Key Takeaways

  • Common contract clauses define timing, payment, performance, warranties, and liability, ensuring both parties understand obligations and risks.
  • Clauses like confidentiality, indemnification, and limitation of liability safeguard against financial and reputational damage.
  • Change of control, insurance, and dispute resolution clauses manage risk and continuity when ownership or unforeseen events occur.
  • Emerging business contracts also include modern clauses such as data protection, non-compete, and governing law provisions.
  • Understanding and negotiating these clauses ensures clarity, minimizes disputes, and strengthens enforceability.

Types of Contract Clauses

There are many different types of contract clauses.

Timing

A statute of limitations clause defines the time frame, applied by law or agreed to by the parties, within which a claim must be filed to be valid.

A time limitation clause, like a statute of limitations clause, sets the time frame within which a claim must be made if a specific action or event occurs.

A time of performance clause designates the time frame within which performance must occur. If performance does not occur within that time then the non-performing party has breached the contract. If no specific time is designated, performance must occur within a reasonable amount of time.

Conditions and Deliverables Clauses

A conditions clause defines the prerequisites that must be met before the contract becomes binding or before obligations are enforceable. These may include regulatory approvals, financing milestones, or delivery conditions. Similarly, a deliverables clause specifies exactly what goods, services, or results the performing party must provide. Clear deliverable descriptions help prevent misunderstandings, especially in service or technology contracts where outputs can be subjective.

Businesses should ensure these clauses outline:

  • Specific outcomes expected (e.g., product specifications, reports, or project milestones).
  • Acceptance criteria, detailing how and when deliverables will be reviewed or approved.
  • Consequences for failure to meet conditions or deliverables, such as penalties, extensions, or contract termination.

These provisions clarify expectations and reduce disputes over whether obligations have been met.

Payment and Escalation Clauses

Payment terms clauses are among the most common contract clauses and define how and when payments are to be made. These clauses typically address due dates, acceptable payment methods, late fees, and penalties for non-payment. They can also include discounts for early payment or structured installment arrangements.

Escalation clauses (often found in long-term service or supply contracts) allow for periodic price increases based on specific factors such as inflation, labor costs, or material prices. These clauses help protect suppliers from cost volatility over time.

Retention, Advance, and Reimbursement Clauses

Beyond standard payment terms, contracts often include retention clauses, allowing a portion of payment to be withheld until project completion to ensure quality performance. Advance payment clauses authorize upfront payments, which are common in construction, consulting, and software development.

A reimbursement clause defines how one party will be repaid for expenses incurred while performing contractual duties, such as travel or materials. These should clearly specify allowable expenses, documentation required, and reimbursement timelines to avoid disputes.

These financial clauses, when drafted properly, balance risk between payer and payee and help manage project cash flow.

Performance

Along with the time of performance clause, a force majeure clause applies to performance. A force majeure clause outlines what happens if a party is unable to fulfill their part of the contract because of an unforeseen circumstance, or “acts of God.” These events, such as natural disasters, are beyond the parties’ control.

Compliance and Regulatory Clauses

Compliance clauses ensure both parties adhere to applicable laws, regulations, and industry standards throughout the contract term. This may include compliance with anti-bribery, data protection (GDPR or CCPA), and employment laws.

For businesses operating internationally, these clauses should specify which jurisdiction’s compliance rules apply. In regulated industries, non-compliance can void contracts or result in penalties. Adding these provisions demonstrates due diligence and builds trust between contracting parties.

Warranty and Disclaimers

A warranty clause outlines the guarantees one party makes regarding the quality or condition of goods or services provided. This can include express warranties (clearly stated) or implied warranties (automatically presumed by law unless disclaimed).

A disclaimer of warranties clause attempts to limit or eliminate those guarantees. For example, a software provider may disclaim warranties of merchantability or fitness for a particular purpose. These disclaimers must comply with the Uniform Commercial Code (UCC) or other applicable law to be enforceable.

