In the realm of legal agreements, clauses are the building blocks of contracts. Contract clauses define the specifics of an agreement, and make sure all parties to the contract are made aware of their rights and responsibilities. That means a clear understanding of clauses is essential for creating precise and enforceable agreements.
Here, we’ll define what contract clauses are, and provide you with examples of several common types used in business. From general categories to specialized provisions, we’ve got you covered. So let’s dive in and explore the fascinating world of contract clauses together!
What are contract clauses?
Clauses are sections of a contract that define a party’s rights and responsibilities. For example, a clause might specify a deadline, require written notice of a change, outline a service to be provided, restrict a signer from disclosing confidential information, or explain what will happen if one of the parties fails to uphold their responsibilities. Across all these areas and more, the purpose of each clause is to clear up potential confusion by stating terms explicitly.
In general, standard clauses fall into three broad categories:
- Interpretation clauses, which specify how the contract should be interpreted;
- Enforcement clauses, which establish the rights and obligations of the parties; and
- Execution clauses, which include information like signatures and dates of signing.
As we’ll see below, most types of clauses fall into the “interpretation” and “enforcement” categories, while a contract typically includes just one execution clause for signers.
How should you use contract clauses?
You can use clauses to shape almost any aspect of a legal agreement. Although clauses can appear in any part of a contract, they’re most commonly placed toward the end, after the main terms of the agreement. In fact, clauses often make up the bulk of a contract, because they have to cover every possible way a person might try to interpret the agreement’s language.
Many organizations cover their bases by including a library of pre-written clauses – known as “boilerplate” – across a wide range of different contracts. At the same time, many contracts also need to include special provisions that are custom-tailored to the specific type of agreement.
Although most customers and contractors may not read most of the terms of an agreement, clauses become essential in the realm of dispute resolution. If someone takes legal action against your organization, carefully worded clauses can protect you from having to pay damages – while some boilerplate sections, like arbitration clauses, can actually help protect you from having to go to court at all.
Examples of contract clauses
To help clarify what they can do, let’s take a closer look at some of the most common types of contract clauses. Here’s a list of examples:
Arbitration clauses specify how the parties will resolve any disputes that may arise. The signers typically agree to “arbitrate, not litigate” – in other words, to use a neutral third-party arbitrator rather than going to court.
Cancellation clauses allow one or both parties to terminate an agreement under certain conditions – for example, if they provide written notice 30 days in advance.
Choice of law clauses specify that the contract’s terms will be interpreted according to the laws of a certain state. They may also specify that any litigation will be held in a certain jurisdiction.
Confidentiality clauses forbid one of the parties from sharing trade secrets and other proprietary info with third parties. Although any contract can include a confidentiality clause, many organizations prefer to package these clauses in standalone contracts known as nondisclosure agreements (NDAs).
Exclusion clauses exempt one of the parties from liability in certain circumstances – for example, if a product is used unlawfully, or if the user doesn’t follow the instructions.
Escalation clauses allow for increases in prices or wages under certain circumstances – for example, specifying that a loan’s interest rate will rise in response to currency inflation.
Force majeure clauses are specific kinds of exemption clauses that exempt one of the parties from liability due to “acts of God,” or other events beyond their foresight or control.
Indemnity clauses hold one party accountable for the other party’s damages under specific circumstances – for example, if a product malfunctions while being used as directed.
Penalty clauses require one of the parties to pay the other a specific amount of money in case of a breach of contract – for example, to pay $1,000 if they move out before a lease expires.
Non-compete clauses prohibit an employee or contractor from working for a competitor. They typically specify the services that can’t be offered to others, as well as the region in which the clause applies.
Severability clauses specify what will happen if any part of the contract is found to be unenforceable. They typically state that even if any clause is invalid, the rest of the contract will still remain valid.
Statute of limitations clauses specify the timeframe within which litigation about the contract is allowed to happen – sometimes overriding state laws.
Developing a library of common clauses should be a part of every organization’s contract management process. This preparatory step will help streamline the creation of contracts, and prevent team members from unintentionally drafting agreements whose language is inconsistent with company policy. Standardizing contract clauses also helps ensure that every agreement is legally binding, saving the legal team significant time they’d otherwise spend checking each contract individually.