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What is a contract clause?

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What Is a Contract Clause?

A contract clause in a section in a legally enforceable contract that contains terms and conditions and important provisions of the legal agreement. The Article I, Section 10, Clause 1 of the United States Constitution is known as the contract clause which imposes rules and prohibitions on states to protect individuals from state administration’s intrusion in private contract rights.

In general, contracts are made up of many different contract clauses, all of which serve a different purpose. Together, these contract clauses form a legally binding contract for the parties to sign.

Here is a contract clauses guide to learn about different clauses.

Purpose of a Contract Clause

A clause dictates the conditions under which the contract is legally enforceable and determines the terms of the contract. Contracts often contain boilerplate clauses or standard clauses found across most contracts. These standard clauses do not require a lot of negotiation. Sometimes contracts can also contain very specific clauses that are aligned with a specific case or term of the deal.

Clauses in a contract are important for laying out certain conditions under which parties agree to the terms of the contract. They also can provide direction on how the contract will be enforced under different conditions or events. For instance, if your employment contract contains a clause to keep information about the company confidential, the employee would be required to keep all proprietary information a secret. You should carefully read clauses before proceeding to the contract signing step.

Here is an article where you can read more about the contract clause and its use.

Common Contract Clauses

Contract clauses are usually found towards the end of the contract. After the general elements of any legal agreement are addressed, clauses are added to set specific rules regarding the contract. Below are some common clauses found in most contracts:

  • Arbitration Clause: An arbitration clause helps in avoiding time and costs associated with taking a case to court. It states that if there is conflict, the case will be presented to an arbitrator instead of it being taken to court.
  • Confidentiality Clause: Often companies do not want their trade and business secrets to be disclosed. A confidentiality clause in a contract between an employer and employee ensures that no confidential business information is leaked by the employee, often even after they are not associated with the company.
  • Definitions Clause: A definitions clause or contract definitions are used to define terms used in the legal agreement. Using a definitions clause reduces the chances of misinterpreting any part of the contract. It is important to write this part in plain language to avoid any confusion between the parties.
  • Dispute Resolution Clause: A dispute resolution clause specifies the methods which would be used to resolve any dispute. This can involve arbitration, mediation and litigation.
  • Entire Agreement Clause: An entire agreement clause simply states that the contract constitutes the whole agreement. It is used to prevent the parties from using any prior agreements or discussions when enforcing the contract. Only terms and conditions laid down in the contract will constitute the agreement.
  • Governing Law Clause: A governing law clause is used to declare the rules and laws that will be used to interpret the agreement in case of any dispute or legal issue. This usually states which state law would apply in case of disputes.
  • Indemnification Clause: An indemnification clause is a type of exemption clause which is used to make one party carry the responsibility in case the other party suffers losses. This clause is also used to release one party from any liabilities that might result in loses to the other party.
  • Severability Clause: A severability clause is used to lay out what would happen if the entire contract or part of it was found to be unenforceable. Generally, it states that if part of the contract become unenforceable, it would not render the entire contract invalid and unenforceable.
  • Termination Clause: A termination clause is a contractual provision that sets forth the circumstances under which agreements may be terminated, including the effects of termination, such as payments and other rights and obligations of the parties.
  • Copyright Clause: A copyright clause or an intellectual property clause is used to provide limited times to authors, developers or owners of certain intellectual property, the sole right to their work. This prevents the work from being imitated or copied by other competitors in the market. This clause is often used to promote inventions and original discoveries in different industries. You will need to file for a copyright for any work that needs to be protected.
  • Escalation Clause: An escalation clause allows one party to increase originally agreed upon terms, such as prices, rates, etc.
  • Cancellation Clause: A cancellation clause allows either party to cancel the contract before its agreed upon expiration. It can outline the penalties of canceling the contract or provide specific instances when cancellation would not result in any penalties.
  • Insurance Clause: An insurance clause requires the parties involved to take out insurance cover. This clause would generally outline the details about the type and length of insurance as well.
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Analyzing Contract Clauses

Analyzing contracts and contract clauses is an essential skill or legal practitioners, scholars and industry auditors. This allows an individual to understand the contractual relationship and assess if all parties have abided by the contract. There are five elements of a general contract that are analyzed in this process:

  1. Agreement : This refers to the agreed upon terms in the contract.
  2. Consideration : This means that each party is contributing something to the arrangement.
  3. Intent : This signifies the intention to be legally bound by the contract
  4. Legal Capacity : This means that all parties have the legal capacity to enter the contract and fulfill the terms of the contract.
  5. Formality : This means that the written and signed contract is to be legally enforced.

In the process of contract analysis, one needs to understand all the terms and conditions, often written as clauses, that the contract contains. During an examination of a contract, one should also look for any bad clauses, which might be contradicting other terms of the agreement or might be in violation of local laws.

Some clauses are also more complicated than the others. For instance, a confidentiality or copyright clause is often complicated. During review, it is important to ensure the clauses leave no room for confusion in case of a conflict.

In case of a copyright clause, it can be difficult to establish ownership of intellectual property depending on the employee-employer relationship. In any case, the right to file copyright remains with the developer of the intellectual product in most cases. In Stanford University v. Roche Molecular Systems Inc , 563 U.S. 776 (2011), the US Supreme Court established that even if a product was funded by someone else, the researcher will retain the right to file copyright on that product.

You can use online resources and templates to draft a contract. Sometimes, writing clauses specific to your contract can be complicated. Online services can give you a contract clause guide. If you are still unsure about which clauses to include, you should contact an attorney.

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