As a business owner, you grow your business with each contract you sign. Whether it’s closing a deal with a new client, finding a supplier, or entering a joint venture, the terms you agree to matter.

Often, the focus is on the scope, timetables, cost, and deliverables – the primary reasons you entered into the contract. It might seem like everything else is fine being included as “standard boilerplate” clauses.

Don’t let your enthusiasm to close the deal cause you to skip a careful review of all the terms, especially the “standard boilerplate” clauses.

The Myth of “Standard Terms”

Interestingly, the term “boilerplate” originally referred to steel plates used for steam boilers and was later adopted to describe reusable metal printing plates used in publishing in the late 19th century.

In the legal field, it was used to describe standard and repetitive contract terms applicable across different contracts and deals. “Boilerplate” clauses were stock clauses, routine, and seemingly insignificant in the overall context of the entire contract.

However, while these standard terms may not define the deliverables of the contract, they serve another crucial function, they allocate risk.

Limitation of Liability Clause: How to cap your financial exposure

Limitation of Liability clauses pre-define the extent of a party’s financial liability.

Why caps matter

Theoretically, the liability of a party in breach of a contract could be unlimited. Setting a cap on monetary damages sets a limit acceptable to both parties.

This cap is a fixed dollar amount that is often tied to specific terms of the contract itself, such as the total contract value or fees paid on the contract over a fixed period, such as in the last 12 months.

How do Consequential Damages Work?

The Consequential Damages Clause ties a party’s liability under a contract to actual damages incurred by the other party. The categories of damages are also defined and therefore limited. This means that not all types of damages are recoverable, only the ones listed.

In Canada, some of the more common consequential damages include:

• Lost profits

• Business interruptions

• Loss of use

• Loss of business opportunity

• Any revenue that may be tied to downstream contracts

Any other types of damages not included in the clause are considered excluded.

What is an Indemnity Clause and Why Does it Matter?

People often skim or skip over indemnity clauses entirely. The language is often dense and legalistic, and many people might assume they are unimportant.

However, if we break it down, ‘indemnity”, or “to indemnify” simply means what a party agrees to pay for. It is a promise to cover costs such as damages, potential losses, legal costs, even a party’s legal liability, should a triggering event occur.

Is your indemnity one-way or mutual? For example:

• One-Way: Party A shall indemnify and hold harmless Party B against all claims, damages and liabilities arising from Party A’s negligence, willful misconduct, or breach of this Agreement.

• Mutual: Each party shall indemnify and hold harmless the other party from all claims, losses, damages, liabilities and reasonable legal fees arising from the other party’s negligence, willful misconduct, or breach of this agreement.

In the first example, if Party A breaches the contract, Party A agrees to compensate Party B for all losses and damages that Party B might suffer as a result. In the second example, if either party breaches the contract, the party in breach will indemnify and pay for the other party’s  damages, losses, and costs.

It is therefore good practice to review any indemnity clauses in commercial contracts to determine what, if any, exposure you have. Be careful of broad language where you agree to indemnify for “any and all risks” because you might find yourself facing liability for risks you never agreed to cover.

How to ensure a Graceful Exit with a Termination Clause

Executing a contract can be an exciting time for a business. It can mean a new client or a new project, but the potential termination of a contract is just as important.

Maybe you find yourself unable to fulfill your obligations, or it’s your view that the other party is not delivering according to the terms agreed upon. You might decide that it’s better to cut your losses. The question is whether the termination clause of the contract allows for a graceful exit.

• Termination for Cause

If a party is in breach of their obligations under the contract, a termination for cause clause gives the other party the right to terminate the agreement.

Typically, the party in breach of a contract is given notice and a cure period within which they can remedy the breach. Failure to cure or remedy within the given period terminates the contract.

The resulting rights and liabilities are then spelled out for the parties – usually this means immediate termination of services, payment for services already rendered, and liability for damages incurred.

• Termination for Convenience

A termination for convenience means that one or both parties can simply choose not to continue with the contract. One or both parties can simply walk away, often on short notice, without having to give a reason for the termination.

This may seem like a clean break type of contract termination, particularly if the right is exercisable by both parties.

The reality is that one party choosing to terminate for convenience could potentially affect the other party’s long-term business plans, staffing decisions, costs, and investment decisions, particularly if there is no penalty to the party exiting an agreement for convenience.

It is therefore a good idea to check for any risks that could arise from terminating a contract before fulfillment.

• Who owns the products or deliverables?

• Do you retain any obligations to pay?

• Do you have any receivables?

• If there was a breach of the contract, is there a liability for the breach?

Dispute Resolution: Why Location Matters

This may seem like a no-brainer clause, but like most standard clauses, the impact is often felt when the contract you signed doesn’t turn out how you expected.

If there is a dispute over the contract, this is the clause that decides where and how you resolve the dispute, and by extension, the cost of the resolution.

Governing Law and Forum

The governing law determines what rules will apply to the dispute. The selection of forum determines where the resolution of the dispute will take place.

This is a particularly important clause for cross-border, interstate, or international agreements. A choice of one forum or venue immediately entails a higher cost to the party who is not native to that jurisdiction.

Court vs. Arbitration

A choice of proceedings determines which type of process and procedures take place, and whether or not you are locked into it without alternate options.

The parties can elect the manner and method of dispute resolution – whether by arbitration or through the courts of the selected jurisdiction.

One unspoken reality here is that while most people perceive arbitration or mediation to be faster and more efficient than going to court, arbitration can also be incredibly expensive compared to traditional court processes.

Either way, some things to examine include:

• Whether an arbitration decision is final and binding on all parties

• Whether the right to appeal exists for the chosen process

• If arbitration is selected, how the cost is distributed between the parties, given the additional costs to parties not located within the jurisdiction and forum of choice

• Whether, given the context of the terms of the contract,  one jurisdiction and choice of law is more favorable to you than the other

Takeaways: Pressure-test your boilerplate clauses before you sign

This article serves to highlight one overriding practical principle in contracts: align the risk clauses with the real business risk.

Before you sign, ask yourself these questions:

• Who bears the risk?

• Who is in the best position to control or manage the risk?

• Is the risk manageable?

• Should things go wrong, what are acceptable and unacceptable consequences?

As you can see, even though we may refer to these as standard terms or “boilerplate” clauses, it is good practice to review them just as carefully as you review the scope and deliverables of your agreement.

Contracts should match the reality of your situation and should not simply be copied without serious thought based on the (mistaken) assumption that these are just standard terms.

Don’t sign until you’re sure! Contact our team for a contract review today.

Boilerplate clauses became “standard” because of years of careful formulation by legal minds with the overriding idea of risk allocation. They are standard in the sense that most contracts contain some version or another of them as typical inclusions in a contract.

The specific terms of these standard clauses actually vary and are very negotiable. If you skip reviewing these standard terms, you might find yourself agreeing to taking on most, if not all, of the risks that might arise from your agreement. Your contract dispute might be over before it has even begun, and you signed yourself into holding the short end of the stick.

Before signing any agreement, a qualified lawyer can ensure that the terms, scope, and deliverables align with your business objectives. More importantly, they can review standard clauses, break down complex legal language, and identify any hidden risks.

Taking the time to do this upfront can prevent costly disputes later and help ensure that you and your business are legally and contractually protected.