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Force majeure, assignment and novation - best of boilerplate

When reviewing or negotiating a contract, Maureen Kelly provides some compelling reasons to pay attention to the boilerplate terms at the end of the contract.

“Boilerplate” is a term used to describe a collection of provisions which are common to most contracts. Boilerplate terms relate to how the contract will operate and be managed and include clauses dealing with: assignment, notices, variation, entire agreement force majeure and law and jurisdiction.

Whilst reviewing a contract, your main focus is rightly on the terms relating to the activities which the parties will undertake under the contract and the allocation of risk. However, you neglect the boilerplate terms at your peril.

There is a tendency to regard the boilerplate terms as unimportant, or as “the legal bit” to be left to the lawyers, with which the commercial parties need not concern themselves.

Maureen Kelly highlights a few key boilerplate terms and explains how they are important to your business and what factors you need to consider when reviewing them.

Force majeure

“Force majeure” is not a phrase which features widely in conversation outside the world of contract.

The law provides that a contract terminates when a later event makes the obligations impossible or radically different to perform. For example, if you agree that a painter will repaint your shed for £50 but the shed blows down in a storm before work begins, the storm has made the repainting impossible and the contract with the painter terminates. This law is called the doctrine of frustration.

The scope of frustration is uncertain and the effect is always termination. You bring greater certainty and flexibility to your contract in the event of unforeseen circumstances by including a force majeure clause. Force majeure clauses were in the limelight in Europe in 2010 when a volcanic eruption in Iceland led to an air-traffic ban. Those who had a well-drafted force majeure clause were not in breach of their contractual promises to the extent they could not fulfil them due to the ban e.g. suppliers who failed to ship goods on time as a result of the eruption and consequent ban.

The term “force majeure” is not a term which is defined by law. In order to provide in your contract for force majeure, you must first define the term. The definitions may include a specific list of events (e.g. storm, war, acts of terrorism). Instead or in addition, the definition may require that the events be: beyond (reasonable) control; not reasonably foreseeable; and not caused by the party relying on the clause.

The clause should also define the effect of force majeure on the parties. Effects to consider are: one or both parties released from obligations; obligations suspended until the force majeure ceases, possibly subject to a longstop; the ability to terminate after a period and provision for payment of expenses, contract prices and refunds.

Finally, the clause should include a procedure for relying on it, such as a specified period within which notice must be given.

The party tasked with undertaking most of the activity under the contract will be keen to have a force majeure clause which is as wide as possible. Conversely if one party to the contract has very little to do under the contract, for example a licensor who is simply receiving licence payment under the contract, that party will be keen to narrow the scope of the force majeure clause as much as possible. The key to negotiating such a clause is therefore first to identify whether you are a party responsible for extensive activity under the contract or not.

The party who is to receive payment under the contract is well advised to include a provision which stipulates that lack of funds shall not constitute force majeure.

Assignment and novation

This clause is key to the growth of your company.

“Assignment” is the term used for the transfer of rights under a contract. Parties are free to assign their rights unless the contract involves a personal relationship or assignment is prohibited by the terms of the contract.

Although you will read in contracts of rights and obligations being assigned in contracts, strictly speaking, obligations are “transferred”, not assigned. Obligations under a contract may only be transferred if the other party to the contract agrees.

“Novation” is the technique used when a party wants to transfer rights and obligations to a new party. This requires a three-way agreement between the two original parties to the contract and the new party. A novation agreement extinguishes the original contract and replaces it with a new contract.

There are frequently two conflicting interests at play in this clause. On the one hand parties may have chosen to contract with each other precisely because of the identity of the specific individual or company with which they are contracting. By way of example, when you enter into a contract to buy IT services this is usually on the basis of having carried out some research to identify the firm which has the right expertise and with whom you feel you can work. You may not want a provision in the contract which allows the company to simply transfer the engagement to another firm.

On the other hand, a company which enters into a contract which prohibits it from assigning its rights under the agreement and which does not permit it to transfer its obligations to anyone else could be in difficulties in the future. For example, if it subsequently wishes to transfer the part of its business to which this contract relates to another legal entity, whether as part of an internal reorganisation or more seriously as a way of exiting part of the business and realising value for the shareholders.

If in contract negotiations you state that you wish to be free to assign your rights under the contract to a third party, the chances are that the other parties around the table will only be willing to do so if they too enjoy the same freedom. It is necessary to question in each individual case whether this sort of symmetry really is justifiable.

The two extreme positions on assignment are: complete freedom to assign and transfer and a complete prohibition on assignment and transfer at the other end of the spectrum. Positions in between those two extremes include permitting a party to assign to its affiliates (this covers the risk mentioned above in relation to internal reorganisations); and assignment only with the consent of the other party, not to be unreasonably withheld (this naturally introduces a degree of uncertainty as to what is reasonable).

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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