Contracts. The Boilerplate Matters Too

You’re reading through a contract. Maybe you are downloading it for free off of some internet website to use for your business, or maybe you’re about to sign something with a vendor. Or maybe something completely different. Whatever the reason, you want to be responsible. Get things in writing. Be taken seriously. So, you are reviewing the contract before using it or signing it.

Great!

Well, there are all these sections near the end that seem like they’re the SAME for every contract. Your eyes start glazing over when you get to these because you are pretty sure that they don’t matter. You also know that people generally call them “boilerplate.”

Let’s take a look at how some of these so-called “boilerplate” provisions can be used to screw you either intentionally or unintentionally.

1. Venue/Jurisdiction/Choice of Law: A clause of many names. What does this mean? It picks the preference for where any disputes will be argued. So, you download a contract from the internet that was written by a California attorney, and the choice here is for California, that means you are telling people that if there is an argument…you would prefer to have that argument settled in California. If you live in Washington, and your company is in Washington, that does not make much sense. Plus, that other state’s laws may not be favorable to you and could cause you to incur more costs in the event of a dispute!
2. Assignment: This allows someone else to take over the contract. So, let’s say the company is bought by someone else, this provision can allow those people to take over without you being notified or without you being given the opportunity to renegotiate the terms. In the reverse, if there is a provision stopping you from assigning the contract, it may create a hassle for you if you were to take on co-founders or investors. You don’t want to lose contracts or have to go through a process of renegotiating your contracts because you rebranded or restructured your company.
3. Capital Contributions/Distributions: This is typically found in Operating Agreements or Shareholders Agreements. It governs when and if the Founders or Members need to pony up more cash to help fund the business. The flipside — the distributions, governs when and if the Founders or Members are required to distribute cash to the Members/Shareholders. We see a lot of people ignore this provision, but it can be used for or against you. It can be used as a way to dilute members and shareholders (if you don’t pony up cash when you’re required to, your shares can be diluted). It can also be used by creditors (people who a Member or Shareholder may owe money to) to pull cash out of the business. It can be used to screw over potential creditors by forcing them to contribute cash into the business.
4. Indemnification: Another way to describe this clause is, “If something goes wrong, who covers the bill?” Many times it makes sense for one party to be indemnified against the other because that party being indemnified bears the majority of the risk in the relationship. However, sometimes it makes more sense to have some limited mutual indemnity. This is a section of the contract where you can be taking on risk and not even realize it!

Long story short, just because it seems like boring, legalese to you, doesn’t mean that it isn’t important. Don’t screw yourself over just because you don’t want to read the fine print or because you don’t want to hire an attorney to set you up with contracts that make sense to you.