Do you know what a clause is? Do you have a grasp of the most common clauses found in commercial contracts? If you don’t, no need to worry. In this article, we walk you through the most important clauses in a commercial contract, starting from the basics.
What is a contract?
Before we look at clauses, lets zoom out for a quick introduction to commercial contracts. Contracts are legally binding agreements. They can be written or verbal and outline the details of an arrangement between the contracting parties. Under the laws of England and Wales, a contract is only legally enforceable if there is an offer and acceptance, an intention by both parties to enter into legal relations, and consideration.
You can learn more about contract basics in our article “Commercial Contracts: Everything You Need to Know”.
What is a clause?
The dictionary definition of a clause is that it is a specific part of a written legal document. Clauses contain details about specific provisions of the contract. They explain various rights, privileges, responsibilities, obligations, duties or liabilities that either party has under the contract.
There are three types of common clauses found in commercial contracts: interpretation clauses, enforcement clauses and execution clauses. All of these are important as they set out the conditions under which the parties agree to contract and they bring both clarity and direction on how the contract will be enforced under different conditions or events.
1. What is an interpretation clause?
An interpretation clause is exactly what it sounds like. It is a clause that details exactly how certain words should be understood or interpreted within the contract.
2. What is an enforcement clause?
Enforcement clauses tell you how the contracting parties’ obligations, duties, or responsibilities will be enforced under the contract. They also indicate the repercussions for failure to fulfill the contract.
3. What is an execution clause?
An execution clause outlines how each contracting party should uphold their end of the agreement. This could be by stipulating a finite timeline for when certain obligations under the contract should be actioned/completed.
Key Clauses Found in Commercial Contracts
There are a number of different types of contractual clauses and it all comes down to what kind of contract is being agreed. Certain clauses are only relevant in particular contexts or situations. However, you will come across clauses that are common to most commercial contracts. These are called ‘boilerplate clauses.’
1. What are boilerplate clauses?
The description ‘Boilerplate clauses’ covers a broad category of contractual clauses. They are clauses which aren’t necessarily intimately related to the commercial transaction or agreement at hand, but are nevertheless important to include. Boilerplate clauses can help to protect or limit the liability of the contracting parties, regulate the contract’s operation, as well as outlining the contractual and commercial relationship between the contracting parties.
Since there are a number of different types of boilerplate clauses, you won’t include all of them in every single contract. Instead, it will depend on the specific needs, agreement, and contractual position that you are in. It’s advisable to consult your lawyer to ensure you’ve covered all bases when drafting your contract as including clauses that are not relevant can add unnecessary confusion to your contract and may make it less enforceable.
2. Confidentiality Clause
You’ve probably come across NDAs (non-disclosure agreements) before in a business context. These are agreements wholly dedicated to contractually obliging either one or both parties to keep certain information confidential.
However, you can also come across confidentially clauses within bigger contracts that look mostly at other matters. These clauses will either stipulate one-way or mutual confidentiality, and commit the contracting parties to non-disclosure of information relating to their agreement.
3. Modification Clauses
Modification clauses indicate whether the contracting parties have the right to amend, change, or waive their rights, duties and responsibilities under the contract.
4. Indemnification Clauses
Indemnification clauses are another type of key clauses in commercial contracts. An indemnification clause guarantees one party protection or compensation should the other party fail to fulfil their contractual duties. A robust indemnification clause should place the liability on the indemnifying party and will be precise about what costs/amounts the liable party will pay.
5. Limitation Clause
A limitation clause serves to place an upper limit on the damages a party can recover should the other party breach the contract (either themselves or through the fault of a third party). In order to limit liability in certain circumstances, it’s absolutely necessary to include a watertight limitation clause in your commercial contract.
6. Force Majeure Clause
A force majeure clause is another type of ‘limitation clause’ in that it limits liability in the case of an ‘Act of God’. Under the law ‘Acts of God’ refer to incidents such as natural disasters (floods, earthquakes etc.) Your force majeure clause will detail the contractual position should one of these events occur.
7. Jurisdiction & Governing Law Clause
These clauses are particularly important if you’re negotiating a trans-national contract and often go hand-in-hand. A governing law clause will state which law governs the agreement, and the jurisdiction clause will indicate the location of the courts to be used in the event of a contractual dispute.
Frequently Asked Questions about Commercial Contract Clauses
1. What are major clauses in contracts?
First, it’s important to clarify that all clauses are important in a commercial contract. Each clause will relate to a different provision and ensuring that every single detail is correct and robust is essential to negotiating a strong contract. That being said, there are some clauses that are essential to every contract such as clauses agreeing the price/fee to be paid, the duration of the contract, as well as many boilerplate clauses such as those that we looked at earlier.
2. Why are clauses important in a contract?
Clauses are important because they are critical to limiting liability, ensuring clarity around your duties, rights, and responsibilities, and giving you the power to enforce your contractual agreement.
3. What are contract clauses called?
It depends on their role and subject matter. There’s no single name to refer to all commercial contract clauses because they’re all different and all serve a different, but essential, purpose.
The subject of Contract law is vast and complete. Even the most experienced business people can struggle when it comes to drafting the perfect commercial contract. Familiarity with the most common types of clauses found in commercial contracts is a great starting point and can help strengthen your negotiating power, but it’s always advisable to seek the expertise of a commercial lawyer to ensure your contract is robust and as watertight as possible.
If you need help drafting or reviewing a contract, one of our first-class lawyers is on hand to help. Get in touch today to get started.