Don’t Place Blind Reliance On Boilerplate Contract Provisions

After putting all of the specific deal points into a new contract, you are just about finished.  All you have to do now is add in the “Miscellaneous” section with all of your boilerplate provisions like force majeure, choice of law and a few others.  You have drafted so many contracts for so many years that you do not even know where some of these boilerplate provisions came from, let alone remember all of the implications of each.  Even more dangerous, there may be some boilerplate provisions on which you rely that may not be as enforceable as you think.  Take, for example, a standard clause appearing in many contracts stating the following:  “Nothing in this Agreement is intended to create any enforceable right in favor of any non-party to this Agreement.”

For sure there is no downside to including such a clause in a contract.  Indeed, Professor Corbin, one of the preeminent authorities on contract law has said, “If two contracting parties expressly provide that some third party who will be benefited by performance shall have no legally enforceable right, the courts should effectuate the expressed intent by denying the party any direct remedy.” (Corbin on Contracts)

As with many things in life however, blindly assuming can be a dangerous thing, as it may lead to a false sense of security.  Indeed, the Steward Family Hospital recently learned this lesson the hard way after a decision by the United States Bankruptcy Court in In re Quincy Medical Center, Inc.  The case began with Steward agreeing to purchase the assets of the Quincy Medical Center (QMC).  In the Asset Purchase Agreement (APA) there was a provision expressly stating that the APA did not bestow any rights on any third party.  Notwithstanding this general provision however, the APA also stated that Steward “shall be liable to any [QMC employee] terminated at or following the closing.”

Based on this language and the well-established principle that if there is a conflict between two provisions in an agreement, the more specific clause shall prevail over the more general one, the Bankruptcy Court held that Steward was liable to two QMC employees that were terminated at the time of closing.  Accordingly, while Steward relied on the general provision in the APA that it would not be liable to third parties as a result of its purchase of QMC’s assets, Steward ended up paying two third-parties almost $400,000 in damages for severance and lost wages even though Steward had never employed them.

While using boilerplate provisions in contracts is not going to go away, it is important for in-house counsel not to place blind reliance on them nor to ignore their interplay with any of the more specific provisions that might be included in the agreement.  As Steward Family Hospital just learned, doing so can be quite expensive.

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