Businesses use a variety of contracts to protect themselves and their clients, vendors, and employees. These contracts often include clauses that include information specific to that particular contract. What contract clauses should be included in a contract? Do you need the same clauses in every contract? There are many types of contract clauses that you may use. Understanding the most common types of contract clauses and when to use them can help you create stronger, clearer contracts and ward off unnecessary contract disputes. Consider contacting the experienced attorneys with Harrison Law, PLLC at (480) 320-2310 to learn more about drawing up enforceable contracts.
What Is the Purpose of a Contract Clause?
A contract clause dictates the conditions under which each party will take specified actions, such as payment of expenses and assumption of liability. Contract clauses also commonly provide direction for when and how the contract is enforceable. These clauses determine the terms of the contract and lay out the specific conditions by which the parties agree to be bound. Contract clauses establish the rules specific to that contract, specifying the parameters of the agreement.
Arbitration
An arbitration clause helps the parties avoid court in the event of a dispute. This can save both parties time and money. If a dispute arises, the parties present their case to an arbitrator, who will help settle the conflict.
Arbitration can be binding, which means the parties must abide by the arbitrator’s decision. Arbitration can also be non-binding, which means if one of the parties disagrees with the decision, they can still take the dispute to court.
Confidentiality
Confidentiality clauses keep trade and business secrets from being disclosed. These types of contract clauses prevent employees, contractors, and vendors from telling confidential business information to third parties who are not part of the contract. This clause often extends past the end of the employment or business relationship.
Dispute Resolution
Dispute resolution clauses specify the methods that can be used to resolve disputes. These methods can include arbitration, mediation, and litigation. This clause can limit parties to just one method or can allow for multiple methods. Dispute resolution clauses can also require the parties to follow a particular path of resolution, such as beginning with mediation before litigation.
Maricopa County Superior Court offers a Civil Short Trial and Settlement Conference as alternative dispute resolution options that may be included in this contract clause.
Governing Law
A governing law clause declares the rules and laws that will be used to interpret the agreement if there is a dispute or legal issue. Because different states have different laws, this type of clause is often included in contracts between parties in different states. This common contract clause usually states which state’s law will apply to settle the dispute. For example, as an Arizona business, you will likely stipulate that Arizona laws will apply.
Indemnity or Indemnification
An indemnity or indemnification clause is an exemption clause used to make one party responsible if the other party suffers losses. In some cases, these types of contract clauses can also be used to release one party from any liabilities that might result in losses to the other party. Indemnity clauses are often contentious. Harrison Law, PLLC may be able to assist in preparing a contract with this and other important clauses.
Severability
Severability clauses explain what happens if the entire contract or part of the contract is found to be unenforceable. Without a severability clause, if just one part of the contract is found unenforceable, the entire contract may be considered invalid. Including this clause generally ensures that if one part of the contract is found unenforceable, the rest of the contract will still be considered valid and enforceable.
Termination
Termination clauses set forth the circumstances under which a contract may be terminated before its expiration date arrives or the contractual obligations have been completed. These common contract clauses usually include the conditions of termination, such as how much notice must be provided, payments that must be made, and any other rights or mutual obligations the contracted parties may have.
Cancellation
A cancellation clause allows either party to cancel the contract before the agreed upon expiration date. This clause may outline penalties for canceling or it may indicate specific circumstances under which the contract can be canceled without penalty. Cancellation clauses and termination clauses are similar, so a contract may not need both types of contract clauses.
Force Majeure
Force majeure is a French phrase that means “superior force.” A force majeure clause exempts the parties to a contract from liability if unforeseeable events that are beyond their control prevent them from performing their contractual obligations. Acts of God, natural disasters, and acts of terrorism or war may all be examples of force majeure.
Non-Compete
A non-compete clause is often part of an employment contract. This type of clause is often used to prohibit an employee from competing with their employer by working for a competitor or opening their own competing business. Non-compete clauses typically include details about the time span during which the employee cannot compete and a specific region or state in which they cannot compete. In some cases, this clause can also be found in contracts for freelancers or contractors.
The Federal Trade Commission (FTC) proposed a rule in January 2023 that would ban non-compete clauses. If this rule passes, it will supersede state laws regarding non-compete clauses unless the state laws provide more protection for employees.
Limitations on Liability
A Limitations on Liability clause, also known as limit of liability, limits the amount a party has to pay the other party if the latter suffers losses. This clause may also cap the types of compensation that can be recovered in the event of a loss. These clauses typically cover losses caused by negligence, breach of contract, infringement of intellectual rights, and misrepresentation.
Are You Uncertain Which Types of Contract Clauses You Need?
Including the right clauses in a contract can help protect you and your business, and including the wrong ones can clutter your contract with information that does not matter. An experienced attorney can help you determine which types of contract clauses you need and which ones you can safely leave out. If you need help drawing up a contract, consider contacting one of the knowledgeable attorneys with Harrison Law, PLLC at (480) 320-2310 to discuss your needs and learn more about your options.
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This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
