19Jun

Legalese: Standard Interpretive Boilerplate

“Legalese Schmegalese.” I first started reviewing contracts back in my days working with TIC Wyoming, Inc., a subsidiary of the Kiewitt  Corporation, reviewing large scale heavy industrial construction contracts for construction jobs such as oil refineries, natural gas compressor stations, and coal mine facilities.

I’ll be honest with you: my first impression of all the boilerplate legalese at the end of a contract was that it was totally unnecessary. I had the impression that these provisions were not ‘essential deal terms,’ and were drafted by some uptight committee of scholars.  This attitude is not uncommon amongst transactional attorneys – they are often concerned with ‘getting the deal done’ and making sure the ‘deal works.’

Since then, however, I have developed a different attitude. While the essence of the deal may be encapsulated in the other provisions of the document, subsequent dispute negotiations, arbitration, mediation, and litigation almost always involves the boilerplate language in one way or another.

Today I want to address one type of standard ‘legalese’ boilerplate found at the end of a contract: contract interpretation provisions.

These can be found in practically any type of agreement I draft for my oil and gas clients, such as:

  1. Commission Agreements;
  2. Purchase and Sale Agreements;
  3. Master Services Agreements;
  4. Confidentiality Agreements;
  5. Farmout Agreements;
  6. Participation Agreements;
  7. Exploration Agreements;
  8. Settlement Agreements;
  9. Surface Use Agreements;
  10. Etc.

Interpretive Boilerplate Clauses – What are they?

The short answer is that these provisions pigeon hole a court into interpreting the contract from one narrow and controlled viewpoint.  But why?  To understand, we must look at how courts interpret contracts without these boilerplate interpretive clauses.

Over the last few centuries, courts have developed a complex set of rules as to how contracts should be interpreted.  These rules are so numerous and complex that they often provide unforeseeable results. The general categories of interpretive mechanisms used by courts are:

  1. Holistic Interpretive Principles:
      1. Four Corners Rule
      2. Preference for Harmonization
      3. Avoid rendering any clause superfluous
      4. Read contemporaneous agreements together
  2. Cannons of Construction:
      1. Ejusdem generis
      2. Expresio unius est exclusio alterus
      3. Specific controls the general
      4. same words in different areas of same writing have same meaning
      5. Contra proferentem
      6. Etc. (there are literally hundreds of these canons of construction)
  3. Other Principles:
      1. More deference to literal language used, and technical meaning, when dealing with two sophisticated parties
      2. The meaning of contractual silence – material issue vs. nonmaterial issue
      3. The weight of punctuation vs. text
      4. Weight of construing terms as obligation vs. condition

I once saw a law review journal that aimed to categorize and summarize most of the canons of construction, grouped into “harmonizing” and “anti-harmonizing” canons.  It was 100’s of pages — these boilerplate interpretive clauses aim to harness the unforseeable aspects o these rules, and narrow the courts’ aim in a way the parties see fit.

The Common Interpretive Boilerplate Clauses

These clauses vary greatly in length and number, but here are several of the most common clauses I run into:

  1. Addendum Controls over Main Body. Landmen are typically quite familiar with this clause. Typically parties do not modify the contents of a form directly, but instead make their modifications by adding different or additional clauses in the addendum.  This interpretive clause lets the court know which section is to control in the event of a conflict.
  2. Headings Have No Meaning. Headings can drastically improve the readability of a lengthy contract by summarizing several sentences or even paragraphs into a short phrase that can both be remembered, and provide for searchability when flipping through the document.  However, these headings are not typically meant to have any real meaning apart from these purposes.  Therefore, this interpretive clause lets the court know that these words should not be read as contractual provisions, but merely as headings.
  3. Gender Neutral. Judges and juries generally do an excellent job at figuring out what the parties really meant in what they wrote.  However, attorneys are very good at picking apart the literal language used, and finding the way that language could best suit their client.  However, this interpretive clause aims to avoid this possibility where the contract has used gender-based wording.  For example, “If a Party fails to respond in writing, then he shall forfeit his right to Commission Based ORRI.”  This interpretive clause would ensure that both men and women will forfeit their rights, not just men like the clause actually states.
  4. Singular/Plural. Similar to the Gender Neutral clause explained above, parties often want to avoid the possibility that a party can avoid contractual liability on the basis that a contractual provision used only plural or singular nouns.  These arguments can become nuanced, and often are completely void of reality.  However, they can and do fuel legal arguments come disputes, and this can be avoided by inclusion of this clause.
  5. Mutual Drafting/Sophistication/Lawyer Review. Courts have created several rules as to whose favor the contract will be read.  For example, courts often “construe against the drafter,” which is supposedly fair because that party was in control of the terms.  But in Oil and Gas, typically both parties heavily negotiate all terms, and it is unfair to construe against one or the other on the basis of being a drafter.  Similarly, parties want to avoid contractual construction based on which party was more sophisticated, or which party was represented by more or less legal counsel.  This clause can aim to make it clear to the court that the parties were on equal footing, mutually drafted, and each had an opportunity to have their lawyer review the contents.
  6. Governing Law. While parties usually believe it would be obvious which set of laws would apply to their agreement, the area of law known as “conflict of law” certainly can and does make this the opposite from time to time.  This is especially true when dealing with multi-jurisdictional business relationships.  These clauses aim to control which set of laws will apply between the parties.

