Types of contract clauses

Types of contract clauses

Contracts come in all shapes and sizes. They also contain a wide range of different types of clauses.

Some clauses will be specific to the type of contract. For example, a contract for the supply of goods will usually contain specific provisions relating to delivery, freight arrangements, and insurance.

But there are some clause types that are commonly found in all kinds of contracts. In this handy guide, we have identified – and explained – some of the most common types of contract clauses you might come across when reviewing a contract. 

Commencement

The commencement clause states when the parties intend the contract to start. That might be from the date of signing, or it might be another convenient date – such as the start of the next month or accounting period.

Term and termination

The term of the contract refers to how long the contract relationship will last. The contract might be for a fixed term (this could be relatively short or may even be for several years). Alternatively, it might roll on from period to period until one party terminates (for example a month-to-month contract).

The termination clause will state when the contract can be terminated and with what notice. This might be at any time (a termination “for convenience”) or if defined events occur (a termination “for cause” – such as a breach of the contract or a party’s insolvency).

Time for performance

The contract may contain a clause that specifies when performance must occur. The parties can also agree that “time is of the essence”. This means that punctual performance is to be regarded as essential – so that late performance is to be treated as non-performance. If time is not “of the essence”, the other party’s remedies will be more limited.

Force majeure

Normally, the parties to a contract are required to perform their obligations even if circumstances have changed. The parties will therefore often include a force majeure clause. This excuses a party from liability if that party is unable to perform its obligations due to circumstances beyond its control.

The contract will often list examples of the types of events that will be treated as “force majeure”, including, for example, natural disasters or new laws or regulations that are imposed by a government. For some contracts, the events of the Covid-19 pandemic will likely have triggered the force majeure clause.

This type of clause may also state that a party can terminate the contract if the force majeure event lasts for a defined amount of time.

Confidentiality

A business that enters into a contract may often need to provide confidential information to the other party. For example, the business may need to share details about an invention, future strategic plans, or key customer accounts. The parties may also want to keep the terms of the contract itself confidential.

Contracts therefore often include a confidentiality clause. This clause requires that the information can only be used by the other party for the purposes under the contract. The clause also requires the recipient to safeguard the information and not to disclose it to others. Exemptions may apply – for example, if the disclosure is required by law or if it needs to be provided to their professional advisers.

Usually, the clause will also specify that a party can request the return or destruction of their confidential information – either at any time or at the end of the contract term.

Exclusion of liability

The parties to a contract may try to reduce their potential exposure to liability under the contract. Different types of clause achieve this in different ways:

  • Exclusion clauses – these clauses aim either to exclude liability in specific situations (for example, if the user of a product did not comply with the user guide) or to exclude particular categories of liability (for example, liability for consequential or indirect losses, or punitive damages).
  • Clauses to cap liability – where a party imposes a limit on the maximum amount that can be claimed by the other party.
  • Time bar clauses – these require a party to bring their claim before a deadline expires, or otherwise, their claim will be barred.

Indemnity clause

An indemnity clause is a special contract mechanism used by one party to shift the risk of a particular loss or liability onto the other party. The first party “indemnifies” the other – that is, they agree to be liable if the second party suffers a specific risk, loss, or liability.

Indemnities are often heavily negotiated. They can sometimes be drafted broadly so that they apply in a wide variety of situations. Alternatively, they might be narrow and will only be triggered if a specific risk or scenario occurs. An example might be where one party agrees to indemnify the other against any losses that it might suffer arising from a third party claiming that its intellectual property has been infringed.

Non-compete clauses

As the parties to a contract work and do business together, they often get access to each other’s confidential information. They may also get a unique insight into the other party’s strategic plans – which they could then use unfairly to their own advantage. For this reason, the parties may agree to a non-compete clause, where one or both of the parties are restrained from competing in a particular market for a certain period.

This type of clause is often found in employment agreements (especially at the executive level), or in contracts for the sale of a business, or for a joint venture. The clause prevents the other party from owning or operating a competing business in that territory. More elaborate versions include non-solicit or non-poach obligations, which are intended to prevent a party from trying to solicit or poach the other party’s customers, employees, or suppliers.

Warranty clauses

A warranty clause is a statement that promises that a particular fact in the contract is true, or that something will take place.

For example, in a software license, the licensor might provide an “intellectual property warranty” to the licensee. This means the licensor “warrants” (or confirms) that they are the valid owner of the intellectual property in the software. If this turns out to be untrue, the licensee will have a claim for a breach of the warranty.

A representation performs a similar function in contracts but is usually reserved for confirming facts that the other party is relying on to be true. A party will have stronger remedies against the other party if it was induced into entering into a contract on the basis of a misrepresentation.

Liquidated damages

If one party breaches the contract and causes the other party to suffer a loss, that other party is entitled to claim damages. In a liquidated damages clause, the parties agree in advance on what the amount of those damages should be. This saves the parties from having to dispute the amount later.

A typical example is in a construction contract. The builder promises that construction of the building will be complete by a particular date. The builder also agrees to pay liquidated damages if the project is late. Usually, this is specified as a fixed amount per day.

Dispute resolution

The parties will usually include a dispute resolution clause to specify how claims, disputes and disagreements under the contract should be dealt with.

Usually, this type of clause will require one party to notify details of the dispute to the other party. There is often an escalation and negotiation procedure, which creates an opportunity for the parties to try to resolve the dispute themselves. If that doesn’t work, the clause may require the parties to engage in mediation or for the dispute to be resolved through arbitration.

Notices

The notices clause may seem administrative, but it plays an essential role. The clause specifies when any notices (as might be required under the contract) will be treated as having been delivered. This reduces the scope for one party to claim that they were not properly notified of a matter under the contract.

Choice of law

The choice of law clause specifies which national or state law will govern the contract. This may be the law of the place where the contract is being performed, or where one or both of the parties are located. Alternatively, it might be a jurisdiction that is seen by one of the parties as being favorable if a dispute were to arise in relation to that type of contract.

Final word

These provisions are found in many different types of contracts. As they are so common, the parties might not consider them important, or review them in as much detail as they do for the more specific provisions. However, these clauses can each have a big impact on the contract relationship. That means it’s always worth including these clauses in your contract review – and learning what they mean!

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