Wondering what are the 29 common contract clauses and why they mean?
What are the common contract clauses typically found in contracts?
Contractual clauses fall under what category?
In this article, we will look at 29 common contract clauses and explain to you what they mean so you know all there is to know about it.
Are you ready?
Let’s get started!
What is a clause in a contract?
Contract clauses are the specific provisions of a contract outlining the content of what the parties have agreed to.
Each contractual clause will outline a party’s right or obligation under the contract.
The combination of all the contractual clauses found in a contract will represent the extent of the agreement reached by the contracting parties.
Companies enter into contracts every day to understand what’s in a contract, it’s important to understand contract clauses.
Not all contract clauses are intended for the same purpose.
Contractual clauses help define what the parties will perform, how the parties will interpret their contract and how they may potentially enforce the contract.
Some clauses are considered “standard clauses” or “general clauses” while others are considered “special clauses” or “specific clauses”.
There are different types of contract clauses to choose from and each type of agreement will warrant the use of a different contractual clause.
29 Common contract clauses
What are some common contract clauses?
Let’s look at some of the common contract clauses you may have already seen but have wondered what they were!
The appearance is generally the first page of the contract where the parties are identified.
This sounds pretty basic but the identification of the parties is one of the most important contractual provisions.
It’s important to know who you are contracting with.
If you are contracting with a person, the person’s full legal name must be indicated along with their address.
If you are dealing with a company, the company’s full legal name must be indicated, including the “inc.” or what have you.
The appearance will work hand-in-hand with the signature page to ensure it is clear who is committing to be legally bound by the contract.
Statue of limitation clause
The statute of limitation clause is a clause outlining how long the parties may have to file a lawsuit against the other in the event of a breach of contract.
The enforceability of this type of contractual clause can vary from one state to another.
The parties should be careful how they draft the statute of limitation clause as the mandatory requirements of the law cannot be contractually altered.
Time of performance clause
The time of performance clause is a clause stating that some obligations or duties must be performed within the stipulated timeframe.
As such, time is of the essence.
If a party fails to fulfil its contractual obligations by the required timelines, a party may be in breach of contract by the mere passing of time.
With a merger clause or an integration clause, the parties confirm that the content of past agreements between them is brought together under this agreement.
In other words, you are merging past agreements into one.
It is a good practice to consolidate multiple agreements into one so there’s one single contract to refer to outlining the rights and obligations of the parties.
The merger clause should be carefully drafted to avoid losing contractual pieces in the process.
An exemption clause is a contractual clause limiting the liability of a party.
Typically, the exemption clause will apply in the event of a breach of contract.
There are three types of exemption clauses:
- Limitation of liability
- Exclusion clauses
- Indemnification clauses
A party will exempt his or her responsibility for certain events or certain liability.
An exclusion clause is a type of exemption clause intended to limit a party’s liability.
The exclusion clause will state in what context a party may not be held contractually liable.
The most notable example of exclusion clauses relate to insurance contracts.
Insurance companies will typically exclude their responsibility for certain events.
As a result, certain events are not insured events or are excluded events.
Limitation of liability clause
The limitation of liability clause is a very important clause in a contract.
The limitation of liability clause establishes a cap or a limit of how much a party can be potentially held liable towards the other party.
What is typically seen is that companies will establish the liability cap to the level of the commercial value of the contract.
For example, if the contract is worth $500,000, they’ll establish the total liability cap to $500,000 or some multiplier of that number.
The indemnification clause represents another important clause in a contract.
The indemnification clause states that if a party fails to respect the terms of the contract or observe the law resulting in a loss or damage to the other party, the non-breaching party can demand that the breaching party indemnify or assume the losses.
Essentially, with this type of clause, one contractual party releases the other contractual party from any losses or injury they may suffer as a result of the performance or non-performance of the contract.
Quite often, the indemnification clause will also state that the non-breaching party may also recover its reasonable attorney fees resulting from the breaching party’s actions.
It’s important to properly scope the indemnification clause so the triggers are well defined.
The non-violation states that a contracting party confirms that by entering into this contract, it is not violating the terms of another contract.
This clause is generally aimed at validating whether a person is bound by a non-compete clause or confidentiality clause.
