Types of Contract Clauses

Updated January 29, 2024
9 min read
Types of Contract Clauses

Introduction

Contracts come in all shapes and sizes and contain a wide range of different types of contract clauses. Some clauses will be specific to the type of contract. For example, a contract for the supply of goods will usually contain specific provisions relating to delivery, freight arrangements, and insurance. However, there are some clause types that are commonly found in all kinds of contracts. In this guide, we identify and explain some of the most common types of clauses in contracts you might come across.

Commencement

The commencement legal clause for contracts states when the parties intend the contract to start. That might be from the date of signing, or it might be another convenient date — such as the start of the next month or accounting period.

Term and Termination

The term of the contract refers to how long the contract relationship will last. The contract might be for a fixed term (this could be relatively short or may even be for several years). Alternatively, it might roll on from period to period until one party terminates (for example, a month-to-month contract). 

The termination clause will state when the contract can be terminated and with what notice. This might be at any time (a termination "for convenience") or if defined events occur (a termination "for cause" — such as a breach of the contract or a party's insolvency).

Time for Performance

The contract may contain a clause that specifies when performance must occur. The parties can also agree that "time is of the essence." This means that punctual performance is to be regarded as essential — so that late performance is to be treated as non-performance. If time is not "of the essence," the other party's remedies will be more limited.

Force Majeure

This clause excuses a party from liability if that party is unable to perform its obligations due to circumstances beyond its control. The contract will often list examples of the types of events that will be treated as "force majeure," including, for example, natural disasters or new laws or regulations that are imposed by a government. For some contracts, the events of the Covid-19 pandemic triggered the force majeure clause. This type of clause may also state that a party can terminate the contract if the force majeure event lasts for a defined amount of time.

Confidentiality

This clause requires that the information can only be used by the other party for the purposes under the contract. The clause also requires the recipient to safeguard the information and not to disclose it to others. Exemptions may apply — for example, if the disclosure is required by law or if it needs to be provided to their professional advisers.

Usually, the clause in contracts will also specify that a party can request the return or destruction of their confidential information — either at any time or at the end of the contract term.

Exclusion of Liability

The parties to a contract may try to reduce their potential exposure to liability under the contract. Different types of clauses in a contract achieve this in different ways:

  1. Exclusion clauses: these legal clauses for contracts aim either to exclude liability in specific situations (for example, if the user of a product did not comply with the user guide) or to exclude particular categories of liability (for example, liability for consequential or indirect losses, or punitive damages).

  2. Clauses to cap liability: where a party imposes a limit on the maximum amount that can be claimed by the other party.

  3. Time bar clauses: These require a party to bring their claim before a deadline expires; otherwise, their claim will be barred.

Indemnity Clause

An indemnity clause is a special contract mechanism used by one party to shift the risk of a particular loss or liability onto the other party. The first party "indemnifies" the other — that is, they agree to be liable if the second party suffers a specific risk, loss, or liability.

Indemnities are often heavily negotiated. They can sometimes be drafted broadly so that they apply in a wide variety of situations. Alternatively, they might be narrow and will only be triggered if a specific risk or scenario occurs. Contract clauses examples might be where one party agrees to indemnify the other against any losses that it might suffer arising from a third party claiming that its intellectual property has been infringed or where the contractor agrees to indemnify and hold the client harmless from any liabilities or damages that might occur due to the contractor's actions or negligence during the project execution.

Non-Compete Clauses

As the parties to a contract work and do business together, they often get access to each other's confidential information. They may also get a unique insight into the other party's strategic plans — which they could then use unfairly to their own advantage. For this reason, the parties may agree to a non-compete clause, where one or both of the parties are restrained from competing in a particular market for a certain period.

This type of clause is often found in employment agreements (especially at the executive level), or in contracts for the sale of a business, or for a joint venture. The clause prevents the other party from owning or operating a competing business in that territory. More elaborate versions include non-solicitor non-poach obligations, which are intended to prevent a party from trying to solicit or poach the other party's customers, employees, or suppliers.

Warranty Clauses

A warranty clause is a statement that promises that a particular fact in the contract is true, or that something will take place.

For example, in a software license, the licensor might provide an "intellectual property warranty" to the licensee. This means the licensor "warrants" (or confirms) that they are the valid owner of the intellectual property in the software. If this turns out to be untrue, the licensee will have a claim for a breach of the warranty.

A representation performs a similar function in contracts but is usually reserved for confirming facts that the other party is relying on to be true. A party would have stronger remedies against the other party if it was induced into entering into a contract on the basis of a misrepresentation.

Liquidated Damages

If one party breaches the contract and causes the other party to suffer a loss, that other party is entitled to claim damages. In a liquidated damages clause, the parties agree in advance on what the amount of those damages should be. This saves the parties from having to dispute the amount later.

Typical liquidated damages contract clause examples can be found in a construction contract. The builder promises that the construction of the building will be complete by a particular date. The builder also agrees to pay liquidated damages if the project is late. Usually, this is specified as a fixed amount per day.

Dispute Resolution

The parties will usually include a dispute resolution clause to specify how claims, disputes, and disagreements under the contract should be dealt with.

Usually, this type of clause will require one party to notify the other party of the details of the dispute. There is often an escalation and negotiation procedure, which creates an opportunity for the parties to try to resolve the dispute themselves. If that doesn't work, the clause may require the parties to engage in mediation or for the dispute to be resolved through arbitration.

Notices

The notices clause may seem administrative, but it plays an essential role. The clause specifies when any notices (as might be required under the contract) will be treated as having been delivered. This reduces the scope for one party to claim that they were not properly notified of a matter under the contract.

Choice of Law

The choice of law clause is another type of important clauses in a contract that specifies which national or state law will govern the contract. This may be the law of the place where the contract is being performed or where one or both of the parties are located. Alternatively, it might be a jurisdiction that is seen by one of the parties as being favorable if a dispute were to arise in relation to that type of contract.

Conclusion

Different types of clauses are found in various contract forms. As they are so common, the parties might not consider them important or review them in as much detail as they do for the more specific provisions. However, common contract clauses can each have a big impact on the relationship between the parties signing the document and the outcome of the deal.

Copying and pasting provisions from previous contracts may be an easier task. However, there is one efficient way to streamline the work with contracts. Loio has a clause bank that has more than 100 precise and up-to-date snippets for any type of contract. Also, you can compose your own clauses in a contract. Try Loio to master the art of clause management for your agreements and boost your contract drafting.

Article by
Yevheniia Savchenko
Lawrina

Yevheniia Savchenko is a Product Content Manager at Lawrina. Yevheniia creates user interface copies for Lawrina products, writes release notes, and helps customers get the best user experience from all Lawrina products. Also, Yevheniia is in charge of creating helpful content on legal template pages (Lawrina Templates) and up-to-date information on US law (Lawrina Guides). In her spare time, Yevheniia takes up swimming, travels, and goes for a walk in her home city.

If you have any questions or suggestions regarding the product or UX content for Lawrina, feel free to contact Yevheniia directly at y.savchenko@lawrina.org or connect with her on LinkedIn.

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