Contract Clauses

Muhammad Hanzala Advocate

In the realm of legal agreements, clauses are the building blocks of contracts. A contract clause
defines the specifics of an agreement, and makes 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 daily life transactions,. From general categories to specialized provisions, we have
got you covered. So let’s discuss and explore the of contract clauses together!

What is a clause in a contract?

A clause in a contract is a section that defines 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:

1. Interpretation clauses, which specify how the contract should be interpreted;

2. Enforcement clauses, which establish the rights and obligations of the parties; and
3. 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.

Why are clauses in agreements important?

Contract clauses are important because they define the scope, rights, and duties within an
agreement.

Agreement clauses are crucial for all the following reasons:

 Precision and clarity: Clauses provide specific details about the terms of the agreement,
reducing ambiguities and potential misunderstandings.
 Risk management: By outlining the obligations and responsibilities of each party,
clauses help in managing and mitigating risks associated with the contract.
 Legal protection: Well-drafted clauses can protect parties from legal disputes and
liabilities, ensuring that the agreement is enforceable in a court of law.
 Flexibility and customization: Clauses allow for customization of agreements to address
the unique needs and circumstances of the parties involved.
 Dispute resolution: They set out the process for resolving disputes, saving time and
resources that might otherwise be spent in litigation.
 Compliance with laws: Clauses ensure that the contract complies with relevant laws and
regulations, thereby avoiding legal penalties.

In all these ways, incorporating well-thought-out clauses is key to crafting strong and effective
contracts, ensuring clarity, compliance, and protection for all parties involved.

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.

Frequently used contract clauses include the following 24 types:

1. Arbitration clauses
2. Assignment clauses
3. Cancellation clauses
4. Change control clauses
5. Choice of law clauses
6. Confidentiality clauses
7. Conflicts of interest clauses
8. Data protection and privacy clauses
9. Dispute resolution clauses
10. Exclusion clauses
11. Escalation clauses
12. Force adjustment clauses
13. Force majeure clauses
14. Indemnity clauses
15. Intellectual property (IP) clauses
16. Liability limitation clauses
17. Penalty clauses
18. Non-compete clauses
19. Payment clauses
20. Severability clauses
21. Statute of limitations clauses
22. Subcontracting clauses
23. Termination for convenience clauses
24. Warranty clauses

A detailed explanation of 24 types of contract clauses

Here’s a detailed explanation of each of these types of contract clauses, including sample
wording:

