Introduction:
Every contract has some specific goals for the parties. That can reduce the risk, negotiable terms, protect rights, etc. That’s the reason the clauses that you include in a contract play a significant role. Because of the lack of important contract clauses, it may be resulted to breck an agreement. Essential contract clauses outline the rights, duties and obligations of the contracting parties. It is also important for preventing legal disputes and ensuring the enforceability of the agreement between the parties.
Not including certain crucial clauses can drain your business into uninspected legal disputes and financial losses. There are some important contract clauses that you never miss while making an agreement, such as the Scope of Work (SOW), payment, termination, Indemnity, confidentiality, dispute resolutions, and more. In this article, we explore some important contract clauses that ensure business goals and protect your interests and rights towards the contract.
What are Clauses in a Contract?
Contract clauses define separate sections or parts which is setup a specific term, outline the obligations and conditions between the contracting parties. They provide more clarity, define the rights and responsibilities, which help the parties to reduce risks, and make a legally binding agreement.
Some Important Clauses in a Contract:
Drafting an effective contract, certain important clauses must be included, such as:
Risk Mitigation: This clause protects the parties’ rights in the event of unforeseen liabilities and conflicts between them.
Compliance clause: This clause defines adherence to legal formalities and follows the rules and regulations.
Flexibilities: This clause helps the contracting parties to amend, customise, add or remove the contract’s terms according to the business requirements.
Clarity: Ensures the obligations and duties of the contracting parties, and also helps to avoid doubt in the understanding of the contract terms.
Efficiency and Dispute Resolution Clause: This clause specifies how the contracting parties resolve their disputes. It the mechanisms of helps them to reduce unnecessary litigations, time and costs. It also creates a healthy and wealthy business relationship between the parties involved.
What are contract clauses, and why are they important?
Contract clauses define the specific sections in the agreement; they specify the rights, responsibilities, and obligations for the contracting parties. They build a foundation of a legally binding agreement and create a rulebook that manages the relationship between the contracting parties.
In the modern business world, making commercial deals and agreements with well-crafted contract clauses plays a significant role. We can say it’s the heart of agreements.
Main Contract clauses can be categorised into three parts:
The basic contract clauses can be categorised into three sections, which are given below:
1 Interpretation clauses:
These types of clauses explain how to understand and read the terms of the contract in a legal way.
2 Enforceable clauses:
These types of clauses explain the duties and obligations of the parties. Such as contracting parties, what must be done, and what must not be done. They narrate the legal enforceability in the court of law if the party fails to fulfil their duties towards the contract.
3 Execution clauses:
The execution clauses narratethe implementation part of an agreement, such as signing, registering a legal document and making it complete as a legally binding agreement.
How to draft a perfect contract?
Some tips help you to craft a perfect contract, which are listed below:
- Every contract clause should be specified with the aims of the contract.
- The language of an agreement clause is to be used in the active voice. Because the passive voice sentence may create confusion for the reader of an agreement.
- It is advisable to use simple language while drafting a contract, and to avoid technical terms in writing unless they are necessary.
- Use that type of lantract language that every non- technical or non- legal background person would easily read and understand the contract’s terms and conditions.
Essential clauses in a contract are listed below:
Title of agreement:
The title of the agreement is a necessary clause of every agreement. It explains how the agreement is in nature or types.
Name of the parties:
The contracting parties are mentioned with a particular name. They identify by using the term in the agreement.
Recitals:
Recitals refer to the parties’ background as well as their aims for entering into the agreement. Sometimes it happensthat the contracting parties enter into a supplementary agreement, in that case the reference of main agreement is given under this clause.
Definitions:
There are some technical terms needed to enter into an agreement. Those terms should be mentioned under the clause with accurate interpretations.
Representation and Warranties:
This clause represents a statement of fact of the contracting parties. Let’s understand with an example, Mr A represent him self as the sole owner of the property, which has a clear title and is debt-free. In future, if he does not prove that fact, then another party has the right to seek compensation from Mr A. for the misrepresentation.
Covenants:
Covenants refer to the promise made by contracting parties to do some specific act in future. Let’s see with an example: Mr A agrees to make a payment to Mr B between the 1st and 5th day of each month.
