Key Takeaways

  • Contract clauses define the duties, rights, and obligations of all parties in an agreement and are enforceable under state and federal law.
  • Clauses can cover a wide array of functions, such as payment terms, confidentiality, liability, and dispute resolution.
  • New additions include categories of boilerplate clauses, risk allocation clauses, performance-related clauses, and termination-related provisions.
  • Understanding specialized clauses like severability, amendment, and waiver clauses helps protect parties from ambiguity and legal disputes.
  • Businesses should tailor contract clauses to their specific needs and seek legal guidance when drafting or reviewing them.

Contract Clause Overview

Having contract clauses explained is an important step to take if you encounter any contract clauses you do not understand, since clauses are what make up a contract, and signing a contact you do not understand, even in the smallest part, is very unwise.

Any contract will contain a number of clauses pertaining to the subject of the contract, each of which is designed to define the rights, privileges, and duties of each party involved in the contract. Such clauses can come in many forms and deal with almost any commercial and business interest. They are also fully enforceable under both federal and state laws. Thus, it is of the utmost importance to understand what they mean.

Contract Clause Examples

There are a wide variety of clauses one may encounter when dealing with contracts, varying from contract to contract. Although any clause encountered should be understood fully before agreeing to it, some of the more common ones you may encounter include:

  • Choice of Law Clause. Also known as a Forum Clause, this clause has parties agree that the terms of the contact will be interpreted in accordance with the laws of a specific state only and that litigation will be handled in a specific jurisdiction.
  • Statute of Limitations Clause. This clause is used to define the timeframe in which litigation pertaining to the contract can occur. It can be used to override state law concerning litigation, but states may not always recognize the terms of the clause. Nonetheless, the best practice is to assume all terms of a contract will be considered valid.
  • Time of Performance Clause. This sets out the timeframe of performance for the work specified by the contract. Some contracts may use “time is of the essence” phrasing, meaning that the contract will be considered breached if the specified duties in the contract are not performed in a reasonable time.
  • Non-Waiver Clause. This allows one party to excuse another party for not completing their side of the contract. However, it does not mean the party cannot still enforce the contract. For example, with a non-waiver clause, a party receiving bi-monthly payments instead of monthly payments as specified by the contract could still enforce the contract if they chose to. Without such a clause, if the bi-monthly payments were accepted as standard over a period of time, them a court could rule such payments to not be a contract breach.
  • Arbitration Clause. This will state that legal disputes should be resolved with arbitration, not litigation. Arbitration involves bringing in a third-party to settle a dispute out of court, whereas in litigation disputes will be settled in court. Arbitration can be quicker than litigation, but more expensive.
  • Assignment Clause. This prohibits or allows the transfer of the rights stipulated in the contract to a third party.
  • Confidentiality Clause. This defines what information should not be shared with third parties, or specifies what parties such sensitive information may be shared with.
  • Consideration Clause. This states the type, amount, and schedule of payment to the party performing the duties specified in the contract.
  • Entire Agreement Clause. This defines the agreement as being the written terms in the contract. Prior and oral agreements must be included within the written agreement for them to be enforceable.
  • Force Majeure Clause. This protects a party from being considered to be in breach of contract if uncontrollable circumstances like natural disasters (sometimes referred to as “Acts of God”) prevent them from fulfilling the terms of the contract.
  • Indemnification Clause. In this clause, one party will agree to waive, or indemnify, certain claims, losses, or damages that could be levied against another party. Great detail should be expressed in these clauses so as to limit the scope of what may be indemnified.
  • Liquidated damages clause. This lists the damages to be paid if a breach of contract occurs.
  • Acceleration Clause. This states that if a party breaches the contract, the other party may demand immediate performance of the contract. This often can be found in contracts involving monthly payments: if a payment is not made, then the full amount can be demanded for payment immediately.

Termination and Exit Clauses

Termination clauses govern how and under what circumstances a contract can be ended before its natural expiration. This section is vital for managing business risk and avoiding costly disputes:

  • Termination for Convenience: Lets a party exit the contract for any reason, typically with advance written notice.
  • Termination for Cause: Permits termination when a material breach or specific event occurs (e.g., nonpayment, fraud).
  • Survival Clause: States which contractual obligations (e.g., confidentiality, indemnity) continue after termination.
  • Notice Clause: Specifies how and when notice of termination or other legal communications must be delivered.

Performance and Delivery Clauses

Performance clauses specify how and when contractual obligations must be fulfilled. These provisions are crucial in service-level agreements, manufacturing contracts, and construction projects:

  • Milestone Clause: Outlines specific benchmarks that must be achieved at different stages of the contract.
  • Service Level Agreement (SLA): Defines performance standards, metrics, and remedies if expectations are not met.
  • Inspection and Acceptance Clause: Allows the buyer to inspect goods or services before formally accepting them, which can trigger payment or warranties.

Risk Allocation Clauses

Risk allocation clauses assign responsibility and liability between parties in various scenarios. These provisions help mitigate financial exposure and provide clarity on who bears which risks. Key clauses include:

  • Limitation of Liability Clause: Caps the amount or type of damages one party can recover from another.
  • Exclusion Clause: Explicitly removes liability for certain types of damages (e.g., consequential or indirect loss).
  • Insurance Clause: Requires one or both parties to carry specific insurance coverage to mitigate potential liabilities.
  • Indemnity Clause (Expanded): Often includes detailed conditions under which one party must cover the costs of claims, damages, or losses incurred by another.

Standard Boilerplate Clauses

Boilerplate contract clauses are standard provisions that appear in most agreements, often found at the end. While they may seem routine, they can have significant legal consequences if disputes arise. Common boilerplate clauses include:

  • Severability Clause: Ensures that if one part of the contract is found to be unenforceable, the remainder still remains in effect.
  • Amendment Clause: Outlines how modifications to the contract must be made, typically requiring a written agreement signed by all parties.
  • Waiver Clause: Prevents one party’s failure to enforce a provision from being considered a permanent relinquishment of that right.
  • Counterparts Clause: Allows the contract to be executed in multiple copies, each of which is considered an original.
  • Further Assurances Clause: Requires parties to take additional actions necessary to carry out the contract’s intent.

Frequently Asked Questions

  1. What are contract clauses and why are they important?
    Contract clauses are specific provisions within a contract that outline the rights, duties, and obligations of each party. They provide structure and reduce ambiguity in business agreements.
  2. Can I remove or modify a boilerplate clause in a contract?
    Yes, boilerplate clauses can and should be tailored to suit your agreement. Do not assume they are harmless—modifying them can significantly affect how a contract is interpreted.
  3. What happens if a clause in a contract is deemed unenforceable?
    If the contract includes a severability clause, only the invalid clause is removed while the rest of the contract remains enforceable.
  4. How can I ensure a contract clause is legally binding?
    To be legally binding, a clause must be clear, agreed upon by all parties, and not violate any laws. Written agreements and signatures are key.
  5. Should I consult an attorney before signing a contract?
    Yes, especially for complex agreements. Legal counsel can help interpret the language, identify risks, and ensure that your interests are protected. You can find experienced contract attorneys on UpCounsel.

These are just a sampling of the clauses one may encounter in a contract. If you need contract clauses to be explained further, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.