Common Contract Terms Explained

Contracts can contain specialized language that isn’t always clear. Many contract terms have been around for hundreds of years, and the people signing may not be sure what they mean. This article explains many common terms of contract law so you can understand what you’re agreeing to when you sign a legal agreement.

Contract disputes can vary depending on state law. For more information about common contract terms and what they mean, talk to a business lawyer for legal advice.

Boilerplate Templates

Every contract has legal terms and conditions that go unchecked by the people contracting. These contractual terms and conditions are often called the contract’s boilerplate language.

Most people don’t give these sections a second thought. It’s not an issue until you have a breach of contract claim. Common law terms can influence the lawsuit’s outcome. You should know at least their general meaning and how they can affect your business relationships and dealings.

Indemnification and Hold Harmless Agreements

If you agree to an indemnification clause, you agree to not sue the other party. It’s easiest to understand indemnification through an example. Imagine that you rent a car and sign a contract with the rental agency, saying that you will indemnify them against any future claims. If you were to get into a car accident where another party was injured, the victim would not be able to sue the rental agency because you have indemnified them.

Indemnification is a way for people to protect themselves from liability for another’s actions or negligence. It’s important for you to understand the limitations and scope of the indemnity before signing these types of contracts.

Sample indemnification clause:

Widgets, Inc., agrees to indemnify and hold harmless Corp. X against loss or threatened loss or expense by reason of the liability or potential liability of Corp. X for or arising out of any claims for damages.

Time Is of the Essence

A time is of the essence clause signals that any performance delay will amount to a material breach of the contract. For example, a landlord may insist that a contractor complete a condo remodel completion by a certain date because tenants will be moving in. If the remodel isn’t completed by that date, the landlord would lose rent. Without a time is of the essence clause, this delay might be a minor breach. It could limit the landlord in suing the contractor for the breach.

Sometimes, contracting parties will explicitly agree that time is not of the essence. You might do this when unknown variables could affect the contractual obligations. If a delay in performance is acceptable, you can include a time is not of the essence clause in the terms of the agreement.

Sample time is of the essence clause:

Time is of the essence with respect to all provisions within this Agreement. Any delay in performance by either party shall constitute a material breach of this Agreement.

Choice of Law and Forum Selection Clause

If you include a forum selection clause, you agree that a specific jurisdiction’s laws will control any disputes. Parties may choose a specific jurisdiction when doing business across state lines. If there are any discrepancies, the forum selection terms of the contract clarify what laws to follow. Be aware of the applicable law as stated in your contract when dealing with a company in a different jurisdiction. The contract agreement laws can differ from your state’s laws.

The contract may also state that a certain forum will handle any disputes. This means that a contract signed in California could be litigated in Florida. These elements of a contract can also limit your ability to litigate a court dispute. The contract can demand disputes to go into arbitration. Arbitration clauses require dispute resolution with an arbitrator.

Sample choice of law and forum selection clause:

This Agreement shall be interpreted and construed according to, and governed by, the laws of Delaware, excluding any such laws that might direct the application of the laws of another jurisdiction.

In the event that the parties cannot, by exercise of their best efforts, resolve the dispute, they shall submit the dispute to Mediation.

Severability Clause

Language mistakes in a contract can potentially void the entire agreement. Severability clauses can separate the unenforceable parts of the contract and keep the rest of the binding agreement. A severability clause can allow a change to the invalid portion that reflects a person’s actual intentions. Severability clauses can also rescue the other portions of the contract and keep them valid and enforceable.

Sample severability clause:

Invalidity or unenforceability of one or more provisions of this Agreement shall not affect any other provision of this Agreement. If possible, any unenforceable provision within this Agreement will be modified to reflect the parties’ original intention.

Attorney Fees Provisions

This provision states that the losing party will pay both sides’ attorney fees if a dispute arises from the contract. If you have an issue with this outcome, you may want to negotiate for this provision to only apply to claims not brought in good faith.

Sample attorney fees provision:

In any proceeding by which one party either seeks to enforce its rights under this Agreement or seeks a declaration of any rights or obligations under this Agreement, the prevailing party shall be awarded reasonable attorney fees, as well as costs and expenses incurred.

Liquidated Damages Clause

A liquidated damages clause states that if someone fails to live up to the terms of an agreement, they will be liable for a specific sum of money. People use these clauses when the actual damages cannot be determined. For example, a developer may hire a builder to construct a new restaurant that will open on a certain date. When the parties sign the contract, there’s no way to determine how much revenue and profit the restaurant will make each day after it’s opened. The parties may agree that for any construction delays, the builder will pay liquidated damages of $500 per day for a delay in the opening.

Liquidated damages must be reasonable to be enforceable. If reasonableness is questioned, the judge can side with the party trying to enforce the damages clause. So, reading your contract for a liquidated damages clause is important. If you’re uncomfortable with the amount, feel free to negotiate.

Sample liquidated damages clause:

If the contractor fails to complete the work within the contract time, the contractor agrees to pay the Owner $500 per day as liquidated damages to cover losses, expenses, and damages not to exceed $10,000.

Acceleration Clause

This clause allows a non-breaching party to demand full performance immediately if the other party breaches the agreement. This is important in contracts with installment payments, such as mortgage arrangements. With an acceleration clause, if one party fails to make a payment, the other party can demand the entire amount immediately.

For example, suppose a buyer contracts with a store to purchase a couch for $1,000, paid in 10 monthly installments of $100. If the buyer makes the first three payments but fails to make the fourth, an acceleration clause requires the buyer to pay the entire balance of $700. If the buyer can’t make the $700 payment, they lose not only the couch but all the money previously paid.

Sample acceleration clause:

In the event of default in the payment of any of the said installments or said interest when due as herein provided, time being of the essence hereof, the holder of this note may, without notice or demand, declare the entire principal sum then unpaid immediately due and payable.

Merger and Integration Clause (Entire Agreement Clause)

This clause states the entire agreement has been completely memorialized in the words of the contract. If there’s a dispute, a judge would only look to the language of the contract to decide the case. For example, say you agreed to buy goods from a merchant who will deliver them on a certain date. If a contract for this sale of goods included a merger and integration clause, the merchant can’t later claim you agreed to a different date.

Sometimes, a judge may allow outside evidence to clear up language ambiguities or determine whether there was fraud. But outside evidence won’t be admitted into court to directly contradict the written contract’s terms. For example, say one person thought the word “soda” included fruit juices, and the other thought it included only carbonated beverages. Outside evidence is admissible and useful in clearing up the disagreement.

Sample merger and acquisition clause:

This Agreement and exhibits attached hereto constitute the entire agreement between the contracting parties concerning the subject matter hereof. All prior agreements, discussions, representations, warranties, and covenants are merged herein. There are no warranties, representations, covenants, or agreements, express or implied, between the parties except those expressly set forth in this agreement. This agreement may only be amended by a written document duly executed by all parties.

Uniform Commercial Code Clauses

The Uniform Commercial Code (UCC) is a set of legal standards for many common business transactions. It has general definitions for common contract terms. Some contracts have UCC clauses that apply the Uniform Commercial Code to the legally binding contract.

How Can a Contract Law Lawyer Help?

A contract lawyer can draft and review your contracts and make sure you understand your legal rights and obligations. If there is a breach, your lawyer can file a lawsuit to hold the breaching party liable and claim damages. Contact a business law lawyer for help with your legal contract issues.