Key Takeaways

  • A contract clause is a specific provision in a legal agreement that defines the rights, duties, and obligations of the parties.
  • Clauses can address numerous topics like confidentiality, dispute resolution, timing, and liability.
  • Standard contract clauses include force majeure, termination, arbitration, and confidentiality provisions.
  • Specialized clauses, such as severability and waiver clauses, help maintain contract enforceability even if one part is invalid.
  • Understanding the purpose and enforceability of clauses is essential for minimizing legal risk.

A contract clause is a very important component of a contract. It specifies certain aspects of the contract that can ultimately make or break the agreement.

What is a Clause?

A legal document is typically broken into many different numbered sections so that it is easier to read through. All of these different sections are referred to as clauses. A clause is used in a contract, will, deed, settlement agreement, and other legal documents.

It is easier to find and refer to pertinent information when it is broken into clauses. A clause with regard to grammar is a group of words that consist of a subject and a verb. Legally, it is a part of a document.

What Is a Contract Clause?

A contract clause is a provision or section in a contract. All clauses in a contract will address a certain element of the contract matter. They are meant to define the rights, duties, and privileges held by each party as noted in the terms of the contract.

Clauses can be found in any part of a contract, but they are most often found in the back of the document. A contract clause can cover almost any part of a business interest and take any form. One of the most common clauses is a non-disclosure clause in an employment agreement. In this, the employee will promise not to divulge any confidential information about the company.

Contract clauses will be enforceable with the rest of the contract in the eyes of the law.

What Are Some Common Clauses in a Contract?

Clauses are used in a variety of ways to benefit the party’s needs. You may notice more clauses in some contracts and fewer in others.

A boilerplate clause could appear as a typical part of a business contract. You can also create your own clauses that are made specifically for your client.

The most common contract clauses include the following:

·      Choice of Law: The parties to the contract will agree that the terms will be interpreted only according to the laws of a certain state. They can also agree that any litigation be held in a specific jurisdiction. The language is not always enforceable, but these clauses can be upheld in more sophisticated contracts. When you go into a contract, you have to assume the provision will be enforceable. You have to consider how it could affect the cost of litigation if it were to happen.

·      Statute of Limitations: This clause will provide a timeframe in which a lawsuit may be filed for a violation such as breach of contract. It will change the statute of limitations that is applied to the information in the contract. Some states do not always enforce reductions in the statute of limitations, but you always have to assume that a clause reducing the statute of limitations is enforceable. A court could find the clause to not be valid, so you will need to work with your attorney within your own jurisdiction to find out if the limits are valid.

·      Time of Performance Clause: This clause will indicate a timeframe in which the duties of the contract cannot be performed. A breach of contract lawsuit can be formed if some contracts are not completed in a timely manner. This is a common clause found in construction contracts since that work needs to be completed quickly.

·      Merger Clause: This clause says that the current contract will override a verbal or oral contract made previously. The point of this clause is to keep the parties to the contract from trying to claim the contract is not indicative of the entire agreement at a later date. It can be impossible to enforce a promise that is not written.

·      Indemnification Clause: This clause releases the other party from liability if losses or expenses occur. This clause should be used cautiously since it can put limits on the ability to get damages for losses. This type of clause will require that one party indemnify the other party if certain expenses occur. You have to be safe when entering into this type of clause. It can make changes to your financial matters should any type of breach occur.

Additional Examples of Contract Clauses

Here are several other commonly used contract clauses to be aware of:

  • Force Majeure Clause: This clause relieves a party from liability if unforeseen events—such as natural disasters, war, or pandemics—prevent them from fulfilling contractual obligations. It’s especially relevant in international and commercial contracts.
  • Confidentiality Clause (Non-Disclosure): Often used in employment or business contracts, this clause prevents one or both parties from disclosing proprietary or sensitive information.
  • Termination Clause: Specifies the circumstances under which a party may terminate the agreement early. It can include termination for cause (e.g., breach) or for convenience (e.g., a party's strategic decision).
  • Dispute Resolution Clause: Outlines the steps for resolving disputes, such as negotiation, mediation, arbitration, or litigation. Arbitration clauses are common in commercial agreements to avoid court proceedings.
  • Waiver Clause: States that a party’s failure to enforce a contract term does not waive their right to enforce it later. This prevents a party from accidentally giving up rights through inaction.
  • Severability Clause: Ensures that if one clause of the contract is deemed invalid or unenforceable, the remaining provisions remain in effect. This protects the integrity of the contract.
  • Entire Agreement Clause: Similar to a merger clause, this provision clarifies that the written contract reflects the full and final agreement between the parties.
  • Liquidated Damages Clause: Pre-determines the amount of compensation due if a party breaches the contract. This helps avoid lengthy court battles over damages.
  • Assignment Clause: Dictates whether a party can transfer their contractual rights and obligations to another entity. Some contracts require written consent before any assignment.
  • Amendment Clause: Specifies how the contract may be altered, typically requiring that changes be made in writing and signed by all parties.

Each of these contract clauses plays a vital role in allocating risk, clarifying responsibilities, and outlining remedies. When drafting or reviewing a contract, it's important to ensure that these clauses align with your business interests and legal protections.

Enforceability and Legal Impact of Contract Clauses

While contract clauses are generally enforceable, their validity can depend on the language used and applicable jurisdiction. Courts may refuse to enforce:

  • Clauses that are overly vague or ambiguous
  • Provisions that are unconscionable or heavily one-sided
  • Terms that contradict public policy or local laws

Working with a qualified attorney helps ensure that each contract clause is clearly drafted, enforceable, and serves your intended purpose. Moreover, laws can vary by state, particularly when it comes to clauses like statute of limitations, indemnity, or non-compete agreements.

Constitutional Reference to the "Contract Clause"

In the U.S. Constitution, the "Contract Clause" (Article I, Section 10, Clause 1) restricts states from passing laws that impair the obligation of contracts. While this clause historically protected private agreements, its modern application is limited. Courts now weigh state interests, such as economic or public welfare goals, against the contractual rights of individuals or businesses.

Frequently Asked Questions

  1. What is the purpose of a contract clause?
    A contract clause defines specific rights, responsibilities, or protections within an agreement. It helps clarify how the contract should be executed and what happens in various situations.
  2. Are all contract clauses legally enforceable?
    Not necessarily. Clauses must be reasonable, clearly written, and compliant with applicable law to be enforceable. Some provisions, like non-compete clauses, face stricter scrutiny.
  3. Can I create custom clauses for a contract?
    Yes. While standard clauses are common, parties can draft custom clauses tailored to their unique business needs. Legal guidance is recommended to ensure enforceability.
  4. What happens if a clause is invalid?
    If a clause is found unenforceable, a severability clause (if present) can allow the rest of the contract to remain valid.
  5. Why are boilerplate clauses important?
    Boilerplate clauses, though often overlooked, govern critical aspects like dispute resolution, amendments, and legal jurisdiction. They can significantly impact how a contract is interpreted and enforced.

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