As mentioned in the first article of this series, Boilerplate Clauses are very useful in helping to control the bigger picture in which the contract exists, and provides the contracting parties with greater certainty. Let’s have a look at a few more boilerplate clauses.
Severance or Severability
There may be times where for an unforeseeable reason, a provision of a contract is no longer enforceable. Does this make the entire contract void? If there is no Severance Clause, the answer is likely to be a yes, and all the hard work in negotiating the contract goes down the drain.
A Severance Clause states that the terms of the contract are independent of each other. So, if a provision has been deemed unenforceable for any reason, that provision will be severed from the contract, and the rest of the contract will remain intact and continue to operate. Some common examples where provisions may be deemed unenforceable include when there are changes to the legislation after the contract is signed, resulting in a provision becoming illegal, or if, in the event of a dispute about a restraint of trade clause, the court deems the clause too broad and restrictive.
Typically, a Severance Clause will state that an unenforceable provision will simply be deleted from the contract. This may result in the removal of a provision or concept that significantly disadvantages one of the parties.
The Severance Clause can be drafted to avoid this outcome. It will stipulate that the unenforceable provision is replaced with a valid and enforceable provision covering the same subject matter and reflecting the same business intentions as the original clause. Alternatively, a Severance Clause can stipulate that the unenforceable provision be modified such that it becomes enforceable or even narrowed until the unenforceable portion is removed. Importantly, a Severance Clause requiring modification should make it clear that the parties are to adhere as closely as possible to their original business intentions.
Relationship of Parties
A Relationship of Parties clause provides that nothing in the terms of the contract should be construed as a partnership or agency (among other things). It may seem unnecessary to include such a clause in the contract because it will most likely be defined in the type of agreement you are entering into. For example, a licence agreement involves a licensor and licensee, and an employment agreement includes an employer and employee.
For some agreements, however, it can look very different from the outside, and an entirely unintended legal form can arise implicitly. Potential consequences include tax implications or one of the parties taking advantage of the appearance of a partnership and entering into unauthorised dealings with third parties. To avoid these uncertain outcomes, a Relationship of Parties clause expressly renounces all other kinds of commercial relationships other than the one defined in the contract between the parties.
An assignment of a contract occurs when one party transfers its rights and obligations under a contract to a third party. The courts usually favour an assignment of contract. Therefore, most Assignment Clauses that you come across that permit Assignment will limit it in some way. They typically achieve this by requiring that the non-assigning party will give its consent. This consent is an important aspect of Assignment because the incoming party will be assuming all the contractual obligations of the outgoing party.
The circumstances of the business deal will depend on whether assignment is permitted. Some parties choose to prohibit assignment. For example, an artist might be commissioned to paint a mural, and the commissioning party would, therefore, wish to prohibit assignment since the artist has been chosen for their specific style and talent. Similarly, in employment contracts where a person has been employed because they have the skills and experience for the role, the employer will not want the employee to have the option of assigning their rights to another party who may well be unknown to the employer.
An Assignment Clause is useful where one of the parties merges or is acquired by a third party. An Assignment Clause provides the mechanism whereby the contract can be transferred to the acquiring party rather than the contract being terminated because one party can no longer meet its obligations. Similarly, the requirement to give consent to an Assignment gives both parties comfort that they will not end up in a contract with a party that has entirely different commercial interests to the original contracting parties.
Even if the parties do not intend to vary the terms of their agreement, it is important that the contract provides a mechanism for varying the terms of the contract. A Variation Clause performs this function. It is common for variations to be effective only if they are in written form and signed by both parties. By having a procedure for variations in place, the parties ensure that the contractual terms are not varied informally or by accident. It prevents a party from claiming a variation was verbally agreed, but there is no accompanying documentation of it.
Importantly, a variation in the context of this discussion refers to a variation of simple contractual terms.
If the variation is much larger than this, the Variation Clauses will typically be more detailed and involve a set of procedures to enable variations to be proposed and agreed to. For example, construction contracts where there is some change to the scope of the work that is to be carried out under the contract.
In the last article of this series, we will look at Notice, Counterpart, Confidentiality and Indemnity.