through boilerplate clauses because they offer a vocabulary that works similarly for many different types of transactions.
  • Evidence: Clarity of Rights and Liability increases the opportunity for a favourable adjudication or dispute resolution outcome because the evidence proves original intent over concluded terms agreed to by parties.
  • Aids to interpretation: The established usage and judicial interpretation of boilerplate clauses may be beneficial.

Conclusion

These clauses require standard language to ensure uniformity, legal consistency, and effectiveness of the contract. This way, using established or standard wording will allow both parties to clearly interpret and agree on the obligations and protections related to important information. Through this standardised approach, risks of misinterpretation or disputes are therefore minimised, aligning with principles of law while improving enforceability in the event of a breach. It also facilitates ease and speed in the drafting process, as the essential clauses must be covered by addressing all the necessary elements that avoid any ambiguity, too. Thus, standard words are at the core basis to establish trust and cover serious information in business contracts.

References

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