What is a Legal Clause
A "clause" in a legal context is essentially a single section, sentence, provision or stipulation within a contract, terms and conditions, or other legal document. A clause has a specific content that is intended to serve a specific purpose, often working together with other clauses to constitute a wider agreement or coverage. The term "clause" can also refer more generally to a paragraph or other distinct section of a legal or contract document.
Clauses may be used in a contract or other identifying legal document to set out terms and conditions , precedents and contingencies, rights and obligations of the parties involved, or limitations and conditions that apply to the coverage and content of the document they are within. Generally speaking, a clause forms a basic unit of meaning within the larger text found in a contract or other legal document, in that each clause normally expresses a single thought or idea.
Common Legal Clauses
Confidentiality clauses are commonly used to create confidentiality obligations between parties. Depending on the agreement, these clauses may apply either to the parties to the contract or to the parties and to their employees and representatives. Confidentiality clauses may limit disclosures for the benefit of either party (and their employees and representatives) or for the benefit of just one of the parties. Apart from enabling either party to sue for injunctions and damages, confidential clauses may enable the aggrieved party to obtain an order for the return of all documents and other materials which contain confidential information.
Indemnity clauses impose an obligation on one person to compensate another for certain costs incurred by that other person. In business contracts, indemnities are generally styled as "keep harmless and indemnify" clauses and are often used in the context of intellectual property rights infringement. Indemnities are unique in that the party who benefits under an indemnification clause is not the party who has incurred the relevant loss or damage. These clauses may apply to "third parties" – that is, a person (or persons) who is not part of the original contract but is considered third to the original contract between the parties. For example, if a person buys a widget and later discovers it causes them property damage, the contract might give the person who sold the widget a right of indemnity against the person who designed the widget.
Arbitration clauses are commonly entered into by parties of commercial contracts to include offences that must be determined through a process of arbitration. Often advocated by lawyers as a means for resolving disputes, arbitration clauses provide the parties with a more amicable means of resolving disputes outside the courtroom. Where an arbitration clause is included in an agreement by one of the parties, that party cannot subsequently apply to a court for the enforcement of the agreement where arbitration would be a valid option. Although it is theoretically possible, it is virtually impossible to litigate a case in the UK courts in the absence of an arbitration clause.
Roles of Legal Clauses in Contracts
Legal clauses are a vital aspect of contracts. They stipulate the actions each party must take and outline the rights and obligations of every individual involved in the agreement. The legal clauses clearly identify the terms or conditions for the completion of the agreement, penalties for violating any of the clauses, and dispute resolution procedures, if necessary. On occasion, the penalties are monetary; however, in certain circumstances, other forms of compensation such as the performance of a specific action might be administered.
Once the legal clauses are in a contract, they become legally binding upon approval of the contract by all parties involved. The only time these clauses are no longer valid is if one or a portion of the clauses that are no longer in service are amended, retraction of the contract or through mutual agreement of all parties to the contract. It may not be possible to amend all the clauses, because some clauses may prove to be disadvantageous to one of the parties involved in the contract.
Creation of Legal Clauses
Legal clauses may be the nuts and bolts of a contract, but their drafting requires an attorney’s expertise. Fundamental legal principles and drafting conventions are embedded in a well-crafted legal clause, often with little or no outward sign of it, sometimes requiring deep contemplation of dry technical and stylistic issues, and with other times an aggressive red pen to get to what is the right balance and appropriate clause to stand the test of a lawsuit.
Getting there can be a process, not merely a cut-and-paste endeavor. Rarely, a published electronic precedent or text can be used, finding the most customized version that has survived careful committee review to be the Holy Grail of legal drafting. There are many times the perfect clause is unavailable because of confidentiality or proprietary concerns, or it is simply lodged away in someone’s personal files and memory and cannot be retrieved. We do not live by precedent alone, or so I am told.
Drafting conventions are not always intuitive, and some are even contrary to common sense. The explanation for such apparent oddities may be an elaborate explanation that bears no connection to the current issue or even any issue, but merely harkens back to ancient custom or practices, generally known as "the way we have always done it." Remember too, that what looks simple and even banal may actually be highly nuanced and represent years of trial and error, common litigation, bad blood between repeat partners, or simply no one being willing to broaden the field of the clause too much.
Some clauses lend themselves to easy editing, but many turn into a battle ground and begin to break down. Attorneys even have phrases and words that simply must be in a clause or in the "non-lawyer" vernacular are really "unwords," phrases that must not be used or implied if they can be avoided.
Experience counts for law firm partners who draft legal clauses and the younger lawyers learn from observing how the one more senior in the firm approaches the issue at hand. The best efforts result from a collaborative approach because of the real need and necessity to achieve compromise and get past far too many prickly issues of divided opinion.
