Boilerplate clauses in English law governed contracts: common pitfalls and how to avoid them - Part 2

In Part 2 of this three-part series, we continue to explore key boilerplate clauses, their common pitfalls and how to develop best practices to avoid them (numbering continues from Part 1, which can be found here).

4. Third-Party Rights

The Contracts (Rights of Third Parties) Act 1999 created a significant exception to the doctrine of privity by allowing third parties to enforce contractual terms in certain circumstances. Boilerplate provisions address whether the Act applies and identify any intended third-party beneficiaries.

Common pitfalls

• Unintended third-party beneficiaries: Contracts that purport to confer benefits on identified third parties (e.g., group companies, successors or financiers) may inadvertently create enforceable rights unless the 1999 Act is expressly excluded.
• Blanket exclusions preventing intended benefits: Conversely, template exclusions of the 1999 Act may prevent enforcement by parties intended to have rights (e.g., third party beneficiaries of indemnity provisions).
• Inadequate identification of third parties: The Act requires third parties to be expressly identified by name, class, or description. Vague references may fail to confer enforceable rights.
• Overlooking variation restrictions: Section 2 of the Act restricts the parties' ability to vary or rescind the contract once a third party has relied on or assented to the term, unless the contract provides otherwise.

… and how to avoid them

• Conduct a deliberate analysis of whether third-party rights are intended and, if so, which third parties should benefit from which provisions.
• If excluding the Act, use clear language (e.g., "No person who is not a party to this agreement shall have any right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this agreement").
• If conferring third-party rights, identify beneficiaries with precision and specify which provisions they may enforce.
• Address the parties' ability to vary or rescind the contract without third-party consent where the Act applies.

5. Severability

Severability clauses provide that if any provision is held to be invalid, illegal, or unenforceable, the remaining provisions continue in effect. These clauses aim to preserve the contract's enforceability despite partial invalidity.

Common pitfalls

• Over-reliance on severability: Courts will not rewrite contracts or sever provisions if doing so would fundamentally alter the nature of the agreement or leave it commercially nonsensical. Severability clauses cannot save poorly drafted or obviously unenforceable provisions.
• Inadequate "reasonable reformation" language: Standard severability clauses typically address deletion of offending provisions but may not authorise courts to modify or limit provisions to make them enforceable (e.g., reducing the scope of an overly broad restrictive covenant).

… and how to avoid them

• Include severability clauses as a safety net, but do not rely on them as a substitute for proper drafting.
• Consider "blue pencil" language allowing courts to modify or limit provisions to the extent necessary to make them enforceable, particularly for restrictive covenants or other provisions that may be challenged as excessive.

6. Waiver and No Waiver

Waiver and no waiver clauses address whether a party's failure to enforce a contractual right constitutes a waiver of that right or of the right to enforce other provisions. These clauses aim to preserve contractual rights despite forbearance or delayed enforcement.

Common pitfalls

• Creating inadvertent estoppel: Despite no waiver clauses, parties may be estopped from enforcing strict contractual rights if they have represented (by words or conduct) that they will not do so and the other party has relied on that representation to its detriment. Waiver language alone cannot override equitable estoppel principles.
• Inconsistent conduct: A party that consistently fails to enforce contractual provisions (e.g., accepting late payment without objection) may find it difficult to rely on strict contractual rights despite a no waiver clause, particularly if the other party has altered its position.
• Single waiver vs continuing waiver: Standard no waiver clauses may not adequately distinguish between waiver of a specific breach and waiver of the right to enforce the provision in respect of future breaches.

… and how to avoid them

• Include clear no waiver language specifying that failure to enforce any provision does not constitute a waiver of that provision or any other provision, and that waivers must be in writing and signed.
• When granting forbearance, document it expressly in writing, specify its scope and duration, and confirm that it is without prejudice to strict contractual rights.
• Avoid establishing patterns of conduct that may support estoppel arguments.
• Consider whether specific waivers should be limited to particular breaches or whether they extend to future or continuing breaches.

Come back next week for Part 3, where I will explain another 3 common pitfalls and how to avoid them. If you have any queries regarding this topic, please don’t hesitate to contact me at hannah.moran-ellis@twobirds.com.