Representations and Covenants

A representation clause outlines factual statements made by one party (e.g., ownership of assets or authority to contract). If these statements are false, the misrepresentation can lead to rescission or damages.

Covenants, on the other hand, are promises to do or refrain from doing something during the contract’s term — for instance, maintaining insurance coverage or protecting intellectual property.

Combining warranties, representations, and covenants provides a complete assurance framework: warranties guarantee performance quality, representations confirm truthfulness, and covenants enforce conduct standards.

Contract Interpretation

A forum, or choice of law, clause designates the jurisdiction, usually a specific state’s laws, under which a contract’s terms will be interpreted in the event of a dispute. Parties can also include a specific jurisdiction in which litigation must occur. This type of clause must comply with other requirements of contract law.

A merger clause declares that the written contract is the final and complete agreement between the parties. This clause overrides and/or consolidates all prior oral or written agreements into the final written document.

Other names for a merger clause:

  1. Entire agreement clause
  2. Whole agreement clause
  3. Integration clause

A severability clause, or savings clause, provides that even if one or more provisions of the agreement are declared unenforceable the whole/remainder of the contract is still enforceable. The unenforceable provisions will be removed from the contract. Without a severability clause, it is possible that a court will invalidate the entire contract even if only one provision is found to be invalid.

A termination clause delineates the circumstances under which the contract may be terminated.

Governing Law and Jurisdiction Clauses

A governing law clause identifies which jurisdiction’s legal system governs the contract, while a jurisdiction clause specifies where disputes will be heard. These clauses are especially important in cross-border contracts to prevent confusion or costly litigation in multiple venues.

They should be chosen carefully to ensure:

  • The jurisdiction has predictable, well-established contract law.
  • Both parties can feasibly participate in legal proceedings.
  • The governing law aligns with related agreements.

Without these clauses, courts may apply conflicting laws, leading to uncertain outcomes.

Boilerplate and Survival Clauses

Boilerplate clauses are standard provisions typically included at the end of contracts. Although they are often overlooked, they can significantly affect the rights and responsibilities of the parties. Common boilerplate provisions include:

  • Notices clause – specifies how formal communications must be delivered.
  • Amendment clause – outlines the requirements for modifying the contract.
  • Counterparts clause – allows the contract to be executed in multiple copies.
  • No third-party beneficiaries clause – clarifies that only the contracting parties have rights under the agreement.

A survival clause specifies which provisions of the contract will remain in effect after termination or expiration. Commonly surviving clauses include confidentiality, indemnification, and dispute resolution provisions.

Confidentiality and Non-Disclosure Clauses

Confidentiality clauses protect sensitive information shared during the course of business. They define what constitutes “confidential information,” the duration of confidentiality, and the penalties for breach.

Key elements include:

  • Scope – specifying what information must remain private.
  • Permitted disclosures – such as disclosures required by law or to legal advisors.
  • Duration – confidentiality may extend beyond the contract’s end.

For startups and technology companies, these clauses are essential in protecting trade secrets and intellectual property.

Contract Rights

An assignment clause transfers all, or particular, rights from the assignor to the assignee. It assigns the assignee with any obligations connected to the right(s).

A confidentiality clause, or nondisclosure clause, guarantees that particular information if a private commercial secret and therefore guarantees that it will not be disclosed without permission. This clause can also guarantee the opposite: allowing particular data to be distributed to whomever the party would like. You can also meet in the middle and specify particular individuals or companies that the information can be given to.

A consideration clause lays out what a party must do, or not do, in order to enter into an agreement. This action or inaction is called consideration. Consideration is usually payment. Without consideration, there is no contract.

Non-Compete and Non-Solicitation Clauses

Non-compete clauses restrict one party from engaging in competing business activities for a specific period or within a certain geographic region. Non-solicitation clauses prevent one party from poaching the other’s clients or employees.