Example Set of Interpretive Boilerplate

Over the years, I have amassed an enormous quantity of forms that help me (1) quickly draft a contract for my clients, (2) ensure thorough and strongly crafted language is included in a timely manner, and (3) gather a reasoned basis in telling my adversaries whether their requested terms and provisions either are or are not common or acceptable in industry custom and practice.

This is merely one set of interpretive boilerplate I have seen:

  1. Sophistication/Representation. The parties are sophisticated and have been represented (or have had the opportunity to be represented) by their separate attorneys throughout the transactions contemplated by this Agreement in connection with the negotiation and drafting of this Agreement and any agreements and instruments executed in connection herewith. As a consequence, the parties do not intend that the presumptions of laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied to this Agreement or any document or instrument executed in connection herewith, and therefore waive their effects.
  2. Entire Agreement. This agreement represents the entire agreement between the Owners and Finder.  Any and all other discussions, negotiations, understandings, agreements, correspondence of ideas and the like, relating to the subject matter of this Agreement, are void.
  3. Governing Law. This Agreement is made subject to and shall be construed under the laws of the State of Texas, without giving effect to its principles or rules regarding conflicts of laws, and that the state and federal courts situated in the State of Texas shall have exclusive jurisdiction to resolve any disputes with respect to this Agreement or the Confidential Information with each Party irrevocably consenting to the jurisdiction thereof for any actions, suits or proceedings arising out of or relating to this Agreement or the Confidential Information, and each Party irrevocably waives its rights to jury trials with respect thereto.  In the event of any litigation hereunder, the prevailing Party shall be entitled to costs and reasonable attorney’s fees.
  4. Amendment. This Agreement may be amended or modified in whole or in part at any time
    only by an agreement in writing among the parties.
  5. Waivers. No waiver of any term or provision of this Agreement shall be binding unless
    executed in writing by the party entitled to the benefit thereof.
  6. Assignment. This Agreement may not be assigned by either Party without the prior written consent of the other party to this Agreement.
  7. Third Party Beneficiaries. This Agreement is for the sole benefit of the parties hereto
    and their respective successors and permitted assigns. Nothing herein shall give or be construed to give any person or entity, other than the parties hereto and their respective successors and permitted assigns, any legal or equitable rights hereunder.
  8. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provisions shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provisions were so excluded and shall be enforceable in accordance with its terms.
  9. Interpretation. No provision of this Agreement will be interpreted in favor of, or against, any of the parties hereto by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof.
  10. Titles & Headings. Titles and headings of sections of this Agreement are for convenience of
    reference only and shall not affect the construction of any provision of this Agreement.

Conclusion

Boilerplate may seem like meaningless legalese.  However, it often becomes quite meaningful when disputes arise between parties to the agreement.  There is practically no end to the various rules a court may apply in interpreting a contract.  Similarly, there are many variations of interpretive boilerplate clauses.

If you need an agreement drafted or negotiated, or need to develop a form for use in your business, don’t hesitate to shoot me an email or give me a call. I probably already have an example that can be quickly tailored to fit your individual needs.

Austin Brister
Austin assists clients in all aspects of mergers, acquisitions and divestitures of energy properties, from the first letter of intent through negotiations, closing and post-closing matters. He has assisted clients in a variety of deals including farmouts, purchase and sale transactions, joint exploration and development agreements, participation agreements, and more routine operational transactions such as joint operating agreements and master services agreements.
Austin Brister
© Copyright 2014, Austin W. Brister. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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