A contracting party may want assurance that the other party is not bound by a non-compete clause or confidentiality clause when entering into this contract.
The non-violation clause gives the necessary assurance that by signing this agreement, the provisions of another agreement will not be violated.
The non-waiver clause is a common contract clause stating that if a party behaves in a way that does not respect the terms of the contract without an explicit objection by the other party, the other party does not waive his or her contractual rights even though no objections were raised.
For example, if you expect to receive payment from your client on a Net 30 basis and your client constantly pays you within 45 days or more without you objecting, the non-waiver clause makes it clear that you are not waiving your right to demand payment in 30 days even though you did not previously object to the 45-day payments.
The severability clause is when the parties agree that in the event the court invalidates one or a few clauses of the contract, the other clauses remain in full force and effect.
In other words, the rest of the contract remains enforceable.
Dispute resolution clause
The dispute resolution clause is a mechanism that the parties define in an attempt to resolve any possible contractual dispute between them.
The dispute mechanism clause can state that the parties have a duty to amicably resolve their dispute by escalating the issue to higher-level management.
If the escalation does not work, they may provide for mediation.
And if that doesn’t work, they’ll provide for arbitration or allow for litigation.
The goal is to define a process to internally attempt to resolve any differences or disputes.
The arbitration clause is a type of dispute mechanism clause.
The arbitration clause is used when the parties intend to submit any contractual disputes to arbitration as opposed to the common courts.
The parties have a lot more flexibility in defining how an arbitration proceeding may be instituted between them.
What’s notable about arbitration proceedings is that the entire process is handled privately whereas lawsuits before the court are inherently public proceedings.
Every contract will have a non-disclosure clause or a confidentiality clause.
Many refer to the actual confidentiality clause as an NDA (non-disclosure agreement).
However, an NDA is a standalone agreement providing for confidentiality obligations.
A non-disclosure clause is a contract clause to watch out for as it provides for the foundation of how the parties should keep the information they get about the other party confidential.
The notice clause outlines the mechanism of how companies are to send formal notices to one another.
Generally, the notice clause will state the address and contact details of where a letter should be sent.
It may also specify how the parties may send formal notices via email or electronic means.
Independent contractors clause
The independent contract clause states that the parties are independent of one another and dealing at arm’s length.
This is an important legal concept.
To make sure that they are not considered as related companies and suffer unwanted tax or legal consequences, the parties include this type of clause in their contract to validate they are independent companies.
Choice of venue clause
The choice of venue clause or choice of forum clause allows you to choose the location where the contract can be enforced before the courts.
For example, a contract can have a choice of venue clause selecting the State of New York.
This means that no matter where the parties are located, any enforcement action on the contract will need to be presented before the courts in the State of New York.
The parties can also include an exclusive venue clause.
In some jurisdictions, there may be many courts that can potentially have competence to hear the contractual dispute.
With an exclusive venue, the parties agree to submit contractual disputes to a specific court in a specific jurisdiction.
Governing law clause
The governing law clause, as the name indicates, is a clause where the parties agree on the law they wish to apply to their contract.
This is a very important clause in a contract.
Your contractual negotiations may be handled differently if you are going to subject the contract to the laws of the State of New York as opposed to the laws of the Province of Quebec in Canada.
For example, if a Canadian company enters into a contract with an American entity, they may decide to include a governing law clause to subject the contract to the laws of New York or perhaps Quebec.
A penalty clause is a contractual clause allowing a party to obtain a specified compensation in the event the other party breaches specific provisions of the contract.
The penalty under a penalty clause is something that the parties mutually agree as a penalty to pay and is not necessarily a function of actual damages that a party may suffer.
Liquidated damages clauses
The liquidated damages clause is a contract clause establishing how much a party may be entitled to in liquidated damages in the event the other party breaches the contract.
For a court to enforce liquidated damages, the clause must be reasonable based on the context and circumstances of the contract.
Liquidated damages, unlike the penalty clause, are linked to the estimate of possible damages a party may actually suffer due to the breach of the other.
Businesses entering into a contract will need to watch out for the termination clause.
The parties can include a termination for convenience clause given one or all parties the right to terminate the contract by convenience or without any cause.