While these clauses safeguard proprietary relationships, they must be reasonable in scope and duration to remain enforceable. Courts often strike down overbroad restrictions. For businesses, these provisions preserve competitive advantage without violating labor or antitrust laws.

Change of Control and Insurance Clauses

A change of control clause outlines what happens if a party undergoes a significant ownership change, such as a merger, acquisition, or sale. These clauses are especially important in vendor and partnership agreements, as they allow the non-affected party to terminate or renegotiate the contract in light of the new ownership structure.

An insurance clause requires one or both parties to maintain certain types of insurance coverage (e.g., general liability, professional liability, or cyber insurance). These clauses help manage risk and ensure that funds are available to cover potential claims arising from the contractual relationship.

Remedies/Damages

A liquidated damages clause designates the amount of money that the non-breaching party may collect from the breaching party as compensation for a specific breach. A liquidated damages clause must be reasonable or a court will not enforce it.

If a non-waiver clause is included in a contract, then the party who included it does not waive their full contract rights, even if they accept non-compliant performance from the other party. In a landlord-tenant situation, if the landlord accepts rent payments every other month for the first six months and does not file a claim, the non-waiver clause allows the landlord to recover the missing rent even though the landlord has accepted non-performance of contract terms for a long period of time.

An arbitration clause requires legal disputes to be resolved through an arbitration process.

An attorney’s fees clause requires the losing party to pay for the winning party’s attorney’s fees. Sometimes this clause will include other litigation costs as well.

An indemnification, or indemnity, clause states that one party promises to reimburse, pay for, the other party’s costs for specific types of damages, claims, or losses that may occur. If a manufacturer sells a client technology with an indemnity clause included in the contract and the client is then sued by a different company for copyright, the manufacturer has to cover the client’s costs of the lawsuit.

Specific Performance and Mitigation Clauses

A specific performance clause allows a court to compel a breaching party to fulfill its contractual obligations rather than simply paying damages. This is especially valuable for contracts involving unique goods, intellectual property, or real estate.

A duty to mitigate clause obligates the injured party to take reasonable steps to minimize losses resulting from the breach. Including these provisions demonstrates fairness and prevents inflated claims, ensuring that damages remain proportionate to actual harm.

Limitation of Liability and Dispute Resolution Clauses

A limitation of liability clause caps the amount one party must pay in damages if they breach the contract. These clauses are often used to exclude certain types of damages (e.g., consequential or punitive damages) or to set a financial limit on liability.

A dispute resolution clause outlines how parties will resolve disagreements. In addition to arbitration clauses, contracts may specify mediation as a first step, followed by arbitration or litigation if unresolved. Some contracts also require escalation through internal channels before engaging in formal proceedings.

Data Protection and Confidential Arbitration Clauses

Modern contracts often incorporate data protection clauses, particularly when personal or client data is shared. These require adherence to privacy laws and outline procedures for breach notifications, encryption, and data storage.

A confidential arbitration clause adds another layer of discretion by keeping arbitration proceedings private. This protects proprietary information and preserves reputations during sensitive disputes.

Businesses in digital or financial sectors especially benefit from including these forward-looking provisions to manage compliance and maintain trust.

Frequently Asked Questions

  1. What are common contract clauses every business should include?
    Key clauses include payment terms, warranties, confidentiality, indemnification, limitation of liability, and dispute resolution provisions.
  2. Why is a governing law clause important?
    It ensures that both parties know which jurisdiction’s laws apply, reducing uncertainty in cross-border or interstate contracts.
  3. How do non-compete clauses protect a business?
    They prevent former partners or employees from using confidential information or client relationships to compete unfairly.
  4. What is the difference between warranty and representation?
    A warranty guarantees product or service quality, while a representation asserts factual truth at the time of contracting.
  5. What happens if a contract lacks a limitation of liability clause?
    The breaching party may face unlimited damages exposure, which can significantly increase financial risk.

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