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Anatomy of an Operating Agreement Part 4: What Do Boilerplate Clauses Mean?

By August 20, 2014April 3rd, 2015LLC, Operating Agreement, Startups

At the end of most contracts there is a section of miscellaneous provisions. It is easy to overlook these provisions as superfluous legalese, but they have significant meaning for the business, most importantly how disputes are resolved.

Arbitration, Attorney Fees, and Governing Law
By contract, the parties may decide that they want to resolve any disputes through arbitration, instead of a court proceeding. This is fairly common because arbitration is a private dispute resolution mechanism and is less costly and more expedient than a lawsuit. If the parties determine that they do not want to limit their remedy to a court, the parties may waive their right to a jury trial.

Further, the parties may decide that they want the prevailing party to receive its fees and costs in the event of a dispute. The default is that each party will bear its owns legal costs, so it must appear in the operating agreement if the alternative is desired.

In the event of a dispute, a choice of law provision determines which state’s legal rules will be applied in the lawsuit. A venue or jurisdiction clause provides the location of where a lawsuit must be filed. It typically dictates both a federal district court and a state county court.

This section provides detail on how to contact the various members. This is important because notice should be required in writing. Also, the members may wish to allow electronic contact or they may wish to be more formal and require mail or fax of notice. In any event, it is important that all members understand how to communicate with one another.

Entire Agreement, Severability, Waiver, and Counterparts
Often times, in the lead up to finalizing the operating agreement, there may be agreements that change or become folded into the ultimate contract. An entire agreement or integration clause nullifies all previous versions and provides that only the final written contract is the final agreement of the parties. Typically this also requires modifications of the agreement to be in writing.

Laws change over time and it is important to preserve the viability of an agreement by permitting a court sever the unenforceable provision and retain the remainder of the agreement. This is known as a severability clause. Sometimes parties will not enforce certain provisions of a contract. A waiver clause provides that a party can forgo its right to claims without affecting its future rights.

Sometimes, many members, who are not all in the same location, must sign an operating agreement. A counterparts provision validates the execution of the operating agreement with several copies differing in time of signature.

Relationships and Anti-Assignment
An operating agreement is also an important place to define the relationships of the parties. Members of an LLC are not employees and this is an important distinction with important consequences for tax and insurance purposes. An anti-assignment clause restricts a member’s ability to sell or transfer their rights under the agreement to another party.