Batten Down the Boilerplate: Drafting Your Contracts in Uncertain Times
Any contract worth its salt will contain a substantial amount of “boilerplate”: those provisions at the back that seem to go on in endless succession, reviewed only by the lawyers tasked with proofreading, but rarely anyone else. The etymology of the phrase is actually quite interesting. Boilerplate is a type of rolled steel used primarily for the manufacture of water boilers. But the coinage of the term, used to refer to repetitive or unoriginal writing, arises from another use of that rolled steel, newspaper plates. There was a time when newspapers were printed from steel printing plates manufactured from set type. Just as they do today, small local newspapers without the budget for too many reporters of their own, would purchase content in bulk to fill their pages, often with advertising built in. In the pre-digital age the bulk content didn’t arrive as a zip file. Instead it arrived in steel plates ready for the press. Over time the prepackaged material was derogatorily called “boilerplate” to distinguish it from the original local content.
These days boilerplate is ubiquitous, annoying and generally disregarded in our personal lives when we acquire credit cards, buy, lease or rent cars, purchase apps or other technology products or invest. The same is true in business when we manufacture and sell products, deliver services, buy and sell businesses or lease factories and offices. Who can blame us for skipping the boilerplate when it often contains terms with only historical significance such as “police actions,” “wage and price controls,” or “government sanctions.” The last police action was Korea in the early 1950s. Wage and price controls go back to the Nixon administration in the 60s. As for government sanctions, we haven’t heard much about those since…last week.
And that is the point. In the past 18 months we have witnessed the passage of the most comprehensive tax legislation since 1986, the imposition of sanctions on Russia, Russian entities and citizens, Iran and you might argue on Chinese companies (in the case of ZTE). Multilateral trade agreements such as NAFTA are the subject of renegotiation or possibly extinction. Tariffs have been imposed on steel and aluminum by the US followed by reciprocal tariff actions by other countries impacting a whole assortment of products. And inflation, which has been tame for decades, now appears to be heating up with consequential price and interest rate increases. The years following the recession of 2007 were ones of slow, gradual, growth with cheap money, stable prices and steady progress. The next decade is shaping up to be a time of upheaval and uncertainty.
How will this boilerplate have an impact? Here is a brief example: a typical boilerplate provision will cover “force majeure.” It addresses the notion that the contract parties should not be held responsible for dramatic external events which upset the balance of the bargain the parties have struck. Many agreements will contain this boilerplate force majeure provision which excludes responsibility for failure to perform due to unforeseen circumstances such as acts of god, war, riots or shortages of transportation. In some agreements the list of causes can be quite extensive. But the typical force majeure provision only addresses the impact upon timely delivery. For instance, allowing the affected party to “…defer the performance date for a period equal to the time of such delay…” The boilerplate does not address unforeseen external circumstances which radically change the costs but not the timing of performance.
Consider the situation of an intermediary who sells to a US end user steel manufactured goods it purchases from a foreign supplier. The contract between the purchaser and the intermediary and the corresponding contract between the intermediary and the foreign supplier will include terms for place of delivery, risk of loss and price. Often these terms will reference definitions in the Uniform Commercial Code or Incoterms. These terms precisely define which party to the transaction is obligated to pay for insurance, freight or custom duties. Incoterm Ex Works, popular among suppliers, imposes all of the responsibility for loading, transporting, shipping and unloading, including all taxes and tariffs upon the intermediary as buyer. Incoterm Delivered At Place (DAP), popular among end users, imposes all of the obligations of loading, shipping, unloading, tariffs and taxes upon the intermediary as seller. Significant changes in the assumptions of the contract are not addressed. If following the confirmation of the order, a 25% tariff on imported steel is imposed, the foreign supplier delivering the goods to Ex Works is unaffected and the end user receiving the goods DAP is unaffected. The intermediary has incurred an additional 25% cost of goods with no recourse to terminate or modify the contract or otherwise shift the loss other than appealing to the “good will” of its contract parties.
The goal of contract drafting is to address the sharing of risks and rewards before the risks occur or the rewards are realized. We have all learned from experience that it is much easier to negotiate how an imaginary pie of rewards will be sliced or hypothetical risks allocated than it is to agree on the division of proceeds after the lottery ticket wins or the assessment of costs after the barn has burned to the ground and the horse has run off. When the pie inevitably shrinks or expands because of some new tariff or the repeal of an old one we will all be retreating to the boilerplate to determine whose slice has diminished or expanded. But that is not the time for these considerations. The time to check the boilerplate is now, before the inevitable occurs, while business partners can still have reasoned conversations about the fair impact of future events. The time to harden the boilerplate is now, uncertainty will arrive soon enough.