A contract is a legally binding agreement between two parties. A written contract consists of specific provisions, or clauses. Clauses define the rights and obligations each party has under the agreement. Clauses generally fall into one of three categories: enforcement clauses, interpretation clauses, and execution clauses.
What are Enforcement Clauses?
Enforcement clauses relate to how each party’s promises or obligations under the party are enforced. If a party fails to abide by one or more terms of the contract, an enforcement clause states what the consequences will be. Enforcement clauses include:
- A Choice of Law/Choice of Forum Clause: This clause provides for what state’s contract law applies if a party files for breach of contract. Parties may reside in different states with different contract laws; having this provision allows both parties to know what set of laws will be used to resolve the dispute. Another, related enforcement clause is known as a choice of forum clause. This clause states what jurisdiction (i.e, state, county) any litigation must take place in.
- A Mediation/Arbitration Clause: This clause may state in the event of a dispute, the parties go through mediation and/or arbitration before either can file a lawsuit. The clause may state that the parties must settle the dispute under arbitration. Clauses that require arbitration may be contrary to a state’s public policy; as such, a court may find that they are void (without effect).
- A Statute of Limitations Clause: This clause states the amount of time a party has to file a lawsuit in the event of a breach. Each state has its own statute of limitations for breach of contract lawsuits. In New York, for example, the statute of limitations is six years. Many states allow for parties to a contract to agree to a shorter period than the state’s own statute. In other states, such clauses violate state law and courts will not enforce them.
What are Execution Clauses?
Execution clauses over how a party is to perform its part of the agreement. Examples of execution clauses include:
- A “Time of Performance Clause”: This clause indicates the time frame in which a party must fulfill its contractual obligations. Some contracts provide a specific time frame, such as two weeks. Others use the phrase “time is of the essence” to describe the time frame. A party may sue under this clause for losses incurred by the delay. Usually, however, a court will not penalize a party for failure to strictly observe the clause, provided that party made a reasonable, good-faith effort to do so.
- A “Non-Waiver Clause”: If a contract calls for performance on a series of occasions (such as a contract calling for monthly installment payments), it is possible that a party will not perform on one of those occasions, by, for example, missing a monthly payment. The other party, to preserve its rights to file a lawsuit in the event of an additional episode of non-performance, may insist on including a non-waiver clause. This clause states that waiver of performance in one instance does not prevent the non-breaching party from insisting on regular performance going forward.
- A “Force Majeure” Clause: The term “force majeure” is a French phrase that translates tof “superior force.” A force majeure clause sets forth conditions under which a party is not obligated to perform under the contract, due to circumstances beyond its control. Such circumstances include natural disasters, terrorism, pandemics, and war.
What are Interpretation Clauses?
Interpretation clauses cover what legal principles will be used to interpret an agreement that is ambiguous or that contains contradictory language. Interpretation clauses include:
- A “Merger Clause”: A merger clause, sometimes referred to as a “final agreement clause,” provides that the terms of the current contract are the final, agreed-upon terms, and that these terms take precedence over contrary terms in prior agreements.
- To avoid ambiguity as to how as to how the contract should be performed, parties may agree to include “course of dealing,” “course of performance,” or “trade usage” clauses. A “course of dealing” clause states that, in the event of a dispute over an ambiguous phrase, the court may look at the course of prior dealings between the parties to determine what the ambiguity “means.”
- A course of performance clause, states that a court must look at the parties’ conduct after the contract is executed, to resolve ambiguities. In a “trade usage” clause, the parties agree that, to resolve ambiguity, the court will look at how businesses in the same type of commerce or trade use the ambiguous terms.
Do I Need the Help of a Lawyer Over Contract Clauses?
If you seek to add or modify a clause to a contract, or seek to understand what a clause means, you should contact a contract attorney near you. An experienced contract lawyer can assist you with preparing, negotiating, and understanding contract clauses.