The parties may also include a termination for cause clause to state in what situations can the parties terminate the contract for breach.
The termination clause provides for how the contract will end.
A sunset clause is a contractual provision that indicates that past a certain date, the contract will cease producing legal effects.
In other words, a sunset clause is like an automatic termination clause.
A non-compete clause is a clause where companies or individuals obligate themselves not to compete against one another.
For example, if a company acquires another company but decides to terminate its relationship with the top-level managers, it may want a binding contract that includes a non-compete clause so they top managers do no compete against it.
This is done to prevent the possibility that the top managers turn around and immediately start competing with the business they just sold.
The non-solicitation clause typically targets either the personnel of a company or its clients.
The non-solicitation clause state that a contractual party cannot entice or lure the personnel or clients of one party for their own benefit.
The goal is to prevent a party from ‘stealing’ the commercial relationships of another for a certain period of time.
Course of performance clause
A course of performance clause or course of dealing clause or even trade usage clause is a clause intended to avoid interpretation issues for potentially ambiguous terms.
In a course of dealing clause, the parties agree that the courts should look at their trade usage or conduct of the parties to interpret ambiguous contract language.
“Force Majeure” clause
The term “force majeure” is French for “superior force”.
The force majeure clause is a clause outlining the rights and obligations of the parties in the event of a disaster or an unforeseeable event and entirely out of their control.
For example, the COVID-19 pandemic can be considered a “force majeure” event under certain contracts.
An unforeseeable event may potentially affect the ability of a party to execute its contractual obligations.
Generally, the parties will want to limit their liability in the event of a “force majeure” event.
An assignment clause is a clause in a contract governing how the contract may be transferred or not to another party.
Generally, the parties limited the assignment of the contract.
For example, if one party intends to assign the contract to a third party, it must obtain the prior written approval of the other contracting party.
This is the case so that the non-transferring party does not end up with a new and unwanted contracting party.
Limitation of warranty clause
The limitation of warranty is a clause parties incorporate in a contract to limit possible remedies a party may have in the event a product is defective or service is poorly rendered.
The counterparts clause is a contractual provision authorizing the parties to sign the contract at different times, in different locations and using different signature pages.
The parties mutually agree that all the counterparts will be deemed as one original contract or one agreement as if all parties had signed at the same place and on the same page.
Contract clause categories
Contract clauses generally fall into three categories:
- Enforcement clauses
- Interpretation clauses
- Execution clauses
Let’s look at each of these contract clause categories.
The enforcement clauses related to how the contract can be enforced by one party in the event of breach or performance failure of the other party.
The following clauses are considered to be enforcement clauses:
- Choice of law clause
- Choice of forum clause
- Mediation clause
- Arbitration clause
- Statute of limitation clause
Interpretation clauses allow the parties to interpret their contractual rights and obligations.
The following clauses are considered to be interpretation clauses:
- Merger clause
- Course of performance clause
Execution clauses are claused intended to clarify how the parties are to execute their obligations.
The following clauses are considered to be execution clauses:
- Time of performance clause
- Non-waiver clause
- “Force Majeure” clause
Enforceability of contract clauses
Contract clauses are enforceable to the extent they do not conflict with mandatory statutory requirements.
For example, if a company is subject to the Sarbanes-Oxley Act and they are required to retain certain documents for seven years, the parties cannot contractually lower the retention period.
They can bonify the minimum retention requirement of the law but cannot reduce it.
Frequently asked questions
What is a boilerplate provision or boilerplate clause?
Boilerplate provisions or boilerplate clauses are contractual clauses drafted generically and based on pre-approved company requirements or best practices.
Boilerplate clauses can help accelerate the contracting process by increasing efficiency, reduce time spent drafting contracts, ensure consistency of the contractual clauses in the entire agreement and incorporate past experiences of the company or best practices into the contract.
Which contract clauses should survive termination?
The parties can contractually define which of their contract clauses should survive termination using a survival clause.
Generally speaking, the parties will want the confidentiality clause, indemnification clause, liability cap, intellectual property rights and dispute resolution clauses to remain in effect even after termination.
In other words, interpretation and execution clauses should survive past the contract termination while performance clauses should end upon termination.