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.

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.

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