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Common Types of Contract Clauses A-Z

This article provides a high-level overview of key clauses commonly found in commercial contracts and their implications, including clauses around assignment of rights, confidentiality, dispute resolution, the entire agreement, force majeure, indemnities, jurisdiction, liquidated damages, and clarifying that no partnership or agency is formed. It discusses some of the practical and legal effects of these standard clauses for contracting parties.

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Muhammad Arslan
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585 views

Common Types of Contract Clauses A-Z

This article provides a high-level overview of key clauses commonly found in commercial contracts and their implications, including clauses around assignment of rights, confidentiality, dispute resolution, the entire agreement, force majeure, indemnities, jurisdiction, liquidated damages, and clarifying that no partnership or agency is formed. It discusses some of the practical and legal effects of these standard clauses for contracting parties.

Uploaded by

Muhammad Arslan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Navigating a commercial contract and appreciating the implications, both legal and practical, can be a

daunting task. This article provides a snapshot of key clauses typically found in a standard commercial
contract and looks at the implications of those clauses for the contracting parties.

A is for Assignment
English law states that, in the absence of express drafting to the contrary in a contract, either party to that
contract may:
1. Assign their rights to a third party (subject to limited exceptions); but
2. May not transfer obligations arising under that contract to a third party.
This 'default' legal position exposes the parties to the undesirable reality that a contract they have entered
into can be freely assigned to a third party without their consent. Particularly in services contracts this is
far from ideal as it could expose the service provider to the situation where a third party of which they
have no knowledge (including its ability to pay) is utilising its services under a contract.
It is therefore common to see the inclusion of the following clause, or some variation on it:
Neither party may without the prior written consent of the other, such consent not to be unreasonably
withheld, assign or in any way dispose of its rights under this agreement to any third party.
Such drafting is neutral and protects both parties from the eventuality discussed above. However, it would
not be unusual to see a one way obligation to seek consent to assign, if the party seeking to impose that
obligation on the other party has concerns as to who might end up providing it with services or products.

B is for Boilerplate
'Boilerplate' describes provisions which are common to most commercial contracts and which do not
relate to the main object of the contract but which are required for regulate its operation. Although such
clauses are often considered 'standard', their ramifications are far from so, and careful thought should
always be given to the impact of the clause in the specific commercial context of the contract.

C is for Confidentiality
Contracts will typically include a clause requiring the parties to protect each other's confidential
information. The inclusion of such a confidentiality clause is imperative in the situations where the parties'
confidential information will be exposed to the other. The wording below is a simplified example of a
confidentiality clause:
The parties shall keep confidential all Confidential Information and not, without the prior written consent of
the other party, disclose the Confidential Information to any other party save to the extent required by law.
The definition of 'Confidential Information' is often drafted widely to include all written, pictorial, machine
readable or oral information which relates to trade secrets, customers, suppliers, or business associations
or information that is financial, technical or commercial in nature. It is vital that the definition of
'Confidential Information' satisfactorily captures the information particular to your business to ensure all
such information remains confidential and protected from disclosure to third parties who could be
potential competitors.

D is for Dispute Resolution


In the early stages of contract negotiation, dispute resolution provisions are rarely given much
consideration. Focus tends towards level of payment, defining the scope of the service or product(s) to be
provided, negotiating warranty and indemnity provisions and payment mechanisms. However, it is
important to ensure that your contract contains suitable and appropriate wording dealing with disputes
which may arise under the contract to ensure clarity for all parties as to the precise procedure to be
followed in the event of a dispute.
Frequently the parties will agree to an escalation procedure, whereby clear steps and processes are
stipulated prior to the matter being referred to the courts. As a matter of principle, it is the duties of the
parties to a contract to "help the court further the overriding objective" (Civil Procedure Rules - Part 1
CPR 1.3). This "overriding objective" is to ensure that all cases are dealt with justly and "to encourage the
parties to cooperate with each other in the conduct of proceedings" (CPR 1.4). In the light of these duties
it is important that pre-court conduct also adheres to these principles which in short encourages
communication and cooperation between the parties.
Typically a notice setting out the dispute/ breach will be served on the breaching party, giving them a
specified period of time to rectify the breach. In the event that the notice is not complied with, there will be
a number of steps to be taken for example the managing directors meeting to attempt to resolve the
dispute/ an arbitrator is appointed to settle the dispute. Only after these steps have been followed will the
non-breaching party be able to take the dispute to court. You should always ensure that the escalation
procedure and time frames given are feasible in the circumstances.

