Don’t Call Them Boilerplate: How Well-Crafted Contractual Terms & Conditions Protect Sellers
In the context of contracts, the dictionary definition of “boilerplate” is “text that will be used repeatedly, often word for word, and relied on as standard wording.” As a practical matter, however, “boilerplate” may as well mean “yada, yada, yada” or “skip to the next page.”
For sellers of goods and services, dismissing the terms and conditions (T&Cs) contained in their agreements with customers as mere “boilerplate” belies the critical importance of these provisions. Far from merely taking up space, and regardless of how standardized they can often be, terms and conditions provide sellers with invaluable rights in the event of disputes and protect them from financial losses, operational risks, and other potential liabilities.
That is why all sellers should understand and appreciate how well-crafted and, where appropriate, tailored and non-standardized T&Cs can add to the upsides and minimize the downsides in their customer relationships. Tailored T&Cs can ensure comprehensive coverage and reflect business-specific concerns, such as industry regulations or niche market practices.
Defining Scope of Services or Goods
One of the primary objectives of T&Cs is to provide each party with clarity and definitiveness as to their respective rights and responsibilities. That starts with defining what exactly is being sold or delivered.
T&Cs clarify the nature, quantity, and pricing for the promised goods or services and whatever ancillary matters the seller will provide. The specifics of how to describe the subject matter of the contract will vary among products, services, and industries. But careful delineation of what is included in the transaction and what is not can prevent buyers from making unreasonable demands or avoid the dreaded “scope creep” that can undermine the anticipated benefits of a deal. By eliminating ambiguity, these terms prevent misinterpretation.
Securing Payment Obligations
Of course, clearly setting forth how, when, and how much the buyer will pay the seller is equally important to clearly defining what the buyer is paying for. The payment-related clauses in T&Cs should specify:
- How much: Clearly state the amounts, whether per piece, per hour, per project, or for the entire contract.
- When: Define the deadlines for payment to be made after invoicing or provide for partial payment, deposits, or similar up-front charges before delivery to secure the seller’s costs.
- How: State the accepted modes of payment (e.g., EFT, cash, credit card).
- What If: Establish penalties for delayed payments to incentivize timely compliance. Such provisions ensure cash flow and provide recourse if buyers fail to honor payment terms.
Breaches and Termination
When things go south, the T&Cs should provide a clear roadmap for how the parties will resolve disputes when they arise and when and how either party may terminate the agreement. They should also delineate the events, acts, or failures to act that constitute a breach of the contract and the rights and remedies available to the aggrieved party in such an event.
These provisions can include requirements that the parties resolve any disputes through arbitration or mediation, provide for the recovery of attorneys’ fees and costs by the prevailing party in litigation, availability of injunctive relief, and other remedies.
Two T&Cs relevant to breaches and disputes that are regularly and unfortunately glossed over as boilerplate include choice of law and venue/jurisdiction provisions.
Choice of Law and Jurisdiction
As crystal clear as a contract may seem, disputes can still metastasize into litigation. Where that litigation proceeds and the law governing the contract’s interpretation and enforcement can play outsized roles in how the matter will be resolved and the cost and disruption involved in pursuing or defending a lawsuit. By including a choice of law provision that outlines which state’s law will apply and a choice of venue provision that establishes where the lawsuit must be filed, a seller can tilt the playing field in their favor if and when a dispute makes its way to the courthouse.
A choice of law clause provides that the contract and any disputes arising thereunder will be governed, interpreted, and enforced under the laws of a designated state. Usually, but not always, the chosen state will be where one of the parties has its principal place of business. However, some state laws are generally more favorable to sellers, while others are more buyer-friendly, especially when that buyer is a consumer. Depending on the nature of the issue and the governing law chosen, a seller may put a buyer at a significant disadvantage in the event of litigation as they reap the benefits of laws more favorable to their claims or defenses.
Litigation is always costly, disruptive, and risky, no more so when that litigation proceeds in a far-flung and unfamiliar location. While a choice of law clause determines how a lawsuit will be resolved, choice of jurisdiction and venue clauses control where it will be resolved. By designating a close-to-home exclusive venue, a seller can use their own lawyers in their own backyard in front of judges they may be familiar with and court rules and local practices that they understand. Those lawyers will not have to get up to speed on their client or matter and won’t have to bill for their time and costs incurred traveling to a far-away courthouse.
Limitations on Liability and Indemnification Provisions
Minimizing downside risks goes far beyond ensuring payment. T&Cs should place firm limits on the scope of any potential liability to the buyer. Sellers can specify that liability is limited to the contract value, exclude liability for consequential losses altogether, and ensure sellers aren’t held accountable for issues outside their control.
Similarly, indemnification provisions delineate who is responsible and who should pay when claims or liabilities from third parties arise. Indemnification clauses can and should cover a wide range of scenarios and claims that frequently occur in the performance of the type of contract at issue.
Establishing Ownership and Risk Transfer
Clear clauses regarding ownership and risk transfer protect sellers during delivery. Terms like “risk of loss passes to the buyer upon delivery” ensure that the buyer assumes responsibility once goods leave the seller’s premises or control. This prevents disputes over damage occurring in transit.
Conversely, a retention of title (ROT) clause may ensure the seller retains ownership of goods until they receive payment in full. If a buyer defaults, the seller can reclaim goods, minimizing its financial exposure (subject to certain other conditions).
Force Majeure Clause
This sparsely invoked provision got its time in the spotlight courtesy of the COVID-19 pandemic. A force majeure clause protects sellers from liability when unforeseen events prevent them from fulfilling contractual obligations, ensuring that sellers are not penalized for circumstances beyond their control. However, it is important to describe what is and is not included under the force majeure umbrella, as there were many disputes about whether vague or undefined force majeure clauses covered the pandemic and associated lockdowns, supply chain problems, and other impediments to performance.
Work With Counsel on Tailored and Updated T&Cs
Sellers who may pride themselves on handshake deals and simple documents that don’t go much beyond product-cost-delivery date often shake their heads when their lawyer comes back with a multipage contract full of provision after provision. However, the pages upon which T&Cs appear can determine whether a transaction is lucrative, a loser, or carries substantial risks. Accordingly, sellers should work with counsel to ensure T&Cs are comprehensive, enforceable, and aligned with relevant laws. Additionally, outdated T&Cs can expose sellers to unforeseen risks. Regularly reviewing and updating terms ensures they remain relevant and enforceable.
If you have questions regarding your contracts’ T&Cs or would like assistance preparing, reviewing, or updating them, please contact Julie Teicher at Maddin Hauser.