Common types of contract clauses and standard elements.

Learn more about standard clauses within a contract, what they mean, and when you might come across them in business.

A business contract is a signed and legally binding agreement that defines the working relationship between two or more parties, including their roles, responsibilities, compensation, benefits, and other aspects of the relationship. Whether you’re an employee entering into an employment contract or a business owner building partnerships with other business owners — to take just a few examples — it’s helpful to understand some of the standard types of contract clauses to help prevent misunderstandings down the road.

What is a contract clause?

A contract clause is a specific provision or segment within a legal agreement that outlines the terms and conditions. They serve to clarify the agreement, make it legally enforceable, protect the interests of the parties, allocate risks, and ensure compliance with relevant laws. Well-drafted contract clauses are crucial to prevent misunderstandings and disputes, making them a fundamental element of any contract.

Using different types of clauses in a contract.

Different types of clauses in a contract allow parties to create agreements that are legally sound, protective of their interests, and conducive to effective business partnerships. Below are a few key ways in which contract clauses are employed:

• Protecting confidentiality. Through confidentiality clauses, sensitive information is protected by prohibiting unauthorized access or usage.

• Preventing competition. Non-compete clauses act as deterrents. They limit parties from engaging in competitive activities or affiliating with competitors after contract completion.

• Mediating conflicts. Dispute resolution clauses set the groundwork for resolving disputes by delineating the mechanisms, whether litigation, arbitration, or mediation.

• Compensation. Indemnification clauses establish the process by which one party compensates the other for losses, damages, or liabilities stemming from specific actions or events.

• Assurances. Warranty clauses offer assurances regarding product or service quality and outline remedies in the event of warranty breaches.

• Defining termination. Termination clauses establish the conditions under which a contract can be legally concluded and stipulate the requisite notice period.

Common types of contract clauses.

Here are some common clauses that may be applicable to your business:

• Non-compete. Typically found in employment contracts, this clause keeps an employee from working for a competitor, usually for a specified period of time after the employment ends.

• Non-disclosure. A non-disclosure agreement keeps confidential information from being shared outside of the involved parties.

• Time of performance. In time-sensitive matters, this clause states when contract duties can or cannot be performed.

• Arbitration. This clause relates to disputes within your business. If a dispute arises, you agree to first attempt to solve the problem with a third-party person (arbitrator) versus a court proceeding.,

• Severability. This is a unique clause that relates to other clauses. If another clause is invalid, this clause states that the rest of the contract is still valid, eliminating the need to write and sign an entirely new one.

• Statute of limitations. If you or other parties break a contract, this clause sets a time limit for filing a lawsuit.

• Penalty clause. Specifies penalties or liquidated damages that a party must pay for certain breaches or failures to meet contractual obligations.

• Exemption clause. Limits or excludes liability for certain types of breaches or losses, often requiring careful scrutiny for fairness.

• Exclusion clause. Excludes certain matters, liabilities, or responsibilities from the scope of the contract.

• Amendment clause. States the process for making changes or amendments to the contract and may require written consent from all parties.

Examples of contract clauses in action.

Let’s go over an example of contract clauses in action. A company hires an employee, incorporating a non-compete clause into the employment contract to prohibit the employee from joining a competitor within a specified geographical area after leaving the company.

However, the employee violates the clause by quickly joining a direct competitor following departure from the previous company. The company that incorporated the non-compete clause initiated legal action, resulting in the court issuing an injunction to enforce the non-compete clause.

As a result, the employee is legally restricted from working for the new company within the designated area for the specified period. A well-drafted contract clause helps enforce and safeguard the interests of all parties involved in contracts.

Elements to add alongside contract clauses.

Clauses are just one element of standard contracts. There are additional essential elements you should always include when writing a contract. These include:

• Basic information (legal names/business names)

• Rights and responsibilities

• Dates

• Signatures of all parties.

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