Clauses that tend to be “forgotten” in purchase agreements – final provisions in the focus

published on 20 January 2023 | reading time approx. 4 minutes

Purchase agreements always end with the same, usually standardised clauses and wordings. In most cases, drafting and negotiating the agreement is very time-consuming and the pressure of a timely closing is high; so it must be prioritized for reasons of time. Often it can be observed that “usual” standard clauses are adopted; in the best case, these clauses are roughly adjusted to fit the specific case, but one does not deal with it in detail. The well-thought-out and individually adapted text of the contract is then combined with “off-the-shelf” final provisions. Ultimately these clauses are given too little attention.

In the following, we will examine some of those clauses in more detail.

Replacement of all prior agreements

“This Agreement constitutes the entire agreement between the Parties and supersedes all prior agreements, arrangements and understandings, whether oral or written, between the parties with respect to the subject matter of this agreement. There are no side agreements to this agreement.”

However, this is not always the intention of the parties. If individual arrangements previously made, e.g. in a non-disclosure agreement or a letter of intent, should further apply in whole or in part, this must be specified accordingly in such clause or, alternatively, the respective clauses should be repeated in the purchase agreement.

Non-assignment clause

“Rights and obligations arising from this agreement may not be assigned or transferred to third parties without prior written consent of the respective other party.”

This is an important regulation in order to avoid being all - of a sudden - exposed to claims of third parties and/or faced with an unwanted new contractual partner. Although in most cases the clause provides for the possibility of granting such consent, it should be considered in advance if there are situations for which consent should already be given. For example, if individual claims have to be assigned as collateral for the financing of the transaction or such assignment will become necessary in the future. If this is the case, it should already be taken into account in the agreement itself in order to avoid later disagreements.

Arbitration clause

“All disputes arising from or in connection with this contract or concerning its validity shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration (DIS) without recourse to the ordinary courts of law. […]”

Before the parties simply adopt such a clause, they should give some thought to whether they wish to agree on the competence of an arbitrary court at all. Here, the advantages and disadvantages of arbitration proceedings should be considered in relation to the individual case. Worth mentioning are e.g. far-reaching possibilities of structuring the arbitration (such as choice of location and language of the proceedings) and ensured confidentiality due to the non-public character of arbitration proceedings. However, the costs should be mentioned, which can exceed the costs of court proceedings many times over. Moreover, there is only one instance in arbitration proceedings. For international contracts, the choice of location and the arbitration institution may, in the individual case, lead to the co-agreement of international regulations and have consequences regarding the enforceability of the title obtained.

Place of jurisdiction

“The exclusive place of jurisdiction for all disputes between the parties arising from or in connection with this agreement and its execution, including its annexes, shall be […].”

If the parties decide against an arbitration clause, the ordinary courts are competent. In order to avoid the principle that legal proceedings must basically be brought before the court having jurisdiction for the defendant’s place of business, the final provisions usually include an agreement on the place of jurisdiction.

In this case, however, it may be advisable to also reflect upon other places of jurisdiction, apart from the courts at the parties’ places of business. Perhaps one of the parties has already had negative experiences with the court agreed on or the latter is known to be adequate for settling M&A disputes.

At the Duesseldorf Regional Court, a civil chamber and one of the chambers for commercial matters have exclusive jurisdiction as special chambers for all M&A disputes with an amount in dispute of more than EUR 500,000 as of 01 January 2022. These special chambers are intended to provide – in addition to judicial competence in M&A matters – maximum flexibility in the design of proceedings. It should enable preliminary discussions with the parties regarding the structure of the proceedings, negotiations in English as well as modern negotiation conditions such as court hearings per video link at any time and/or simultaneous translation services. This may constitute a real alternative to arbitration proceedings.

Choice of law

“This Agreement is governed by German law.”

In an international context, it is customary and advisable to agree on a choice of law clause in order to exclude applicability of the complex regulations of international private law and to avoid uncertainties. However, it should be borne in mind, that such a clause on the choice of law increases transaction costs. The choice of law made in the agreement constitutes a special object of notarization and affects the transaction value for the notarization of the legal transaction. Therefore, it should be verified in any case whether a standardised clause on the choice of law, which is usually incorporated into purchase agreements, is actually necessary. If the transaction is of purely national situations and in cases where the law to be adopted is in any case derived from mandatory statutory provisions, the parties should refrain from establishing a clause on the choice of law in order to avoid unnecessary additional costs.

Provisions on notifications and form

“All legally binding declarations and notifications made in connection with this agreement must be in writing, unless notarization or any other form is prescribed by provisions of mandatory law. Transmission per telefax shall be sufficient for the written form, but not any other telecommunicative transmission. Electronic form (e.g. email) does not constitute the written form.”

It should always be considered on a case-by-case basis if the parties indeed wish a written form requirement or if for reasons of practicability also text form or electronic form (e-mail) should also be sufficient in respect of certain declarations.

In addition, it is reasonable to stipulate in the contract to whom and in what form legally relevant information, notifications or other declarations in connection with the purchase are to be addressed.

Conclusion

If proper attention is given to the above-mentioned clauses in a transaction, this will not only round off the respective purchase agreement but will also turn it into a consistent and tailor-made agreement that perfectly reflects the interests of the parties.