Term of contract:
This clause specifies the period of an agreement, such as a year or months, etc. The term of agreement will continue and be legally binding to the parties unless the contract is terminated by either party or by mutual consent.
Consideration:
Consideration is a key element of the contract clauses. Because missing of lawful consideration, the contract can be void in the eyes of the law. Consideration can be in terms of money, services or in some of the cases, it can be a promise to do something or not do.
Indemnification:
This clause also plays a significant role in effective contract writing. Indemnification refers to a transfer of the risk to another party. If either contracting party breach any contract term and that causes a loss to the other party, then the defaulting party has to pay compensation to the non-defaulting party. How indemnification works in a contract term should be specified in this clause.
Termination:
A termination clause should be mentioned in a contract. Due to an unacceptable event occurring, the agreement needs to be terminated by either party. This clause also specifies whether an advanced termination written notice period is mandatory or not.
Terms of payment:
In this clause, the parties should mention a payment related terms, such as
- Duration of payments – means time-based, every 30 days, 60 days, etc.
- Progressive payments – mean payment after completion of a particular task or getting positive results.
- Full payments – mean total payment after completion of full work.
Method of payment:
In this section, you should mention the method of payment, such as
- Fixed base payment – means fixes sum payable.
- Revenue-based payment – means that payment is made after a percentage of the revenue earned.
- Profit-based payments – mean payments will be made after some proportion of profit gain.
Mode of payment:
In this section, mention the mode of payment, such as by cash, cheque, net banking, online or offline, etc.
Notice:
The address and email ID of the contracting parties are given under this clause make it an easy way to send notice or other communication.
Force Majeure:
This clause plays a significant role in the agreement. It helps when uncontrol event comes, or a contract cannot be forceable either party, the agreement can be terminated.
Confidentiality clause:
If any confidential information is transferred between the parties, it should not be shared with a third party. This clause specifies how confidential information how it keeps control and secret between the parties.
Severability:
For any reason, if a certain part of the contract becomes unenforceable or declared illegal. This clause saves the entire contract from being void, and parties may agree to the performance of other valid parts of the contract.
Amendment clause:
If the contracting parties want to amend or make an alteration in the contract, then what is the procedure that needs to be followed? Specify under this clause.
Jurisdiction:
In case any dispute arises between the parties, which area of jurisdiction shall be applied and which court has proper jurisdiction to handle such a matter? The parties can mention under this clause the details of jurisdiction under the specific word “exclusive jurisdiction”.
Governing Law:
Under this clause, the parties mention the laws that are applicable to the contract. This clause is crucial because, when parties are involved in a global trade, they need to specify the particular laws that apply to the contract.
Dispute Resolution Clause:
The dispute resolution clause is also a crucial contract clause. It must be included while crafting an effective contract. Under this clause, the parties mention how to resolve dispute such as by a mediator, arbitration, conciliation, etc.
Signature section:
For making a valid contract, the parties put their signature on the first and last pages of the contract, along with an initial signature on the remaining pages. Some types of contracts require attestation by a witness under applicable law. Then the parties must follow those rules.
Schedules or Annexures:
When the information given by the parties is too long, it needs to be included in parts under the contract. Such information can be included at the end of the contract with annexes.
Entire Agreement:
This clause is also important in a contract. It specifies that all terms and conditions are included in a contract. It also specifies that all rights and obligations are covered in the agreement, whether in written or oral form, made by the parties.
Duplicate Copies:
It is advisable for the contracting parties that each of them has a copy of the agreement. So, they can be well aware of the terms and conditions of the contract. It will help them to understand and agreed contract’s terms and conditions and avoid future disputes.
Conclusion:
Contract Clauses play a crucial role in making an effective legal agreement. They are essential for building contracts that specify how the contract will work and what it legal mean. For making a meaningful agreement in the finance and business world, contract clauses not only include the legal requirement, but also protect the rights and interests of the contracting parties.
A well-crafted contract clause serves as a proper defense at the event of disputes and misunderstandings between the parties. So, it is important for the business world to have properly structured clauses become safer to manage risk management and create healthy and wealthy relationships.