Contract Clauses Explained: Everything You Need to Know
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.3 min read
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.
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.