Types Of Contract Clauses

Contracts form the cornerstone of many businesses. While some people may be tempted to use boilerplate contracts or contract provisions, every word contained in a contract can have a significant meaning. Therefore, it is important to pay careful attention to all the terms of the contract. Working with a lawyer can help you learn about the different types of contract clauses that are available and which ones should be included in your contract. Consider contacting an experienced California business lawyer by calling Von Rock Law at (866) 720-0195 for help with your contract.

Confidentiality Clause

Confidentiality clauses, or non-disclosure clauses, will prevent the parties from discussing the terms of the contract, or anything that arises within their working relationship, with other parties. A confidentiality clause can be helpful when entering contracts with:

  • Employees
  • Suppliers
  • Co-packers
  • Independent contractors

Use Restriction Clause

This clause may provide for the specific processes one party must follow to have the right to disclose confidential information to others. Generally, use restrictions allow one party to limit how another party uses confidential information, such as:

  • Trade secrets
  • Recipes
  • Formulas
  • Inventions
  • Customer lists

Liquidated Damages Clause

Liquidated damages clauses state that a party who breaches the contract will be required to pay a specified amount to compensate the non-breaching party. These damages are used when it is difficult to independently ascertain the value of actual damages that the non-breaching party might experience because of the breach.

Penalty Clause

A penalty clause imposes a penalty on a party if that party fails to meet its contractual obligations. The penalty clause may specify the amount of a penalty, such as $10,000 or 10 percent of the total contract price. Penalty clauses are not based on an estimate of damages.

Escalation Clause

An escalation clause allows a party to increase the prices or wages that were originally agreed upon under certain situations. This type of clause allows one party to pass on higher costs to the other party as the first party incurs higher expenses. For example, an escalation clause may allow a contractor to charge more if the cost of lumber or other materials increases. A lease may provide for an increase in rent if utilities or maintenance costs increase.

These types of contract clauses may be tied to inflation and allow the charging party to adjust for changes in the market. Escalation clauses may also be tied to the costs of the labor market or to the costs of supplies. Alternatively, the clause may be attached to the consumer price index (CPI) provided by the United States Bureau of Labor Statistics.

Sunset Clause

A sunset clause sets an expiration date by which the parties must reach an agreement on the remaining terms of a contract. If the deadline passes, either party may then walk away from the contract.

Non-Compete Clause

A non-compete clause is sometimes used in a contract with an employee or business partner to state that the party bound by the clause is not allowed to open a competing business or work for a competitor of the business until a certain amount of time has elapsed. These provisions usually identify a geographic region in which the party is prohibited from competing.

While a non-compete clause might sound like a good way to protect your business’s interests, the State of California prohibits most contractual clauses of this nature and most California courts may not enforce them. An experienced business lawyer from Von Rock Law may be able to help avoid such problematic clauses that can threaten the viability of a contract.

Indemnification Clause

A party can agree to answer for the liability or losses that another party incurs through an indemnification clause. This can be a useful way to limit or shift liability. The parties can use this type of clause to protect themselves from damages and lawsuits.

Limitation on Liability Clause

This type of contract clause may be used in conjunction with an indemnification clause. As the name suggests, the limitation on liability clause limits the amount one party will be responsible for paying the other party if that party suffers losses because of the business contract.

Exclusion Clause

An exclusion clause is another type of contract clause that may be used in conjunction with indemnification clauses. This type of clause defines certain situations in which one party will not be responsible for indemnifying the other.

Force Majeure Clause

According to the American Bar Association, force majeure clauses were often relied upon during the COVID-19 pandemic. This type of contract clause holds a party blameless if the contract is negatively affected or cannot be fulfilled due to unavoidable and unforeseeable events beyond the party’s control, such as:

  • Acts of God
  • War
  • Pandemics
  • Labor strikes
  • Supply chain disruptions
  • Government actions
  • Acts of terrorism

These clauses must be carefully worded. A court may allow terms regarding certain events to determine whether the clause applies in certain circumstances.

Dispute Resolution Clause

Litigation can be expensive for businesses. Therefore, a company may include a provision in its contracts that states how to handle disagreements that arise during the duration of the contract. For example, the clause may state that the parties agree to mediation or arbitration of their case.

Termination Clause

A termination or cancellation clause provides information about how either party can terminate the contract before the party fulfills its obligations under the contract. This type of clause states specific terms or conditions that the party must meet to end the contract without being responsible for breach of contract damages. This type of contract clause may require a party to give a certain amount of notice to the other party before being able to activate the clause.

Severability Clause

Severability clauses state that, if any particular provision in the contract is found to be invalid by a court, that offending provision can be removed from the contract. With a severability clause, the remainder of the contract terms will remain in effect.

Contact a Knowledgeable Business Lawyer for Help with Your Contracts Today

If you are not sure of which types of contract clauses to include in your contract, a business lawyer may be able to help. A lawyer will review the situation that calls for a contract and advise clients on which terms should be included and which terms, if any, can be left out. To learn more about which clauses your business contract needs, consider contacting an experienced business attorney from Von Rock Law by calling (866) 720-0195 to schedule a consultation today.

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