Beware the Contractual ‘Boilerplate’

“Oh, that’s just boilerplate language.” I hear this comment far too often from business clients when negotiating contracts. Yes, I understand there are often provisions in contracts that look like lawyers creating vague and wordy provisions just for the sake of considering every conceivable risk known to humanity.

But I’m going to let you in on a dirty little secret . . . these legalese paragraphs typically have specific intentions behind them and can blindside your credit union if not proactively clarified and negotiated. As an example, consider the “force majeure” provision, which can postpone, extend or even excuse contractual performance due to acts reasonably beyond your control, such as government actions or pandemics. You probably see where I’m going with this in light of pervasive business disruption issues involving COVID-19.

There are plenty of form contracts used by credit unions in loan and other settings, many of which can be found online. A quick search for agreements used by three different credit unions revealed the following differentiated “force majeure” language:

• Force Majeure: If either party is unable to perform any of its obligations under the Agreement or to enjoy any of its benefits because of . . . actions or decrees of governmental bodies not the fault of the affected party . . . the Agreement shall be immediately suspended.
• Force Majeure: Except for your obligations to pay the Credit Union hereunder, neither party will be liable to the other party for any failure or delay in performance caused by reasons beyond its reasonable control, including . . . orders or other governmental directive . . .
• Force Majeure: The Credit Union shall not be responsible for liability, loss or damage of any kind resulting from any delay in the performance of or failure to perform its responsibilities hereunder due to causes beyond the Credit Union’s reasonable control.

Now, let’s turn attention to the COVID-19 pandemic, which will likely trigger the language of each version above, with potentially differing consequences:

• In the first version, both the credit union and its contractual counterpart are explicitly authorized to suspend all performance as a result of the government shutdown, including any payment obligations to the credit union.
• In the second version, there is generally no liability for any failure or delay of performance due to the government shutdown, although this would not extend to the counterpart’s payment obligations (which would technically still need to be made in a timely manner).
• In the third version, the language would not authorize any failure or delay of performance by the counterpart due to the government shutdown, including any payment obligations.

Keep in mind, with the second and third versions above, the counterpart may still be able point to other contractual provisions such as early termination and surrender – or equitable defenses such as impossibility of performance – to back out. In the context of commercial lease agreements, your particular state governor may have also implemented an executive order suspending any terminations or evictions on the basis of non-payment during the emergency period.

Long story short, talk to your preventive lawyer before taking any aggressive steps. What you initially may have dismissed as “boilerplate” language could have significant consequences as far as performance obligations in light of COVID-19.

Now, let’s expand this analysis to the remainder of the contract and outside the scope of pandemic events. Aside from differing versions of force majeure language, other “boilerplate” provisions may have you assuming unanticipated obligations and liabilities on behalf of your counterpart. You may also find that recourse against your counterpart in the event of a breach or default is severely limited . . . and further that you may even be required to indemnify your counterpart for some unexpected claim by a third party.

In order to minimize this contractual exposure, consider developing your own set of “pro credit union” contracts that can be tailored across multiple business functions and deployed proactively. Needless to say, the “boilerplate” provisions should be focused toward protecting your interests to avoid being blindsided and taking on unforeseen risks.

A process should also be developed to be flexible enough to accommodate having to react to the other side’s forms when necessary. Keep in mind, some business partners will demand their forms be used. That’s OK – you shouldn’t simply blow up relationships over initial stubbornness.

Instead, if this occurs, simply request and receive a copy of the contract in Word (or another editable) format. Reasonable business counterparts should expect that you will want a copy to redline if they demand use of their one-sided form. And if they refuse to do so, this should be seen as a red flag warranting consideration of other business partners (hint: If they are going to be this difficult in these initial negotiation stages, just imagine how problematic they could become if there are any issues with regard to contract performance).

Contract negotiation and development may not be the sexiest part of operating a credit union, but it is one of the most important. Preventive law practices like those discussed above can ensure “boilerplate” language in contracts is appropriately considered and addressed with prospective business counterparts well in advance of any potential landmines.

Chris Keefer is the Principal of preventive law practice Keefer Strategy in Portland, Ore.