Have you ever wished you could write your own laws?
Generally, when a business negotiates a contract, it is analogous to writing its own laws. In many instances, a business can negotiate contractual terms that will supersede the law that would be imposed if the contract were silent. However, in contract negotiations, many businesses will only focus on certain contract provisions, setting the other provisions aside as simply legal jargon or contract boilerplate.
Businesses focus on the business terms, such as exactly what services or products are going to be provided, when they will be provided and how they will be delivered. These essential terms and conditions are then placed in a contract cushioned with various legal terms, which are meant to protect the parties if something goes wrong in the performance of the agreement.
In negotiating the business terms, the parties may review thoroughly certain legal terms that have an important effect on the business of a party. For example, a provider of a consulting service would strongly negotiate to retain the ownership rights to services and advice it provides to clients. If it does not protect its ownership rights in its services, it will be forestalled from providing that same service to another client.
Clients hire consultants based on their experience and know-how. Giving one client ownership rights in such know-how could be fatal to a consulting business.
As another example, a company might negotiate strongly the confidentiality provisions of an agreement if it is bidding to provide low-cost services to a client for a project. That company will not want its proposal, containing its prices and services, to be copied by a competitor, which would give that competitor an advantage in the bidding process.
Even thought these business and legal terms are the focal point and essence of the contract, the miscellaneous legal boilerplate terms can be just as important — sometimes more important — should something go awry. This article will focus on the effect under Georgia law of several boilerplate terms that may be overlooked in contract negotiations — severability, assignment and successors and assigns provisions.
These are just a few provisions that may impact the parties in an agreement. It is important to review the entire contract, even the seemingly insignificant boilerplate terms, to ensure that the parties have truly reached an agreement and understand their risks under that agreement.
Despite the great power a business has to create the law that will govern its agreements, it comes with limits; not all contract provisions are enforceable. Even though a business may negotiate a provision, such a provision might be unenforceable if it violates a statute or is otherwise illegal, violates public policy or was later modified by the parties.
Faulty provisions in a contract can make the whole contract fail. To protect against failure of the entire contract, most will contain a severability clause such as the following: “In the event that any part or provision of this agreement is declared fully or partially invalid, unlawful or unenforceable by a court of competent jurisdiction, the remainder of the part or provision and the agreement will remain in full force and effect, if the essential terms and conditions of this agreement for each party remain valid, binding and enforceable.”
In Circle Appliance Leasing Inc. v. Appliance Warehouse Inc., the Georgia Court of Appeals held that a covenant not to compete was severable from the remainder of the agreement because the agreement also contained a severability clause. The severability clause specifically provided that if any provision of the agreement was unenforceable, such unenforceable clause would be severed without invalidating the remainder of the agreement.
It did not contain the language from the sample severability provision above. Because of the severability clause, the court held the remainder of the contract enforceable, even though the consultants admitted that the consideration for their promise to render consulting services consisted not only of monetary payments but also the covenant not to compete.
This case substantiates the impact a contract boilerplate provision may have on a party to an agreement. Had the parties evaluated in negotiations the effect of the agreement’s severability clause, they might have realized that even if an essential term of the contract was declared unenforceable, the parties would still be bound to the remainder of the agreement.
If the parties had negotiated to include in the severability clause in the sample provision above, the court might have reached a different conclusion if it found the covenant not to compete an essential condition of the agreement.
Another boilerplate provision which may trump the law is in the “assignment of rights and delegation of obligations” provision. In Georgia, if an agreement is silent with regard to assignment and delegation, a party may assign its rights under the agreement and, as long as personal skill is not required, may delegate its obligations under the agreement. However, once an agreement contains a provision regarding assignment or delegation, that provision will likely control.
Just as with other boilerplate provisions, “no assignment” provisions should be carefully drafted to ensure a party has the opportunity to consent to the assignment of the other party’s rights or obligations under the contract. In order to fully protect a party, the provisions must preclude assigning rights under the agreement, not just assigning the agreement. Furthermore, it is important for the provision to void the contract if a party assigns any obligation or right.
In addition, the contracting parties may want to preclude transfers by operation of law in the agreement. The Supreme Court of Georgia recently decided in Ward v. City of Cairo that the transfer of a business’s rights to a successor business is not encompassed in the definition of assignment.
Therefore, without a specifically drafted assignment provision, a party may still be bound to an agreement with a different party should the original party to the agreement be sold or merged with another company. The following is an effective standard nonassignability clause, which takes into account transfers by operation of law, as well as voluntary transfers: “No party may assign any of its rights under this agreement, voluntarily or involuntarily, whether by merger, consolidation, dissolution, operation of law or any other manner, without the written consent of the other party. Any purported assignment of rights in violation of subsection (a) is void.”
Nonassignability clauses can have a major effect on a party’s rights under an agreement. For example, in Forest Commodity Corp. v. Lone Star Industries Inc., an agreement between a mining company and a storage company contained a standard clause prohibiting assignment unless the other party consented. The storage company assigned its interests and obligations to another company without the consent of the mining company.
The court found this to be a repudiation of the contract and a material breach. Because the storage company in effect repudiated the agreement, the court found that it was stopped from enforcing other provisions of the agreement. The storage company’s rights to recover under the agreement were extinguished.
Successors and assigns
Another boilerplate provision that correlates with the assignment provision is the “successors and assigns” clause. A typical successors and assigns clause simply states, “This agreement is binding upon, and inures to the benefit of, the parties and their respective successors and assigns.”
The purpose of a successors clause is to bind a business’ successors or assigns to the terms of the agreement in the event of a transfer. The Georgia Court of Appeals, however, has interpreted the successors and assigns clause to also be an advance consent to the assignment or delegation of the agreement.
In order to avoid this interpretation, a better drafting of the successors and assigns clause, taking into account the existence of an assignment and delegation provision, is as follows: “This agreement inures to the benefit of and is binding upon the parties, their respective successors in interest by way of merger, acquisition, or otherwise, and their permitted assigns. This section does not address, directly or indirectly, whether a party may assign its rights or delegate its performance under this agreement. Section [insert cross reference to the assignment and delegation provision] addresses these matters.”
The severability, assignment, and successors and assigns provisions are just a few of the boilerplate provisions found in most contracts that are often overlooked. If not reviewed carefully during the negotiations, a business may find itself out of a contract that was crucial to its business or obligated to perform under conditions that are not agreeable to it.
Each provision should be reviewed and tailored to the specific needs and expectations of the parties. Businesses should take the opportunity to review and negotiate these boilerplate provisions because it is a time when they can proactively override the law, instead of simply being governed by it.
Sheila J. Baran is a construction and procurement associate at King & Spalding LLP. Reach her at (404) 572-2707 or [email protected].