Types of Contract Clauses

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When you were a kid and accepted the bribe of a quarter to help your mom with the housework, you actually demonstrated the workings of a business contract. Your mom made an offer, you accepted it, and you agreed on the amount of compensation that would be involved. The contracts you use in your business follow the same pattern, from your cellular provider's service agreement to your takeover bid for a smaller firm. The devil is in the details, as they say, and this is where the clauses of the contract come into play.

Contract Clause Definition

Most contracts are more complicated than "I'll give you a quarter to put the dishes away," so you need to go into more detail. You should be explicitly clear about the offer, the terms of its acceptance and the "consideration," or payment, for completing it successfully. You do that by breaking down each part of the contract into separate clauses or provisions, each one of them addressing a specific detail of the agreement. You could think of them as bullet points on steroids, designed to explain in absolute, unmistakable detail what's expected of each party to the contract.

Contract Consideration Clauses

Consider the compensation, or "consideration," that's built into the contract. In a simple case, such as a one-time payment for a one-time delivery, that clause might only consist of a line or two. In other cases, where the contract calls for payments over an extended period of time or when specific milestones are met, the contract might include a host of other clauses to spell out those details.

The consideration doesn't always have to be money, either. It might be in the form of shares in the other company or even something as simple as the opportunity to cross-market to each other's customers on social media. If there's no consideration clause or if the consideration isn't appropriate to the contract's requirements, then the contract might not be enforceable.

Other Types of Contract Clauses

There are as many potential clauses as there are reasons to draw up a contract, but you'll run into a handful of important ones over and over again. It's important to have a lawyer review any contract before you agree to it, but having even a layperson's grasp of these is useful.

  • Indemnification clause: In essence, an indemnification clause is a way to pass the buck. Usually what it boils down to is that if you're doing work for someone else, you're responsible for any liability that results. If someone else is doing work for you, the shoe is on the other foot, and they're indemnifying you against any potential liability.

  • Assignment Clause: This one says whether or not the terms of the contract are transferable to a third party. For example, if you bought another company, some of its clients might transfer to you under the terms of their contracts, while for others it means they'd open up their contract for new bids or renegotiation.

  • Confidentiality or nondisclosure clauses: Sometimes, it's necessary to trust other companies or individuals with sensitive details about your operations. Including a confidentiality clause or nondisclosure clause in the contract protects you against any damaging disclosures.

  • Time of performance clause: If the contract is time sensitive or if there's a specific timeline that must be maintained, the contract may include a clause addressing that. It may name specific dates or time frames for the entire project or predetermined milestones, or it might just state that "time is of the essence." Failure to meet the specified timelines can lead to penalties or termination of the contract.

  • Forum clause or "choice of law" clause: If you do business in multiple jurisdictions, you might opt to name the specific state or jurisdiction whose laws apply. That can save you from having to learn the quirks of legislation in other states, sometimes in an unpleasant fashion.

  • Acceleration clause: If a party doesn't meet the commitments under the contract, it can trigger a requirement for immediate satisfaction. If you're behind on a project, for example, the client could demand that you finish immediately. On the other hand, if your client is behind on payments, you might demand payment in full.

  • Termination clause: This is a big one, and it specifies what conditions allow one party or the other to terminate the contract. Usually they boil down to nonperformance or nonpayment, but the definition of those terms requires negotiation.

Two Special Cases in Clause Law

Even for professionals, it's sometimes hard to get everything correct in a contract. There might be an ambiguity in the wording, the laws in your jurisdiction might change or there may even be a court case that changes the way the laws are interpreted. You can protect yourself against those hazards through what's called a "severability clause," which means that if any one clause of your contract becomes invalid the rest will remain in force.

Another special case is the nonwaiver clause, which says that if you opt to let something slide "just this once" – a missed payment, for example, or a missed performance deadline – you haven't waived your right to enforce the contract in the future. It leaves you the freedom to decide for yourself when enough is enough and it's time to move forward with penalties or a termination.

References

About the Author

Fred Decker learned business fundamentals at second hand as an insurance and mutual funds broker, and at firsthand as a retail store manager and the chef/proprietor of his own restaurants. He has written hundreds of business-related articles for sites including Zacks.com, Chron.com, Vitamix.com, Bizfluent and GoBankingRates and many others. He was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.

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