Frequently Overlooked, Potentially Impactful: Hot Issues About “Boilerplate”

New Year’s resolutions often include promises to learn more about areas that impact one’s life, even if the learning process is not nearly as fun as other resolutions. While the common perception is that boilerplate provisions are not even deserving of a quick review, much less some bona-fide “learning”, certain boilerplate provisions can have a significant impact on what legal documentation is actually enforced in the event a dispute occurs with respect to a transaction and the parties end up in litigation. As such, this edition of Dispatches from the Trenches addresses three areas of boilerplate which are frequently overlooked– namely amendment and waiver, merger and integration and severability provisions.

Amendment and Waiver

Lessors and other funders who spend time, effort and money creating solid lease documentation obviously have an incentive not to have those documents modified or amended without their intent. It is therefore common for such documents to contain boilerplate provisions addressing when and how modifications may occur. A fairly standard provision would read something like: “The parties may amend this lease only by a written agreement of the parties.”

However, there are additional considerations. For example, must the written agreement be something more formal and, for example, specifically identify itself as the amendment, or can the “written agreement” consist of a series of letters addressing the meaning of an ambiguous section of the agreement?

Another consideration is who must execute the amendment. Some agreements state that the amendment must be signed only by the party against whom enforcement is sought. Absent such a clause, it is likely that both parties must execute an amendment for it to be part of the contract.

A related concept that should be addressed is that of waiver. As used in this context, the term “waiver” is not meant to include jury trial and Article 2A waivers or certain other waivers that are common in lease documents. Rather, the term refers to the waiving of a provision in the agreement (which is very much the same as amending that provision out of the agreement). For example, if late fees are assessed when payment is not made timely and the lessor neglects to charge the lessee for such fees, the lessee may argue that the requirement to pay late fees has been waived and is no longer an enforceable part of the lease.

Again, boilerplate varies significantly on this issue. A simple provision may read: “No provision in this agreement may be waived except pursuant to a writing executed by the

party against whom the waiver is sought to be enforced.” Another way of expressing this concept is to further clarify that the failure or delay in exercising a right or remedy does not constitute a waiver.

Even if a lessor agrees to waive a provision, in a particular circumstance, it may not want to waive it in future circumstances. Going back to the earlier example, a lessor may elect not to collect a late fee once or twice but subsequently decide to collect late fees if the lessee is habitually late. A provision in the amendment/waiver section of an agreement which states that “a waiver made in one instance is effective only with respect to that instance and should not be construed as a waiver of any future occasion or against another person” is helpful to avoid any ambiguity.

Similarly, a waiver of some rights may be implied as a waiver of other rights and an agreement can avoid this risk by explicitly stating that a waiver of on right does not constitute a waiver of any other right or remedy.

It should also be noted that, no matter how carefully a document is drafted, there are always risks and there is some precedent for an argument that a party can orally waive a no waiver or amendment provision in a contract.

Merger and Integration

Merger and integration provisions work hand in hand with the Parole Evidence Rule. The basic purpose of that rule is to give legal effect to the contracting parties’ intention to make a writing the “final” expression of their agreement. Under the Parole Evidence Rule, the legal effect of a determination that an agreement is integrated is that evidence of actions prior to the agreement or evidence of contemporaneous agreements or negotiations are not admissible to contradict a term of the writing. Such evidence is, of course, admissible to interpret an otherwise ambiguous term.

The crucial issue as to whether an agreement is integrated is the parties’ intent that the writing be a final embodiment of their agreement. The more complete and formal a written agreement is, the more likely a court is to find that the parties intended it to be fully integrated. A boilerplate provision that properly describes the agreement as integrated and a complete embodiment of the parties’ intention may be dispositive with respect to the integration issue. A common merger/integration clause would read “This agreement constitutes the final agreement between the parties. It is the complete and exclusive expression of the parties’ agreement on the matters contained in this agreement. All prior and contemporaneous negotiations and agreements between the parties on the matters contained in this agreement are expressly merged into and superseded by this agreement.”

It should be noted that fraudulent inducement claims and similar claims that may prevent the contract from ever being valid and enforceable in the first place would not be affected by an integration or merger clause. However, a number of courts have recognized a limited exception where the allegedly defrauded party has specifically disclaimed in the contract the existence of, or reliance upon, the very representation as to which it now

claims to have been defrauded. See e.g. Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 310 (2nd Cir. 1993) and Mickinney v. Gannet Co., 660 F.Supp. 984 (D.N.M. 1981).

There are some additional considerations when drafting or reviewing the effectiveness of a merger/integration provision, each of which is outlined below.

1. Be sure all relevant contracts are included

As is often the case in equipment leasing transactions, there are sometimes multiple agreements that govern a particular transaction. Care should be taken to make sure that all of these agreements are included in the merger/integration clause that describes which documents are parts of the parties’ final expression of intent. One way of doing this is to use a defined term such as “Transaction Documents.”

Failure to carefully analyze this aspect of boilerplate may create some risk as to the enforceability of a “side letter” or other agreement that is not referenced anywhere in the main documentation containing the integration clause. This is something that should be watched carefully by transactional lawyers and something that can constitute an arrow in the quiver used by litigators.

2. Prior agreements v. Contemporaneous agreements

There is also sometimes a risk that a later agreement that contains an integration clause will be considered by a court to supersede an agreement previously entered into by the parties. Careful drafting of integration clauses that express and confirm the continuing force and effect of other agreements can address this issue.

Severability

Severability is an important concept in the event an agreement contains one or more obligations or rights that are deemed by the courts to be unenforceable. One way in which a court could handle a contract that contains an unenforceable provision would be to avoid an entire contract. This remedy is usually considered to be very harsh and courts often seek to strike or modify the offending provisions instead by using legal concepts like the “blue pencil rule” or the “rule of reasonableness.”

Lessors or other lenders can use severability provisions to help guarantee that courts will not invalidate the entire agreement. This type of provision basically clarifies the parties’ intent to remove an unenforceable provision and remain bound by the balance of their agreement. The basic severability provision would read as follows: “If any provision of this agreement is held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this agreement are not affected or impaired in any way.”

Certain types of provisions are more likely to raise public policy and other concerns which result in those provisions being illegal or unenforceable and agreements which contain such provisions must have a good severability provision. Examples of provisions which raise public policy concerns and that are common in leases include: (1) indemnity provisions; (2) Ipso Facto provisions; (3) a variety of provisions in guaranties; (4)

acceleration provisions; (5) provisions that set forth liquidated damages and penalties; (6) Cumulative remedy provisions; and (7) anti-assignment provisions.

Ken Weinberg has been involved in equipment leasing and finance transactions having an aggregate value well into the billions of dollars, including TRAC, First Amendment, FMV, service contract and other true lease structures; synthetic leases, leases intended as security, equipment finance agreements, and traditional loan transactions; progress payment, interim funding and construction financings; sublease and inventory structures; mixed goods and services transactions; vendor lease programs; assignments and syndications; warehouse and funding lines; and refinancings, back-leveraging, lease assignments, sales of interest and portfolio acquisitions.

Attorney Advertising. This document is not intended to be and is not considered to be legal advice. Transmission of this document is not intended to create, and receipt does not establish an attorney-client relationship. Prior results do not guarantee a similar outcome.