Some standard contract provisions are tried and true, but others have outlasted their usefulness. You can get into trouble by repeatedly using boilerplate provisions without checking to see if they are being interpreted and enforced the same way they were twenty or thirty years ago, when they were first introduced into company contracts.

A substantial share of contract litigation involves disputes over the interpretation of language. This is not surprising, since a failure to communicate lies at the heart of much human conflict. What may come as a surprise is that some boilerplate language may be interpreted differently today than when it was first drafted, and may not be enforced the same way in every jurisdiction. Just as everyday phrases and language evolve over time, the interpretation of contract language can also evolve. The compelling equities of a particular case may have enticed a court to give seemingly clear language a slightly altered, or “gentler” meaning. And, the older the boilerplate is, the more likely it is that a court has given it a meaning different from what a literal reading would indicate.

Here are a few illustrations:

It is common to include a clause prohibiting contract amendments except by an agreement in writing. This “no oral modification” clause has been used for decades. Under Illinois law, however, it is mostly unenforceable. Ironically, the enforceability of oral agreements means parties may orally waive the no oral change clause. In Czapla v. Commerz Futures (N.D. Ill. 2000), an employment contract contained an expiration date and a provision prohibiting oral modifications, but the court held that plaintiff’s allegation of an oral agreement to extend the contract could support a finding that defendants had waived the no oral change clause. While such a waiver must be shown by clear and convincing evidence, this provides little solace for parties required to conduct costly discovery to rebut a claim that a contract was orally modified.

New York has attempted to refine the analysis through statute. § 15-301 of McKinney’s New York Civil Code provides that a contract containing a provision barring oral modifications cannot be changed by an executory agreement unless it is in writing. Caution: an executory agreement is one that involves mutual promises of future performance by each party. If one party has started to perform its promise pursuant to the alleged oral modification, the modification is no longer fully executory and may be enforced.

Consider supplementing your no oral change clause with a provision stating that contract changes can be made only by designated representatives. Agree that only those designees may amend the contract and disclaim reliance on modifications
purportedly made by anyone else.

Now consider a liquidated damage provision that allows the non-breaching party to recover the liquidated sum or actual damages. This seems straightforward enough, but Illinois courts have found such provisions unenforceable. In Grossinger Motor Corp. v. American National Bank (Ill. 1993), the contract allowed the seller of real estate to recover $100,000 in liquidated damages or pursue its actual damages for breach of a contract with a purchase price of $4,750,000. After noting that the provision might be an unenforceable penalty, the court found it unenforceable because it allowed the non-breaching party to recover the liquidated sum or pursue actual damages. Since a liquidated sum is supposed to reflect the parties’ stipulation on damages, the ability to pursue damages in another amount means there is no such agreement, and the liquidated damages clause is therefore unenforceable. New York law is similar. In United States Fidelity & Guaranty v. Braspetro Oil Services (S.D.N.Y. 2004), the court held that a liquidated damage provision would not be enforced where other language in the contract allowed for recovery of actual damages.

Delaware law is a bit more complex. In Gilbane Building Co. v. Memours Foundation (1985), the court held that a liquidated damage provision can co-exist with a provision allowing for actual damages so long as they apply to different types of losses.

What guidance do these opinions offer? Use liquidated damage provisions only for damages that are not easily quantifiable, and draft them with the intent of capturing a bona fide estimate of likely damages. If you feel compelled to include both a liquidated damage amount and a clause permitting actual damages, make it clear that they apply to different types of damages―do not give the non-breaching party the option to pursue liquidated damages or actual damages for the same type of injury.

Boilerplate arbitration clauses present numerous opportunities for problems in interpretation and enforcement. Arbitration clauses that are too general may leave the parties litigating over the manner in which the arbitration is to be conducted. If not specified in the agreement, disputes can arise concerning the number of arbitrators; whether multiple arbitrators are party-appointed or neutral; whether discovery is permitted, and if so, in what types and volumes; and whether the Federal Arbitration Act or the State’s arbitration act apply (which can be important, since they can have different standards for appeal to a court). In addition, if one party claims the contract was induced by fraud, is that claim subject to arbitration? Who decides this issue?

Consider stating that all disputes relating to the transaction are subject to arbitration, including claims relating to the negotiations and the inducement to enter into the agreement. Specify the number of arbitrators; state that each party can take three depositions and serve five interrogatories and document requests, or some variation of this. Specify the standard for appealing the decision to a court or consider allowing an appeal to a panel of different arbitrators within the organization. Don’t rely on a dusty arbitration clause drafted twenty years ago. Think through the parameters of the ideal arbitration and make the necessary refinements to your boilerplate.

What about attorneys’ fees provisions? The typical one states that in an action to enforce the contract the prevailing party shall be entitled to recover its reasonable attorneys’ fees. Simple to state; not always easy to enforce. Which party has “prevailed” may not be readily apparent, especially if there are multiple issues or counterclaims. What if plaintiff recovers substantially less than the damages claimed? In D.A.S. v. Nova Casualty Company (2007), a New York court explained that to determine whether a party has prevailed one must consider “the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope . . . [and] the court should also compare the actual amount sought by the plaintiff, as stated in the pleadings, with the actual recovery.” The D.A.S. court held that a party who recovered only $312,000 on a claim of $716,000 could not recover its attorneys’ fees, for it had not “substantially” prevailed. In Chapman v. Engel (2007), an Illinois court returned the plaintiff’s earnest money in a failed real estate purchase, but refused to hold that either party had defaulted and therefore declined to award attorneys’ fees. In other cases, there is the problem of a court awarding fees but reducing them based on its perception (perhaps unstated) that counsel’s hourly rates are too high.

What hints can we glean to improve our attorneys’ fees boilerplate?

Consider including a definition of “prevailing party.” State that when making a fee award the court may consider the reasonableness of the time spent on the case but not the hourly rates, so long as they are commensurate with those of local attorneys possessing similar expertise and credentials. Perhaps provide for a streamlined arbitration to determine which party has prevailed and to make the fee award.

As a final example, consider integration clauses. The laws of several states, including Illinois and New York, provide that an integration clause will not bar a party from introducing evidence to establish fraud in the inducement. But there are limits to this rule that provide guidance for drafting. Courts have held that a claim for fraud in the inducement cannot survive where (1) there is a provision in the contract disclaiming reliance upon specified representations not contained in the contract; (2) the alleged fraudulent statements are inconsistent with specific statements in the contract; or (3) the terms of the integration clause itself were the subject of specific negotiations. Include language in your integration clause that renders it more likely to be enforced despite a claim for fraudulent inducement.

These are only a few examples of boilerplate provisions whose interpretation over the years, and in different jurisdictions, has produced varying results. Just as equitable doctrines have arisen to avoid the harshness of mechanically applying substantive provisions, so too have courts given boilerplate provisions meanings that may not precisely match the written word. It is important when incorporating boilerplate provisions to stay informed about changes in their interpretation and potential differences in how courts apply “standard” language.

Make it a habit to periodically review the interpretation and enforceability of your boilerplate—a little expense incurred up front can improve your contracts and potentially avoid a world of problems down the road.