Standard Form Agreements – What are they and what is often in them?

Standard Form Agreements – What are they and what is often in them?  
Starting a business can be daunting and require a lot of time and energy.  One of the last things a start-up may want to waste time on is drafting a standard form agreement, or even an agreement at all. 
 
A standard form agreement (“SFA”) can be either for services or widgets.  The agreement is in essence a template agreement that has been drafted once with certain areas left blank, such as the effective date for example, or with alternatives that can be selected depending on the circumstances and the same agreement can be used for several different transactions.  Think about how much effort would be consumed drafting a new form for every time your new start-up agreed to provide services to another company?  Having an SFA can greatly reduce the amount of time and money spent on drafting.
 
Often, people will try draft these agreements themselves by taking clauses from templates available on the internet.  One may conclude that these clauses are in every contract and they should be in yours.  But those templates are not specific to your business and including several clauses from different templates may result in those clauses contradicting one another.  Further, the clauses that you have included may not actually reflect your intentions and the start-up may be left vulnerable.
 
Depending on the nature of the start-up, an SFA can be a good starting point for negotiations.  It is not uncommon for two parties wanting to enter into a contract to exchange several drafts with markups, eventually leading to the executable document.  Additionally, if the other party provides you with their SFA, you will be able to contrast that against your own to determine where it is different and if it is agreeable. 
 
Below is a discussion about several clauses that are often included in SFAs.  Often these clauses can be found on templates on the internet and one may be inclined to include them without really understanding what the clauses are or how they operate.
 
Terms, Payment, Etc.
SFAs will often include the term of the agreement, price, payment, and penalties.  An SFA provides a great starting point for any negotiations regarding the aforementioned.  Including term, price, payment, and penalties provides an anchoring point if any of these are negotiated.  Further, it establishes a more efficient communication of the expectations of the party providing the SFA, which can have a better result than beginning the negotiation low balling each other.
 
The term can be renewed automatically, can trigger the parties to negotiate at a certain date, or simply expire on a certain date.  The SFA can also spell out the expectations of the parties in regard to payments, late payments, interest, and any other penalties.  These provisions must be drafted carefully to ensure none of the provisions contradict one another.
 
Representations and Warranties
Familiar with representations and warranties? Without sufficient knowledge of what these are, a start-up may be at risk.  Representations are statements of a party made before or at the time of entering into a contract that may form part of the contract if so intended, but if the representation is not part of the contract and is inaccurate, it could result in rescission of the contract.[1]  Further, depending on the nature of the representation, it could give rise to damages if it was fraudulent or negligent.[2]  Warranties can be statements within the contract, or can be implied into contracts, that are collateral to the main purpose of the contract and can give rise to damages if breached.[3]
 
Templates found online may attempt to limit representations and warranties.  However, if they are not specific to the start-up, attempting to limit them may be redundant or not actually place a limit on any representations and warranties.  A proper understating of what representations and warranties are and how they operate will better serve the start-up.  A lawyer will be able to assist the company in the drafting of these clauses.   
 
Liability and Indemnification
A good SFA will accurately describe any limitations on liability and whether either party will indemnify the other in specific circumstances. These clauses can be difficult to draft, and the advice of a lawyer may more accurately reflect the drafting party’s intentions.  Further, a well drafted clause will demonstrate to the other party what the expectations are regarding liability and it will provide a good starting point for any negotiations regarding limitations on liability, if the SFA is not “take it or leave it”.  The parties can also choose to limit the penalties in certain circumstances.  For example, the parties may agree that to any extent a party is liable for damages, those damages are limited to the amount paid for the services.
 
Indemnity clauses can also be very difficult to draft depending on the situation. Indemnify means to compensate for harm or loss which is the legal consequence of an act or forbearance on the part of one of the parties or some third person.[4]  In essence, the party indemnifying is assuming and guaranteeing to reimburse or compensate the indemnified party for any loss or harm that falls within the circumstances agreed to.[5]  The historic use of indemnity clauses has resulted in specific terminology to accurately describe which party is indemnifying the other and in what circumstances. Again, discussing indemnification clauses with a legal professional can help ensure that the clause in your SFA meets your expectations.  Taking clauses from the internet could result in accidentally switching the indemnifying and indemnified parties due to the complex language that is often found in these clauses.
 
