Contract Clauses: Everything You Need to Know
Contract clauses are a vital component in any agreement that could safeguard your interests as a business owner.3 min read
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Contract clauses are a vital component in any agreement that could safeguard your interests as a business owner. It is a section or agreement within a written contract that establishes certain parameters or information pertaining to the agreement.
Each clause in the agreement touches upon a certain part of the overall subject of the contract. The clauses are meant to clearly define certain rights, privileges, and duties that all parties must adhere to. You can find the clauses in various parts of the agreement, but they usually appear at the end of the agreement.
Contract clauses may take a variety of forms and may touch upon nearly all aspects of commercial and business interests. A notable example is a non-disclosure clause based within employment contracts. This means that an employee agrees not to divulge sensitive company information to any party. Such clauses are legally enforceable, including the rest of the agreement under federal and state laws.
Parties may also include boilerplate clauses and the usual contract clauses into agreements in the following instances:
- To enhance efficiency
- Ensure consistency in all respects
- Take advantage of existing experience
- Lower the money and time spent on drafting additional documentation
Moreover, the inclusion of various clauses in a contract lowers the risk of any misunderstandings and lawsuits that could arise, providing legal rights that your business may not have otherwise.
Further, you may find clauses upon reviewing a contract, or in contract form that cover similar topics but is worded in a different manner. The subject of such provisions is vital, but the precise wording within an agreement is not as important. If the meaning of the words is the same, it’s not important to use the exact wording.
You should add such wording in the contract, although you may figure that certain clauses are not necessary in other contracts. The vital part is when you pinpoint the risks your business would face when agreeing to the contract. In addition, you must reduce or remove such risks using clauses to your advantage.
Neither party should have rights in contracting or assigning obligations under an agreement. This stops your company and other parties you’re in agreement with from shifting all the subcontracting or assignments to another entity or individual. Contract assignment may occur if you or another company you agreed with got sold (in this case, a new owner could be assigned to the contract).
A subcontract may also happen if independent contractors or another business was hired to complete work that you or another entity agreed to complete. Agreements are assumed to be assignable unless a clause prevents the assignment. Such a clause would not stop either entity from giving consent to a subcontract or assignment. With that, the absence of consent means that subcontracts or assignments would be a violation of the agreement.
The exception to the provisions allows assignment transfer without the consent of a party if the transfer goes to affiliate companies (which usually means that the company in question has a minimum of 50 percent of the same as shareholders or owners). The same rule applies to subsidiaries or to entities that purchases the business that’s in the contract.
- Note: It’s important that your company deals with a party you are in direct communication with. Such a clause is important to note when recording the deal.
If your business is sold, you may want to subcontract either a part or all duties under the agreement, or you may wish to shift a contract to a subsidiary or affiliate company. If you plan to do this, you must not include clauses that would prevent such activity.
You should also include a provision for non-prevailing parties in any agreement to pay any expenses or costs, including attorney and witness fees incurred as the dispute gets resolved. Such a clause establishes a right in recovering expenses and costs paid by a party that wins in an agreement dispute. You must word the clause carefully and include expenses and costs, including those who also did not pay in a lawsuit dispute. It’s usually common to see such a clause in cases where a prevailing party wins in a court of law.
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