1. Arbitration clauses: These clauses require parties to resolve disputes through

arbitration rather than litigation. They often include details about the arbitration
process, such as the choice of arbitrator and the rules governing the proceedings.
Sample wording: “Any dispute arising out of or in connection with this contract shall
be resolved by binding arbitration in accordance with the rules of [Arbitration
Association].”
2. Assignment clauses: Address the ability of one party to transfer their rights and
obligations under the contract to another party.
Sample wording: “Neither party may assign this agreement or any rights or
obligations herein without the prior written consent of the other party.”
3. Cancellation clauses: These allow either party to terminate the contract under specific
conditions, often requiring advance notice.
Sample wording: “This agreement may be terminated by either party by providing 30
days written notice to the other party.”
4. Change control clauses: Manage how changes to the contract or project scope are
handled.
Sample wording: “Any changes to the scope of work must be made in writing and
agreed upon by both parties.”
5. Choice of law clauses: They determine which jurisdiction’s laws will govern the
contract. This is crucial for contracts spanning multiple legal areas.
Sample wording: “This contract shall be governed by the laws of the State of [State],
without regard to its conflict of law provisions.”
6. Confidentiality clauses: These clauses prevent parties from disclosing sensitive
information. They are common in NDAs.
Sample wording: “The receiving party shall not disclose any confidential information
to any third party for a period of [X] years from the date of this agreement.”
7. Conflicts of interest clauses: Require disclosure of any potential conflicts of interest
and often include terms for how they are to be managed.
Sample wording: “The Contractor shall disclose any relationships or interests that
could be perceived as a conflict of interest.”
8. Data protection and privacy clauses:Ensure compliance with data protection laws,
defining how personal and sensitive data should be handled.
Sample wording: “Both parties agree to comply with all relevant data protection laws
and ensure the confidentiality and security of any personal data processed as part of
this agreement.”
9. Dispute resolution clauses: Outline the process for resolving disputes, potentially
including negotiation and mediation before arbitration or litigation.
Sample wording: “In case of a dispute, parties shall first attempt to resolve the issue
through mutual negotiation and, if needed, through mediation before resorting to
arbitration.”
10. Exclusion clauses: These limit or exclude liability for certain events or actions. For
instance, a company might use an exclusion clause to limit liability if a product is
misused.
Sample wording: “The company shall not be liable for damages resulting from
improper use of the product by the customer.”
11. Escalation clauses: These allow for adjustments in prices or other contract terms
based on specified conditions, like inflation rates.
Sample wording: “The annual fee shall increase by the rate of inflation as determined
by the Consumer Price Index published by [Authority].”
12. Force adjustment clauses: Similar to escalation clauses, these adjust contract terms
based on changes in market conditions or other external factors.
Sample wording: “The price of goods may be adjusted in response to significant
changes in market conditions, subject to a maximum of 10% per annum.”
13. Force majeure clauses: These exempt parties from fulfilling their obligations due to
extraordinary events beyond their control, like natural disasters.
Sample wording: “Neither party shall be liable for any failure to perform due to
unforeseen circumstances or to causes beyond their control, such as acts of God, war,
or natural disaster.”
14. Indemnity clauses: One party agrees to compensate the other for certain kinds of
losses or damages. This is often used in supplier contracts.
Sample wording: “The supplier shall indemnify the purchaser against all liabilities,
costs, expenses, damages, and losses caused by defective products supplied under this
contract.”
15. Intellectual property (IP) clauses:Specify the ownership and use rights of intellectual
property created or used during the contract.
Sample wording: “All intellectual property developed during this project shall be the
exclusive property of the Client.”
 16. Liability limitation clauses: Limit the amount or type of liability one or both parties
may have under the contract.
Sample wording: “In no event shall either party be liable to the other for any indirect,
incidental, or consequential damages.”
17. Penalty clauses: These impose a financial penalty if a party fails to fulfill part of the
contract, such as breaching a lease.
Sample wording: “If the Lessee terminates this lease early, they shall pay the Lessor a
termination fee of $1,000.”
18. Non-compete clauses: These prevent employees or contractors from working with
competitors or starting a competing business within a specified period after leaving the
company.
Sample wording: “The employee agrees not to engage in any business activities that
compete with the employer for a period of two years following the termination of
employment.”
19. Payment clauses: Define the terms for payment, including amount, method, and
schedule.
Sample wording: “Payment of $500 shall be made by the Client to the Service
Provider within 30 days of receiving the invoice.”
20. Severability clauses: These ensure that if one part of the contract is invalid or
unenforceable, the rest of the contract remains valid.
Sample wording: “If any provision of this Agreement is held invalid, the remainder of
this Agreement shall continue in full force and effect.”
21. Statute of limitations clauses: They set a specific timeframe within which legal
action related to the contract must be initiated.
Sample wording: “Any legal action related to this agreement must be commenced
within three years after the cause of action has arisen.”
22. Subcontracting clauses: Address conditions under which a party may subcontract
work.
Sample wording: “The Contractor may not subcontract any portion of the services to
be performed under this contract without the prior written consent of the Client.”
23. Termination for convenience clauses:Allow one or both parties to terminate the
contract without cause, often with notice.
Sample wording: “Either party may terminate this agreement at any time by giving 60
days’ written notice to the other party.”
24. Warranty clauses: Guarantee certain conditions of products or services, often
including remedies for breaches of the warranty.
Sample wording: “The Seller warrants that the goods will be free from defects for a
period of 12 months from delivery.”
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.