Key Takeaways

  • A clause in an agreement defines rights, obligations, or restrictions for the parties. Clauses can appear throughout a contract and often include subclauses.
  • Types of clauses range from performance deadlines and indemnification to attorney fees, with many other common provisions (e.g., confidentiality, governing law).
  • Governing law and jurisdiction clauses determine which state or country’s laws apply and where disputes will be resolved.
  • Numbering and structure of clauses are critical for clarity; contracts often use a hierarchy of articles, sections, and subsections with consistent numbering.
  • Drafting best practices include using plain language, balancing risk fairly, and tailoring clauses to the contract’s purpose.

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

Governing Law and Jurisdiction Clauses

A governing law clause specifies which state or country’s legal system will apply to the contract. For example, two companies in different states may agree that disputes will be resolved under California law, regardless of where a lawsuit is filed. Jurisdiction clauses often accompany this provision, determining which courts have the authority to hear disputes. These clauses provide predictability, reduce uncertainty, and help avoid costly conflicts over applicable law.

When drafting, it’s important to consider the location of the parties, where performance will occur, and any laws that could affect enforceability. Some agreements also include an arbitration clause as an alternative to court proceedings.

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.

Clause Numbering and Structure

Clear structure and numbering make a contract easier to read and enforce. Contracts are often divided into:

  • Articles: broad subject areas (e.g., “Payment Terms”)
  • Sections: subdivisions under articles (e.g., “Methods of Payment”)
  • Clauses/Subclauses: detailed provisions covering specific obligations

Consistent numbering (such as 1.1, 1.2.1) allows parties to reference provisions precisely. Poor numbering or inconsistent formatting can lead to confusion, misinterpretation, or disputes. Using a logical structure ensures each clause in agreement is accessible and enforceable.

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.

Drafting Considerations and Best Practices

When drafting a clause in agreement, clarity and balance are key. Best practices include:

  • Use plain language: Avoid unnecessary jargon so all parties understand their obligations.
  • Balance risks: Avoid clauses that heavily favor one side, as they may be challenged later.
  • Tailor to the transaction: A software license agreement will need different clauses than a supply contract.
  • Avoid redundancy: Each clause should serve a distinct purpose without overlapping with others.

A poorly drafted clause can create ambiguity or unintended obligations. For example, an overbroad indemnification clause may expose a party to unlimited liability.

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.

Confidentiality and Non-Disclosure Clauses

Confidentiality clauses protect sensitive business information such as trade secrets, client lists, or proprietary data. A typical clause in agreement may prohibit parties from sharing specified information with outside parties except as required by law.

These provisions are especially important in employment contracts, joint ventures, and merger negotiations. Confidentiality clauses should clearly define:

  • What information is considered confidential
  • How long confidentiality obligations last
  • Exceptions (e.g., information already public)

A well-drafted non-disclosure clause safeguards valuable assets while allowing necessary disclosures in limited circumstances.

Frequently Asked Questions

  1. What is a clause in an agreement?
    It’s a specific provision within a contract that outlines rights, duties, or restrictions of the parties involved.
  2. Why is a governing law clause important?
    It determines which jurisdiction’s laws apply, providing predictability in case of disputes.
  3. How should clauses be numbered in contracts?
    Clauses are typically structured in a hierarchy (articles, sections, subsections) with consistent numbering for clarity.
  4. What makes a clause enforceable?
    Clarity, fairness, and compliance with applicable laws are key to enforceability.
  5. Can clauses be negotiated?
    Yes. Many clauses, such as indemnification or attorney fees, are negotiable to balance risk between the parties.

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