Boilerplate clauses in transaction agreements under Polish law | In Principle

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Boilerplate clauses in transaction agreements under Polish law

Not every solution that works in a contract under foreign law is equally effective or justified when the contract is governed by Polish law.

One of the consequences of globalisation of trade, involving players from various countries, is copying of solutions from foreign legal systems. But often it happens that an approach that works well in an agreement governed by, say, English law, does not serve the same purpose or offer the same justification if the agreement is governed by Polish law—and vice versa.

In practice, clearly, the main direction for adoption of such legal solutions is when foreign investors present in Poland and entering into agreements governed by Polish law seek (through their legal advisers) to use solutions familiar to them from other jurisdictions. This is particularly noticeable in the case of transactional documents concerning shares in Polish companies or assets located in Poland.

In this context, it is worth exploring the issue of the use of standard contract terms, often referred to as “boilerplate clauses.” The term derives from the nameplates on steam boilers, containing information about their manufacturers. By the early 20th century, the term was being used to refer to print materials, such as advertisements, reproduced in mass quantities from steel plates rather than movable lead type. Thus, in legal usage, boilerplate clauses are standard provisions reused more or less mechanically from contract to contract without being individually negotiated and drafted.

Provisions of this type derive from common-law systems, a notable feature of which is (in very general terms) that the contract as entered into by the parties sets forth the complete set of rights and obligations between the parties (with a few exceptions provided by law). Thus if the parties do not expressly address an issue in the terms of the contract, that issue does not form a part of their contractual relationship. This is a very different approach than in the legal systems of Continental European countries, such as Poland, where “off-the-rack” codified legal solutions apply. Thus, under Polish law, Civil Code Art. 56 provides that the effects of a legal act (such as a contract between the parties) are determined not only by the wording of the act itself, but also by statutory regulations, principles of social coexistence and established custom. Therefore, under Polish law, the overall circumstances, including codified rules and so forth—and not only the wording of the contract itself—form part of the contractual relationship between the parties.

This characteristic feature of contracts in common-law systems means in practice that every agreement should exhaustively address the rights and obligations of the parties. Therefore, apart from issues that are individually negotiated for the purposes of the specific transaction, contracts include a certain number of standard provisions governing miscellaneous secondary issues.

In practice, such provisions are typically drawn from a repository of existing clauses or earlier contracts. Moreover, unlike the provisions that go to the essence of the contract, little attention may be paid to the boilerplate clauses when entering into the contract. This may result in lesser or greater oversights or inconsistencies in the terminology used in the contract, or in extreme cases may even defeat the true intention of the parties reflected in the essential, individually negotiated terms.

With globalisation, boilerplate clauses are more and more often encountered in contracts which the parties agree are to be governed by Polish law. The most common boilerplate language involves clauses on such issues as force majeure, severability, confidentiality, and assignability. As is clear from the names of such clauses, they often overlap to a large degree with comparable provisions of the Civil Code, and indeed they often simply repeat the language of the code.

Sometimes clauses originally drafted to the advantage of the other side of the transaction are used without careful consideration, resulting in modification of statutory regulations—for example, selection of the court with jurisdiction to resolve disputes, when the seller proposes that it should be the court proper for the buyer, which effectively excludes application of Art. 27 and 33 of the Polish Civil Procedure Code and vests jurisdiction in that court to resolve any disputes involving liability for defects in the subject matter of the transaction.

More often, however, the boilerplate provisions may prove ineffective, or may exert an effect that is the opposite of what was intended by the parties.

The discussion below is devoted to three examples of boilerplate clauses which are often encountered in agreements governed by Polish law and which may lead to such unintended consequences.

Merger clause

The essence of a merger clause (also known as an “integration clause” or “entire agreement clause”) is the parties’ statement that the contract they are concluding sets forth the entire agreement of the parties with respect to the subject matter of the contract and supersedes any and all previous agreements, understandings, etc. between the parties with respect to the same subject matter. For example, if the parties previously entered into a letter of intent concerning the transaction, inclusion of a merger clause in the final agreement demonstrates their intention to repeal the letter of intent. The purpose is to avoid any doubts about what is included in the entirety of the rights and obligations between the parties to the final agreement.

In practice, however, the parties sometimes state in the final agreement that it supersedes “all prior agreements between the parties.” The failure to specify the nature of the prior agreements could mean—following a linguistic interpretation—that the provision refers to all previous contractual relationships between the parties of any kind, regardless of the subject matter.

Consider, for example, a case where an individual shareholder of a company is a party to an agreement on sale of his shares, and undertakes in the agreement that he will not conduct activity competitive with the company and will be liable in damages for breach of this non-competition undertaking. Subsequently, the same party, serving as a member of the management board of the company that was the subject of the share sale agreement, concludes a separate non-competition agreement which includes a merger clause, but the sanction for violation of the non-competition undertaking differs from that included in the previous agreement (for example, providing only for a contractual penalty instead of damages). This could raise doubts whether the parties inadvertently modified the scope of the manager’s potential liability. This is because the subsequent agreement, stated to constitute the entire agreement of the parties on the issue of liability for violation of the prohibition on competition, modifies the scope of such liability by repealing the provisions of the previous agreement (assuming that the parties to both agreements are the same).

In effect, the subsequent modification of the manager’s contractual liability may not accurately reflect the true intention of the parties.

Insolvency clause

Provisions of this kind typically give a party the right to terminate the contract in the event of the insolvency or bankruptcy of the other party. But if the agreement is governed by Polish law, it should be borne in mind that under Art. 83 of the Bankruptcy & Recovery Law, contractual clauses providing for modification or termination of a legal relationship to which the debtor is a party in the event of declaration of the debtor’s bankruptcy are invalid. Thus a provision of this type in an agreement governed by Polish law may not achieve the result intended by the parties.

Severability clause

An example of a clause that basically just repeats the provisions of a statute, and in this sense constitutes naturalia negotii—a non-essential part of the contract—is the severability clause. Its function is to protect the parties if a court or other competent authority finds that any provision of the agreement is invalid or ineffective. Typically a severability clause provides that such a finding shall not affect the other provisions of the agreement, but the parties will negotiate to replace the invalid provision with another, valid provision. When such a clause is used in an agreement governed by Polish law, and the clause does not contain specific provisions concerning, for example, the procedure to be followed if a contractual provision is found to be invalid, it basically just repeats the rule set forth in Civil Code Art. 58 §3. Under that provision, if only part of a legal act is invalid, the act remains valid in other parts unless the circumstances indicate that the act would not have been made without the invalid provisions.

Whether the wording of particular boilerplate clauses in agreements governed by Polish law merely reiterates the substance of provisions of the Civil Code or other statutes, or may be regarded as an inventive means of governing the relations between the parties, it is clear that in the course of drafting the transaction documents such clauses should be given the attention they deserve. Otherwise, the parties may be exposed to the risk that the agreement they have concluded does not accurately reflect the arrangements and compromises they negotiated. This may open the way to entirely avoidable disputes over contract interpretation.

Maciej Szewczyk, Mergers & Acquisitions Practice, Wardyński & Partners