Common Contract Clauses
Our business law clients often wonder why their contracts include some version of the following contract provisions. These clauses may seem unnecessary to a business owner or layperson. However, each of these common contract provisions does serve an important purpose in protecting a client’s interests, as described by our business lawyers below:
Merger and Integration Clause
A merger and integration clause serves to prevent the parties to a contract from later claiming (usually if a dispute or lawsuit arises) that the contract does not reveal their entire understanding, it was modified by a previous or subsequent oral agreement, or even a previous writing, or is not consistent with prior agreements. This type of provision usually looks something like this:
This Agreement and accompanying exhibits attached hereto contain the entire agreement of the parties with respect to the subject matter of this Agreement, and supersede all prior negotiations, agreements and understandings with respect thereto. This Agreement may only be amended by a written document duly executed by all parties.
Anyone entering into a legal contract which includes this type of language should make certain that all promises and terms agreed to between the parties are actually included in the written contract. If not, it may be impossible to enforce those unwritten promises through parole evidence. However, this type of contract provision is often very useful in forestalling litigation altogether.
Choice of Law and Forum Clause
Contracts will often contain language indicating that they are to be interpreted under the laws of a particular state or jurisdiction, and that any litigation will occur within a specified court system. This type of provision usually looks something like this:
This agreement shall be interpreted under the laws of the State of California. Any litigation under this agreement shall be resolved in the trial courts of San Diego County, State of California.
While this language is fairly straight-forward, its importance can be easily underestimated, as pointed out in a recent article penned by one of our trusted business litigation attorneys, Contract Disputes and Personal Jurisdiction.
An indemnity clause requires that one party indemnify the other, or both parties indemnify each other, in the event certain expenses are incurred. This type of provision can vary considerably depending on the situation. Here is one sample version of this type of contract clauses:
The seller agrees to indemnify and hold harmless the buyer against loss or threatened loss or expense by reason of any liability or potential liability of the buyer arising out of any claims for damages which were incurred prior to the closing date.
Take care, as these types of contract clauses since they can significantly increase a party’s exposure to liability in the event of an unexpected event. However, they can also be extremely useful in causing a party to think twice about pursuing a lawsuit unless they have a rock solid case.
Savings (Severability) Clause
Many contracts include a savings clause, which is meant to ensure that the contract remains enforceable even if part of the contract is later held invalid:
If any provision of this Agreement is held unenforceable, then such provision will be modified to reflect the parties’ intention. All remaining provisions of this Agreement shall remain in full force and effect.
In the absence of a savings clause, it is possible that if a single clause is held invalid, a court will find the entire contract unenforceable.
Attorneys’ Fees Clause
An attorneys’ fees provision requires that, in the event of a dispute, arbitration or litigation, the prevailing party is reimbursed by the losing party for their attorneys’ fees:
In the event of litigation relating to the subject matter of this Agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable attorneys’ fees and costs resulting therefrom.
There are many hidden issues when using this type of provision, such as what happens if there is not a clear winner following litigation or arbitration. It is important to seek advice from an experienced business lawyer when considering whether to use this type of clause.
Liquidated Damages Clause
Where it can be difficult to calculate actual damages, your business lawyer may suggest including a liquidated damages clause in your contract. Here is an example for the rental of a university dormitory room:
Should buyer materially breach this Agreement, buyer shall pay to seller liquidated damages in the amount of $10,000.00 within 30 days of said breach.
Like many of the common contract clauses, this example is an over-simplification of an actual liquidated damages clause, but is included here for the purpose of illustration. This is not an exhaustive list of common contract clauses, but a representation of some of the most often used.
If you are negotiating a contract, would like to have a contract prepared memorializing your agreement with another party, or need someone to review and interpret your contract, contact the trusted and experienced business law and contract law attorneys at Gehres Law Library You’ll be glad you did.