Some Important Information About Contracts and “Boilerplates”
Have you ever read towards the end of a contract where there seems like a lot of stuff that doesn’t have to do with what the contract is all about, but that the lawyers think should be there? Sometimes people call it “boilerplate.” Some people might think it is useless or standard wording. Really, although the general topics covered by such “boilerplate” are usually about the same, the specific wording and variations can make a huge difference—meaning, you should be careful that it fits your transaction.
In this blog I will talk about two such provisions, commonly labeled, first, “Entire Agreement” or “Integration Clause,” and second, “Parties In Interest” or “Successor and Assigns.”
Entire Agreement/Integration Clause
The purpose of this clause is to make the rule for what happens if later on in the future the parties dispute whether there is some important part of the deal not contained in the written contract. More precisely, the entire agreement/integration clause comes into play (if the contract has one) when the parties are in court arguing about the terms of the deal (or are arguing before a lawsuit about who they think will win if there is a lawsuit). In these disputes one side usually is happier with what the contract literally says, while the other is not so happy—either because they didn’t read and negotiate the draft contract carefully before they signed, or because they never imagined the set of circumstances that now give rise to the dispute. The consequences are whether the judge or jury will decide the case after only reading the contract, itself, or whether the judge or jury will also hear testimony about what the parties intended to be part of the deal even if it is not in the written contract.
As an aside (and this is a point that even some lawyers don’t seem to understand), if the contract contains a key word of provision that is just simply ambiguous, then the judge will always permit the parties to testify about what that term was supposed to mean. That’s because the goal of the law is to enforce the contract, but if upon reading the contract you just can’t tell what the damn thing means, you need to get testimony from the parties about what they were trying to say. And, of course, they might have totally different stories about what they intended, and the judge or jury will have to decide whose version is more credible. And this will happen regardless of whether there is an entire agreement/integration clause in the contract or not.
The integration clause really comes into play when one side says that there were discussions and understandings that didn’t find their way into the written contract, but were still part of the deal. A typical integration clause says something like “this contract expresses the entire understanding of the parties with respect to the transactions described herein.” So if the contract contains such a clause, and one side later on says there was another aspect of the deal that was agreed upon but not contained in the contract (e.g., that if delivery was late the buyer would get a discount of 10% for each week of delay), the other side will point to the integration clause and argue it forbids any testimony that any such further agreement ever existed—i.e., the other side will point out that the “entire agreement” clause point blank says the contract expresses the entire understanding of the parties as to the subject of the contract, so there can’t be any other important terms not found in the written contract.
At this point the law becomes highly technical and looks at the wording of the “entire agreement” clause, and considers that together with the entire look and feel of the contract, to decide if the contract is “fully integrated” or just “integrated.” If it is integrated, but not fully integrated, testimony about additional consistent terms is permitted—so if a 10% discount is not inconsistent with what is otherwise stated in the contract, the buyer would be able to try to convince the court or jury that the parties did agree to that discount for late delivery. The seller might say that’s baloney, and no such agreement was made. But at least the buyer would have a chance to convince the court or jury otherwise.
On the other hand, regardless of whether the contract is “fully integrated” or merely “integrated,” testimony that there was an understanding inconsistent with what the contract actually says is not permitted. So if the contract with a simple integration clause says “there shall be no discount for delays in delivery unless delivery is delayed by more than three weeks,” the buyer would not even be permitted to try to convince the court or jury that that the seller had actually agreed to a 10% discount for each week delivery was delayed starting from week one.
If the integration clause goes on to say (as some do) that neither party is relying on any sort of other understanding, oral or written, besides what is expressly contained in the contract, and says (as some do) that neither side will ever claim there ever was such an understanding, then the contract is almost certainly “fully integrated.”
So why aren’t all contracts “fully integrated”? I mean, why not make as sure as humanly possible that neither side will ever be able to try to convince a court or jury there was more to the deal than stated in the contract?
The answer is in most cases it is impossible to predict ahead of time which side will be benefitted most by a full integration clause. Deals come in all shapes and sizes with all sorts of different sorts of parties, young, old, rich, poor, sophisticated, stupid, and so forth. Sometimes it will seem like one side or the other is more likely to be benefitted by a full or strong integration clause—but then, damn, it turns out that one of the managers of that party did get the other side to agree orally to this or that consistent additional term, but just didn’t tell the lawyers so it didn’t make it into the 25-page contract. So, in practice, except in some contexts, the parties are often just content with a simple “boilerplate” integration clause that at least forbids any side saying later on that the real deal was something inconsistent with what the contract says.
Successors and Assigns/Parties In Interest
What happens if the individual you contract with dies before the contract is performed? Or what happens if the company you have a contract with sells all of its assets, including the contract, to another company before the contract is performed? Or what happens if you contract with a corporation because you trust its current owners, but along the way those owners change. The answer is, it depends, and it can depend on what the “successors and assigns” clause actually says, and sometimes one side or the other will have a real stake in the answer.
A typical (short) successors and assigns clause says something like: “This agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties.” Usually, in my view, this is too skimpy, even for “lean” agreements. More thought needs to be put into it.
First of all, who the heck are successors and assigns, anyway?
The answer is, if one of the parties to the contract is a human being, the term “successor” is misplaced. Humans don’t have “successors.” If a party to the contract dies before the contract has been fully performed, he or she has a personal representative of the estate (called “executor” in other states) and heirs. Corporations and certain other legal entities have “successors.” A successor of a corporation, e.g., is another corporation into which that corporation merges. Individual human beings do not “merge” into other human beings, except in science fiction movies.
Both individuals and legal entities can have “assigns.” An “assign” is a third party, not a party to the contract, to whom one of the party transfers any of that party’s rights or obligations under the contract. Sometimes contracts prohibit assignment without the consent of the other party. Sometimes contracts prohibit assignment of obligations but not rights. Sometimes the other way around. Sometimes drafters are not careful to distinguish between the assignment of rights or obligations.
Sometimes, also, the subject matter of the contract makes it clear what happens if one party dies. But often that is not the case, and the parties will want to think about that. Will the estate of the deceased (and heirs) of the deceased party be required to assume the obligations and be permitted to benefit from rights under the contract? Or not?
Sometimes contracts are made for the benefit of third parties who are not themselves a party to the contract. If so, the “parties-in-interest” clause should say who they are and what rights they have. If they are not a party, they can’t have obligations, but they can have rights (in other words, two of my friends can’t sign a contract, not signed by me, obligating me to mow their lawns). Many times neither party wants any third party to have rights under the contract. If so, the “parties-in-interest” clause should say so, usually with a sentence similar to “There is no intended third-party beneficiary under this Agreement and the undersigned parties are the only parties-in-interest.”
My point is that there are so many different possible variations of what the parties might really want, if they think carefully about it, that there really is no “boilerplate” successors and assigns clause. And on the other hand, sometimes the economics of the situation don’t justify getting bogged down on these details that probably—with emphasis on probably—won’t matter. But if something unexpected happens, and the attorney just went with “boilerplate,” his or her client might not like the outcome. And if the attorney peppers the client beforehand with “what if’s,” and the fee for writing the contract escalates, or complicates or tanks negotiations with the other party, his or her client might not like that, either. That is why the practiced of law is just that, a practice, not a science.