Object reference not set to an instance of an object.
  • Home
  • >
  • Publications
  • >
  • Boilerplate clauses – useful but don’t push them too hard
Brief Counsel

Boilerplate clauses – useful but don’t push them too hard

04 May 2010

A recent unanimous decision by the Supreme Court makes clear that, while general boilerplate clauses can be useful, they cannot be pushed beyond what was intended when the agreement was signed.

Facts

Totara Investments Limited v Crismac Limited and Ulster Limited [2010] NZSC 36 related to the use by Totara (as lender) of a power of attorney provision to grant to itself a General Security Agreement (GSA) over all of Crismac and Ulster’s assets (as borrowers) so that it could appoint receivers to the companies.   

Totara was relying upon a clause in the mortgage document requiring the mortgagor to “do all such acts and execute all such documents and securities as the Mortgagee may in its absolute discretion require to further secure to the Mortgagee…the payment of the Moneys Hereby Secured” and appointing the Mortgagee the attorney of the Mortgagor to do all things “which may become necessary or as regarded by the Mortgagee or the said attorney as necessary for more satisfactorily securing the payment of the Moneys Hereby Secured”.

Crismac and Ulster argued that this use of the power of attorney was contrary to what they intended when they entered the agreement.  In particular, the granting of further security was inconsistent with a limited recourse provision in the documents which limited the liability of the borrower to the value of the security provided, namely an insurance policy and a share acquisition agreement.  The borrower could satisfy its repayment obligations by transferring its rights under those assets to the lender.

The case went first to the High Court and then to the Court of Appeal before going to the Supreme Court.  The High Court found that Totara was entitled to exercise the power of attorney to grant the GSAs and to take further security prior to the borrower exercising its rights to transfer the specific assets to the lender.  The Court of Appeal and the Supreme Court disagreed. 

The Supreme Court

The Supreme Court agreed with the conclusions of the Court of Appeal and found that the parties had intended the security would be limited to the specific security granted initially. 

The Court went on to note that “in the documentation of commercial transactions the drafter will frequently, out of caution (belt and braces) or perhaps without thinking about function in the particular case, incorporate boilerplate provisions which have little or no work to do.  While a Court will strive to find a role for such general provisions to play, their presence should not be permitted to lead to distortion of the objective intention of the parties which can be discerned from a reading of the whole contract”.

Chapman Tripp comments

It is common in loan and security agreements for boilerplate provisions to be included giving the lender very wide powers to require additional security or amendments to the documentation.  The agreements often contain broad powers of attorney in favour of the lender to give effect to these powers.  Lenders who seek to rely on these provisions should be cautious if doing so would extend their security or amend other terms of the agreement significantly beyond what was intended when the agreement was entered into.  This applies whether the change is effected by making demand on the borrower or by using a power of attorney.

The facts of this case are specific due to the inclusion of the limitation but the principle will apply to all agreements.  The case does highlight that the Courts will give precedence to those clauses which the parties have given specific importance to and will not allow boilerplate clauses to alter the effect of those provisions.  The Courts will try to prevent a party from taking advantage of a boilerplate clause in a manner that would distort the objective intention of the parties.

Boilerplate provisions are useful for lenders and there is no suggestion that they cannot be relied upon at all or should be excluded from loan agreements.  They can be effective but too often they are included without any thought being given to them.  It is worth the parties considering how these clauses apply to the agreement at hand and whether they need to be tailored to correctly reflect the agreed position.

For more information, please contact the lawyers featured.

Contacts

Related services