In the end, a good legal clause does reflect the risk tolerance of the client, how compromised the client is willing to be on any issue to get the deal closed, or on the contrary, the contentious nature of persons who might fight about anything. Each legal clause might embody the fighting spirit of the negotiator who fought for it, without compromise. This is not merely a wild inference. The author of the legal clause, whether with or without a distinction in title, must execute the offer, which creates a good faith defense should such clause turn out to be worthless or ineffective, if viewed in a forensic light of hindsight. For this reason and others, the intent of the parties, when reflected in a wellcrafted legal clause, can result from a negotiated, and hence "bargained for," rejoinder that creates a binding contract, setting the parties’ future relationship in stone.
Examples of Legal Clauses
While we have previously explored some of the more commonly used clauses (and what they mean) for lease agreements, these clauses are not limited to that context. Clauses are found in all sorts of everyday contracts and understanding these clauses can be an important tool in ensuring a positive business relationship. In this blog, we look at some common legal clauses and how they work.
A Cap on Damages Clause
Let’s say that you enter into a contract with a service provider for repair work on your commercial property. The terms of the contract require the service provider to complete the work by a certain date. If the work is not completed on time and you miss a deadline with another commercial property tenant, you may have claims against the service provider for the damages you incur. But what happens if the clause in the contract has a cap on the damages the service provider may be liable for? What happens if you have incurred $150,000 in damages, but the cap only allows for $50,000?
For large-scale companies that enter into contracts regularly, these clauses may relegate the damages they may be liable for. But for small business owners, avoiding these clauses altogether in the first place may be the best option. If the cap on damages is relatively low, it may not justify entering into a contract with the service provider. A cap on damages can include all damages the injured party has incurred against the service provider. If the cap on damages is unusually low, the injured party may have little recourse to claim even legitimate damages against the service provider.
Non-Compete Clauses
Although they can be limiting for the other party of a contract, non-compete clauses are not uncommon. If you are entering into a contract with a service provider, you may find that the contract includes a clause that limits the use of your competitors. Depending on the service provider, this can limit your options, but it can also protect you from other nearby business owners from using the same service provider that you are currently using. For example , if you are searching for a snow removal company to fulfill a contract with your commercial property, and enter into a contract with the snow removal company, you can rest assured that your commercial property will not have the same snow removal company as your competitor down the street.
On the other hand, if you entered into a contract with the snow removal company to provide services to your commercial property, you may want to see provisions in your contract that allow you to leave the contract if they enter into a contract with a similar company that also services commercial lots. While limiting the use of your competitors’ services, it may be in your best interest to keep your options open should your service provider present a conflict of interest.
Termination Clauses
Termination clauses allow a party to terminate a contract. If your lawyer decides that the contract with a service provider is not in your best interest, or you feel unsure about entering into contract, termination clauses give you the ability to terminate the contract should you need to. However, if your lawyer has not recommended termination due to the risk of breach, or you are unsure about extending termination rights, the termination clauses can also restrict termination by either party. In addition to protecting one party or the other, termination clauses may also have a specific time period before either party may terminate the contract should the need arise.
Termination clauses are critical components of many contracts and should not simply be overlooked. Commonly, termination clauses outline the actions that would allow for parties to terminate the contract as well as notice periods for either party to issue a termination notice. Failure to adhere to termination clauses may result in legal liability for the party who did not follow the process outlined in the contract.
This blog is part of a four-part series on legal clauses. Check back for more where we’ll explore the legalities of warranties in contracts and how warranties overlap with contracts with service providers.
Legal Clauses in Global Contracts
Legal clauses in international contracts serve a similar purpose as those in domestic contracts; however, their application varies according to legal systems and practices between countries. Legal clauses come into play when parties to a contract wish to modify their agreement or create stipulations that go beyond the standard provisions provided by law. They regulate not only the contents of obligations and contracting procedures, but also delimit the parties’ rights and the remedies available to them in the event of breach of contract. Parties in an international transaction must adjust their contractual clauses to take into account the legal environment in the country where the performance of the contract is to take place or to which the contract has a close connection. This can prove complex because the law with which the contract has the closest connection could be that of the country in which the contract is performed or of the country in which the parties are established.
There are several types of clauses, either general or specific, which are often found in international contracts. General clauses aim at ensuring a basic protection of the common law principles applicable in most jurisdictions (e.g. clauses limiting liability for indirect losses or consequential damages, caps on liabilities, interest rates, and confidentiality clauses). Specific clauses deal with the particularities of each contract and provide for remedies in case of breach (e.g. defining the liability of the parties in case of breach and the damage suffered by the non-breaching party).