Force Majeure Clause
Another common clause is a “force majeure” clause.  Force Majeure clauses generally operate to discharge a contracting party when “a supervening, sometimes supernatural, event” beyond the control of either party makes performing the contract impossible.[6]  Proper drafting of these clauses can outline the situations which would frustrate the contract and possibly relieve the party who is suffering from the force majeure event of their duties under the contract, or suspend them until the effects of the event are no longer causing issues.  Every contract may not need to contain a force majeure clause, so you may want to discuss with a lawyer the particular situation and whether it is necessary.
 
Dispute Resolution
One of the most devastating things that could happen to a start-up is litigation.  It can be a huge drain on capital and time which could be better spent on advancing the start-up.  One possible way to reduce the amount of time and money spent is to include a dispute resolution clause in the SFA.  The mechanisms can include how disputes are governed, what triggers a dispute, what the process is, who will be the mediator or arbitrator, where the meetings will occur, among others.  Hopefully the clause will lead to a faster resolution than the traditional court process and possibly save the business relationship from degrading to a point that is beyond repair. 
 
Another clause that is often included in standard form agreements is a clause describing the governing law if there is a dispute.  If you are dealing with parties that are located in other jurisdictions, this may be a clause you want to include in order to ensure the dispute will take place in your home jurisdiction.  Further, some jurisdictions costs are assigned to the “loser” of the dispute, which is good news for the start-up if it comes out on the winning side.  Additionally, some jurisdictions allow for the parties to agree to waive their rights to a jury trial which is also a benefit as they can be quicker and cheaper.[7]
 
Confidentiality Clauses
Confidentiality clauses are frequently found in SFAs.  This is especially true when the sharing of sensitive or personal information is required.  Several things may be overlooked in drafting these clauses such as how long they should last, what is covered under the clause, what occurs if there is a breach of the clause, etc.  Compiling a clause from different templates off the internet can result in a piecemeal clause that may contradict itself, the law, or place the parties in a place with impossible obligations to fulfil.
 
In relation to confidentiality clauses, a clause can be drafted to place an obligation on a party using your device or software to not reverse engineer your design.  Again, consult with a legal professional to ascertain how to accurately incorporate this into your standard form agreement to protect your device or software.
 
Conclusion
An SFA can be a useful tool for any start-up that needs to either buy or sell services or widgets.  Although initially there are some costs associated in having an SFA drafted, there are many advantages to having a well drafted SFA.  This is a small investment compared to costs of the issues that can arise from a poorly drafted SFA.  The internet can be a wonderful place for information but trying to decide what clauses to copy and paste might not be the best idea when a person is unsure what the clauses mean or how they are intended to be used.  The information above may shed some light on how these typical clauses are typically used and in what scenarios.  When in doubt, legal advice should be sought to ensure the start-up has what it needs to achieve the desired result.
 
Sheldon McDonald is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.

[1] John Yogis et al, Barron’s Canadian Law Dictionary, (Hauppuge, NY: Barron’s Educational Series, 2009) (updated as necessary) sub verbo “representations”.
[2] Ibid.
[3] Ibid sub verbo “warranties”.
[4] Axa Pacific Insurance Co. v Premium Insurance Co., 2003 ABQB 426 at para 11.
[5] Yogis, supra note 1, sub verbo “Indemnity”.
[6] Atlantic Paper Stock Ltd v St. Anne-Nackawic Pulp & Paper Co., [1975] 1 SCR 580 at 584, 10 NBR (2d) 513 (SCC).
[7]  A trial without a jury can proceed quicker because there is less time used on selecting the jury, informing the jury of their duties, and familiarizing the jury with the law.  Additionally, if more time is spent in the court room, the costs will also increase.