Key Takeaways

  • A contract clause is a specific provision within an agreement that defines rights, responsibilities, or procedures for the parties involved.
  • Clauses can be boilerplate (standard) or customized to address unique aspects of a deal.
  • They provide legal clarity, prevent disputes, and ensure the enforceability of the agreement.
  • Common clauses include choice of law, indemnification, arbitration, and confidentiality clauses.
  • Drafting effective clauses requires clear language, legal compliance, and consideration of potential risks.
  • Poorly drafted clauses can lead to ambiguity, costly disputes, and unenforceable provisions.

What Is a Clause in a Contract

What is a clause in a contract? It is a very specific provision in a legal agreement that relates to an important point of understanding between the parties engaged in the contract.  A clause dictates certain conditions under which the parties agree to act during the term of the contract.

Clauses can be what is termed boilerplate clauses, meaning they are fairly standard in every contract, and as such, are generally agreed upon conditions that require little debate or negotiation. Contracts can also contain very specific clauses that address a unique characteristic of the agreement and certain conditions that exist at the time it is negotiated. There is no limit to the number of clauses to be found in a contract, and they can cover practically every aspect of the way companies will conduct business throughout the life of the contract.

Purpose and Importance of Contract Clauses

Contract clauses serve as the building blocks of an agreement, outlining the precise rules and expectations that govern the parties’ relationship. Each clause functions as a safeguard, providing clarity on how to handle foreseeable scenarios, such as disputes, payment obligations, confidentiality requirements, or unforeseen events.

Well-drafted clauses help:

  • Define rights and obligations to reduce ambiguity.
  • Allocate risk and responsibility between the parties.
  • Establish remedies or procedures if obligations are breached.
  • Ensure compliance with relevant laws and regulations.

Because clauses can directly impact how a contract is enforced, they must be clear, specific, and tailored to the nature of the agreement. Ambiguity can lead to misinterpretation, weakened enforceability, or costly legal disputes.

Common Clauses in A Contract

As a rule, clauses are usually found towards the end of contract after the requisite elements of a legal agreement have been addressed, which are the offer, acceptance, intention to create a legal relationship, and consideration. An important point to remember is that clauses cannot violate any existing laws regardless of the intent of the parties. Here are some examples of the clauses you will find in practically every agreement:

  • Choice of Law Clause: This is where the parties determine the jurisdiction whose laws will be used to interpret the contract. It often spells out the state where any litigation, if required, will take place.
  • Statute of Limitations Clause: Time limits are set for how long a party to an agreement may file a lawsuit or seek legal remedy if the other party fails to uphold its obligations under the terms of the contract.
  • Time is of the Essence Clause: This clause is often found in construction contracts when the duties agreed to in the contract must be performed by a certain date in order to complete a project. If they are not, the damaged party may pursue a breach of contract.
  • Merger Clause: Also known as an integration clause, the language in this clause states that any previously existing agreements, whether written or oral, are made void by the execution of this agreement.
  • Non-Waiver Clause: Under a non-waiver clause, a party is protected from inadvertently relinquishing its right to seek damages against the other party in the event of a breach of contract.
  • Severability Clause: Regardless of whether one part of a contract is found to be invalid, this clause guarantees that the rest of the contract is enforceable. It’s necessary to prevent a court ruling on one aspect of a contract making the entire agreement worthless.
  • Arbitration Clause: An important clause to help parties to a contract avoid the costs and time that a court case would entail by agreeing to present their situation to an arbitrator.
  • Liquidated Damages Clause: This clause allows a party to recover reasonable damages when it is determined the contract has been breached but actual damages are difficult to determine.
  • Attorney Fees Clause: In the event that there is a breach of contract, this clause provides that the injured party will be reimbursed for any attorney fees that were accumulated during the legal proceedings. Often this clause also covers incidentals such as court fees.
  • Indemnification Clause: This clause releases one of the parties from any liabilities that may result in losses being incurred by the other party in the event of non-performance or extenuating circumstances. Indemnification clauses can be a significant element of a contract.

Not only are the above clauses fairly standard in most contracts, but the language found in the clauses usually does not change from contract to contract. However, there are standard clauses that are found in most contracts that by their very nature require language that is specific to existing conditions that are unique to the agreement being formed.

Parties should enlist the aid of an experienced attorney to help draft this language to avoid misunderstandings. Examples of these are assignment clauses, confidentiality clauses, consideration clauses, and termination clauses.

Clauses exist in contracts to protect the interests of the parties involved. They are a vital component of every agreement, essentially the “what if….” components that provide relief in those instances when things may not go according to plan.

Best Practices for Drafting Contract Clauses

Creating effective contract clauses requires both precision and foresight. Poorly drafted clauses can result in unintended loopholes or unenforceable terms. To reduce risk:

  1. Use Clear, Unambiguous Language – Avoid vague terminology that could lead to multiple interpretations.
  2. Ensure Legal Compliance – Clauses cannot override existing laws or public policy.
  3. Anticipate Possible Scenarios – Consider “what if” situations, such as delays, nonperformance, or regulatory changes.
  4. Be Specific with Conditions and Triggers – Clearly state the events or conditions that activate a clause.
  5. Avoid Overuse of Boilerplate – While standard language is useful, it should be adapted to the specific agreement.
  6. Review for Consistency – Ensure clauses don’t conflict with each other or the main terms of the contract.

Seeking legal review before finalizing a contract clause can help confirm that the provision will be enforceable and effective.

Risks of Poorly Drafted Clauses

An inadequately drafted clause can have serious consequences, such as:

  • Enforceability Issues – Courts may strike down clauses that are overly broad, vague, or contrary to law.
  • Unintended Liability – Poor wording may unintentionally expand a party’s obligations.
  • Dispute Escalation – Ambiguity can increase the likelihood of litigation or arbitration.
  • Business Disruption – Inadequate risk allocation can harm operations if a dispute arises.

For example, an indemnification clause that fails to clearly define the scope of coverage could leave a party responsible for costs they never intended to bear.

Frequently Asked Questions

  1. What is the main purpose of a contract clause?
    It defines specific terms, rights, and obligations in a contract to guide how the agreement is carried out and enforced.
  2. Are all contract clauses legally enforceable?
    Only if they are clear, comply with applicable laws, and do not violate public policy.
  3. What’s the difference between boilerplate and customized clauses?
    Boilerplate clauses are standard provisions found in most contracts, while customized clauses are tailored to a specific deal or industry.
  4. Can I write my own contract clauses without a lawyer?
    Yes, but legal review is recommended to avoid unenforceable or risky terms.
  5. What happens if a contract clause is ambiguous?
    Courts may interpret it against the party that drafted it, potentially leading to unfavorable outcomes.

To learn more about what is a clause in a contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.