The scope of application of specific clauses, in particular, has been a matter of dispute in case law: civil law countries have generally sought stricter compliance with the formalities contained in clauses (in particular regarding prior warnings and letters of demand), while common law countries have adopted a more flexible approach and have generally emphasized substance over form when deciding on the application of the clauses. The new Civil and Commercial Code of Peru has introduced a new provision requiring prior notice to be sent and giving the debtor an opportunity to cure the breach before applying a clause that triggers sanctions. The new regulation provides that the debtor will only be deemed at fault when the breach of the contract is not considered excusable; that the creditor must prove that the breach ceases to be excusable during a reasonable time period; and that sent notice of intent to apply the said clause at the moment the breach is found as not excusable. That is a great leap forward, considering that no pre-judicial advice was previously applicable.
Interpreting Legal Clauses
The interpretation of legal clauses is a critical aspect of legal practice and adjudication, as they are the primary tools used in the allocation and management of legal obligations and liabilities. In general, legal clauses are interpreted by courts or other relevant legal authorities with regard to their meaning in the context of the obligations and liabilities they may enforce, and the purpose for which they were drafted in the first instance. In many ways, this process allows for the interpretation of legal clauses without requiring the drafter to specifically define their scope of application.
Interpretational principles are based on the perceived intention of the parties and the commercial context in which the clause was drafted. There is no set list of legal clauses that should be included, the best approach is to include those that serve some purpose which may not be addressed in full by the legal documentation which it is attached to. Without recommending any specific clause or clause combination to be dragged into every document, the following discussion utilizes some basic principles to discuss examples that are drawn from common contractual relationships:
For instance, a jurisdiction clause must be made subject to the jurisdiction of the courts in the country where the case is heard. The jurisdiction clause then reinforces that subjection by providing that a party who does not appear before the court in question will be subject to whatever damages and findings the court may rule against them in their absence, notwithstanding any effort they may later make to leave the country and avoid such consequences. The jurisdiction clause therefore both establishes the jurisdiction of the court should the party signatory to the clause decide to stand before them to answer, and strengthens the authority of the foreign court by compensating it for the trouble of sustaining an action, should such a party choose to remain absent.
As a second example, an insolvent construction company may wish to pass its liability for structural defects on to the building owner, by inserting a legal clause binding the owner to preserve the company’s liability for any such defects after title has passed. While a foreign court may recognize the ability of the construction company to limit its liability in this way, it is less clear whether the owner could be bound to honour that legal clause in their construction contract with the corporation that built the house.
The court may not however be able to enforce such a legal clause against a non-business contract on the grounds that the relationship between the parties was not that of a buyer and vendor.
For the purposes of practical planning, legal clauses are often not so simple either. The legal clause may, for example, include specific conditions precedent that must be satisfied before a company or individual can be held to its terms (for example that the company be officially terminated, or that a payment schedule be adhered to and any subsequent payments be received). If these conditions are not satisfied, then the legal requirement has not occurred and the clause cannot be applied.
An additional consideration is the maximum liability of a contracting party, which cannot usually be exceeded without the agreement of the parties in question. If a financial limit on liability is included in a legal clause, the meaning of such clause must be considered. For instance, such clauses are often written as a guarantee of $1 million or other fixed amount, rather than a guarantee of at least $1 million until all liabilities have been repaid with interest. As a result, this construction excludes any use that they might be taken literally to mean one penalizing clause after another. Unless a limitation of liability clause is drafted in clear terms, it is advisable to consult a legal professional before entering a clause into documentation.
Implications of Breaching Legal Clauses
Although there is a broad array of legal clauses, the consequences of violating them are often similar. First, there is often a right to be paid any amounts that may have been negotiated but not received as a result of that violation. Second, the entity whose rights have been infringed may seek money damages. If those violations are substantial enough, that party can seek not only actual damages but also punitive damage and a lawyer’s fee award.
Significant violations of legal clauses can lead to non-monetary consequences as well. If there is an apparent promise by one party to another that it will not engage in importing, manufacturing, or selling certain items, a court may issue an injunction against the violating party. Other restrictions against certain employment or solicitation of employees may also be included in any such injunction.
Some industries will have their own unique legal clauses , which will have their own unique consequences for violation. For example, a license agreement relating to intellectual property may include very unique warnings, disclaimers, and other such clauses that will not be found in other agreements. But similar consequences can be expected for violating those clauses.
For example, if the violation of the intellectual property agreement was such that the offending party had to pay royalties and give up their rights to use a trademark they had previously registered, that would be regarded as a normal money award. That can also be true if the rights violated were not intellectual property related a court could require the offender to account for any profits made or revenues received as a result of the profit. That too, readily applies to such clauses.
As this shows, even if a clause is not clearly defined, the consequences for violation will often be quite clear.