A clause in an agreement is a provision related to the overall agreement. Typically, clauses clarify the responsibilities of each party in the agreement. A clause can require an action or can prevent an action.

What Are Contract Clauses?

When writing a contract, it's common to include specific provisions, known as clauses. Every clause included in a contract will address an individual issue that is important to the overall agreement. Contract clauses can define several issues related to the contracted parties:

  • Duties
  • Rights
  • Privileges

Clauses can appear almost anywhere in a contract, although it's common practice to add clauses to the end of the agreement. Clauses are useful for almost any commercial or business interest and may take a variety of forms. In an employment contract, one of the most common types of clauses is a non-disclosure clause, which is meant to prevent employees from disclosing important company information to outside parties. Contract clauses are enforceable under state and federal law.

Many clauses contain subclauses, and it's possible for one clause to reference other clauses in the contract. Ideally, even if a clause does contain references, a person should be able to read, understand, and act on a clause on its own. Standard clauses will include clauses that outline important issues:

  • Required payment
  • Length and scope of the contract
  • Circumstances that can merit termination of the contract

Types of Contract Clauses

A clause found in many contracts is a statute of limitation clause. The purpose of this clause is to set a time limit for filing a lawsuit after a contractual violation or a breach of contract. While statute of limitations clauses are permissible in most contracts, they cannot violate local, state or federal laws.

Time of performance clauses are another common clause that parties include in contracts. These clauses outline the time frame for performing the contractual duties. If one party fails to fulfill their obligations by the deadline included in the time of performance clause, the other party can sue for breach of contract.

Indemnification Clauses

When entering a contract, most parties will want to protect themselves from liability, which is the purpose of an indemnification clause. If a contract includes this clause, one party will be shielded from liability, or indemnified, if the contract results in losses or expenses. Parties should be cautious when using indemnification clauses, as they have the potential of limiting the possibility of pursuing damages after a major loss.

Essentially, an indemnification clause means that one party is assuming financial responsibility for claims, damages, and losses listed in the clause. One party promises to repay the other party if they bring a claim. The protected party is the indemnified party, and the party that provides the protection is the indemnifying party.

An indemnification clause will contain a list of actions that the indemnifying party could perform that would cause liability of the indemnified party. Generally, these acts will be described at the end of the clause. The indemnified party must contact the indemnifying party when one of these acts take place so that they can either offer a defense or settle the claim.

Most companies insist that contracts include an indemnification clause so that they will have protection from damages resulting from the actions of the other contracted party. For example, imagine that your company produces frozen dinners and you buy beef from another company to include in one of these dinners. If the beef that you buy is contaminated and harms your consumers, an indemnification clause would require the other company to defend your company in a lawsuit related to the tainted beef.

Attorney Fees Clause

When a contract is breached, it often results in a lawsuit. Because these lawsuits can be very expensive, many contracts include an attorney fees clause that addresses the cost of a lawsuit. With an attorney fees clause, the losing party in a legal dispute is legally bound to pay for the expenses of the other party resulting from the lawsuit. In addition to attorney's fees, this clause can require repayment for witness fees and any other costs occurred by the winning party.

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