E is for Entire Agreement


It is common to see the following clause (or similar) inserted into a contract:
This agreement constitutes the entire agreement between the parties with respect to its subject matter. It
supersedes all previous agreements and understandings between the parties and each party
acknowledges that, in entering into this agreement, it does not do so on the basis of or in reliance upon
any representations, promises, undertakings, warranties or other statements (whether written or oral) of
any nature whatsoever except as expressly provided in this agreement.
The purpose of such clause is as follows. Under English law, a basic principle is that outside evidence
cannot be admitted to supplement or vary a written contract (this is known as the 'parol evidence' rule
which was established in 1833). However, if it can be shown that the written contract was not intended to
capture the entire agreement between the parties, outside evidence can be adduced to vary or
supplement the contract. This exposes parties to the potential of unwritten non-contractual terms being
added into the contract which is far from ideal.
The entire agreement clause is designed to exclude this exception and provide certainty to the parties
that the written agreement they have signed has captured all terms agreed between the parties. This
clause is standard boilerplate, is rarely reviewed and yet it commonly generates litigation. In essence the
clause is a statement which stipulates that the document contains the entire agreement and any
preceding statements, negotiations or representations, unless encapsulated by the contract, are of no
relevance and it is the contract alone which can be relied upon. In short, if such a clause is included in
your contract, ensuring all agreed terms are encapsulated within the contract is vital as it is this document
alone that can be relied upon.

F is for Force Majeure

The effect of a force majeure clause is to excuse the affected party from performance under the contract
as long as the force majeure event continues. It should be noted that there is no legal definition of 'force
majeure' and accordingly the precise definition as provided for under the contract is important. The clause
will typically provide for a time limit whereby if the force majeure event continues, the contract will
terminate automatically with both parties being excused from their liabilities under it. Examples of force
majeure events are fire, explosion, strikes, riots, terrorist activity and acts of God.
Recently the clause has been extended to include 'acts of nature which prohibit travel' to capture the
recent disruptions caused by volcanic ash. This serves as a reminder that force majeure clauses are not
set in stone so thought should always be given to the potential risks the contract could be exposed to
and drafted accordingly.

I is for Indemnity
In the context of commercial contracts, an indemnity is an undertaking (in other words a legally
enforceable promise) to meet a specific potential legal liability of another. The purpose of an indemnity is
to provide a guaranteed remedy for a specified event. Indemnities are a highly negotiated point in
commercial contracts and consideration will have to be given to the specific risk(s) arising under the
commercial contract and indemnities sought as required.

J is for Jurisdiction
A commercial contract will stipulate which court will have jurisdiction should any dispute arise which
requires resolution in the court system. In commercial contracts there is often a foreign element involved
and it is essential to ensure the jurisdiction selected best suits the context from a practical perspective.
Many European countries' judicial authorities place much greater emphasis on written submissions as
opposed to the oral evidence favoured by the UK courts. Practical considerations might include the
economics of pursuing a case, the limitation periods under each jurisdiction (which can range from 1-30
years) and research into the costs position (in some jurisdictions legal costs are not recoverable from the
losing party), as well of course as the locations of the parties.

L is for Liquidated Damages


A liquidated damages clause sets out the fixed sum (or calculation of that sum) agreed by the parties that
will be payable on breach by either party. If the figure is deemed by the courts to be punitive, the clause
will be unenforceable so care should always be taken to ensure the clause includes an appropriate figure
which reflects the contractual context and could not be deemed to be punitive.

N is for No Partnership or Agency


Contracts frequently contain boilerplate provisions stating that the relationship between the parties is not
to be construed as a partnership or agency. This is because both of those legal forms may arise implicitly,
without the parties realising that they have done so, and both have a range of legal and tax implications
for the parties. If the parties do not intend for them to arise, it may be safer to state expressly that the
contract does not create either form of relationship, to ensure that no unintended consequences flow from
the contract.

R is for Retention of title


Retention of title provisions are often hotly debated in contractual negotiations. Where a supplier sells a
product to its customer and is not paid immediately upon delivery, then the supplier will wish to provide

that it retains title to (ie ownership of) the products until payment is made. The supplier will also want to
impose various related obligations on the customer, covering issues such as how the products are stored,
how they are identified as belonging to the supplier and whether or not the customer may sell them on
before title has passed.

T is for Termination
It is common is most commercial contracts to see a termination clause which enables the parties to
terminate the contract prior to the expiry of the contract's stipulated term. The clause sets out automatic
triggers which enable immediate termination of the contract or termination on notice. The clause may
provide that the position of both parties in respect of termination is equal thought should be given as to
whether this is appropriate or desirable in each individual case.

W is for Waiver
In the absence of a waiver clause, where a party fails to take action in respect of a breach or default
under the agreement, or delays in taking action, that party may lose its rights to take action in respect of
that breach of default. A waiver clause is designed to ensure that a party's rights, powers and remedies
will not be lost as a result of any delay or omission in exercising or enforcing them and to expressly
provide that any partial exercise/ enforcement of a party's rights or remedies shall not thereby extinguish
or otherwise reduce those rights and remedies.

X is for eXclusion of Liability


An exclusion clause's purpose is to exclude or restrict liability and (where the contract is between
businesses) will often exclude or restrict the party from pursuing a right or remedy (for example the right
to reject goods where they are not of satisfactory quality).
Such exclusion clauses are subject to a 'reasonableness test'. What can and cannot be excluded will turn
in the facts of each case but as a general rule it may be permissible to exclude the following if the clause
satisfies the reasonableness test:

negligence (save where the negligence causes death or personal injury);


breach of the implied conditions of fitness for purpose or correspondence with description or
sample;
breach of contract; or
misrepresentation.

It is important to remember that if an exclusion clause is found to be unreasonable, it will be wholly


unenforceable.

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