Contract Provisions: The DNA of Every Successful Agreement

To understand a provision in a contract, we need to first know some legal terms.

I’m here to simplify complex concepts for you, and we’ll understand all about contract provisions today in this post.

Table of Contents

Understanding Contracts and Provisions

What are Contracts?

A contract is a legally binding deal between two or more parties that promises to do certain things, like buying a house or a car, hiring an employee, setting up a business partnership, etc.

They are found everywhere in our everyday lives, except that many times they are verbal or expressed, i.e., not written.

Do you shop online? Did you sign up for a new phone plan? Did you agree to a website’s terms of service?

All such types of transactions involve contracts because they provide clarity and accountability to everyone involved, and the consequences of not complying with obligations or provisions are seriously unpleasant; they may include financial penalties and legal action.

Define Provisions

It’s a stipulation or condition added while drafting a legally binding agreement to ensure certain things happen or don’t happen, and it could relate to various terms such as payment, delivery, obligations, limitations, default, and penalties.

Provisions defines scope, clarify expectations, and provide guidelines for specific circumstances; they give a contract its form and substance and dictate how things should be done and what happens if things go wrong.

Importance of Provision in a Contract

Contracts define the obligations and rights of all the parties involved; they ensure agreement, reduce misunderstandings, prevent disputes, and maintain fairness and transparency throughout the contractual relationship.

Types of Contract Provisions

Substantive Provisions

These are essential parts of your contract, and they outline each party’s obligations, rights, and duties.

• Example: A substantive provision in a contract for job specifies your role, responsibilities, and salary, whereas in a lease agreement it specifies the rent amount, due date, and payment method.

Boilerplate Provisions

Most contracts contain standard terms that are often hidden in the fine print. Many people don’t read them, but they are important as they establish the legal foundation of the contract.

• One example is the “choice of law” provision, which decides which jurisdiction’s laws will apply to the contract.

• Another is the “entire agreement” provision, which establishes that the written contract is the only agreement between the parties and overrides any other agreements, whether verbal or written.

Even though these provisions can vary based on the nature of the contract and how the parties negotiate, it’s still a good idea to always read and fully understand them to know where you stand.

Endgame Provisions

These terms govern contract termination and dispute resolution. For example, the termination provision outlines how and when the contract can be ended.

Benefits of Provisions in a Contract

• They protect all parties involved in the agreement; for example, an indemnification clause protects a party from financial harm in specific situations, and a confidentiality clause helps to keep sensitive business information private.
• They protect against contract abuses and negligence by clearly setting expectations and boundaries, and they prevent misconduct by defining specifics and reducing ambiguity. For example, a supplier cannot deliver low-quality goods when there’s a quality provision, and the contractor has to provide the services on time without any delays when there’s a timeline clause in the contract.
• They provide clarity and specify who, when, how, and under what conditions everything needs to be done, helping to avoid disputes later on.
• They balance interests by giving an opportunity to negotiate, resulting in provisions that reflect everyone’s interests, thereby benefiting all parties involved.

A good example of this is a lease contract:

1. which states that the landlord has to keep the property in livable condition, and
2. to make sure that the tenant has a safe and comfortable place to live,
3. this in turn makes them to pay rent on a specific date every month,
4. which is good for the landlord because they are able to receive timely income from their property.

How to Add Provisions to a Contract

It’s best to have a lawyer involved when drafting or updating a contract, especially if it has specific details, as they can help you stay fully protected by understanding the nuances of the contract clauses.

Here are the following steps on how you can add provisions to your contract:

Step 1: Identify your needs

Are you protecting intellectual property? or describing the contractor’s job? or setting the payment terms?

Step 2: Research applicable rules

Check out sample contracts or templates in your industry for ideas, or if you are looking for some specific provision, here is a list of sample contract clauses. Remember that these are just starting points; thereafter, you’ll have to customize them to fit your specific situation.

Step 3: Start drafting the provision

Writing is the tricky part. So, please aim for clarity and specificity, and to avoid future disputes, make sure to clearly state what is expected from each party and the consequences if those expectations are not met.

Step 4: Review and revise your draft.

Take a break after drafting your provision, revisit it later the next day with a fresh perspective, and check

Is it crystal clear? Has it covered everything? Are the terms fair?

Step 5: Consult a legal professional

Consider consulting an advocate or a contract drafter to review your contract before executing it because they can help you identify and address potential issues in your language to ensure legal compliance.

Note:

1. A provision in a contract should have a clear purpose and add value to the contract. So, avoid adding anything that is unnecessary to the contract, as it can confuse the other party and make the document cluttered.
2. Be practical and think long-term. What if something goes wrong? What happens if things change? By using provisions, it is also possible to define actions for various scenarios and plan for contingencies.

There you have it! All the finalized provisions in your contract.

Understanding How Provisions Work

They are the building blocks of a contract and help structure the agreement using the main contract clauses or sub-clauses of the contract. They’re like the paragraphs in an essay or the scenes in a movie – each one is a standalone component, but they all work together to portray the entire story.

Imagine the contract as a story where provisions define the terms of the agreement and the scene is set by introducing the parties and their roles, while the action is driven by outlining each party’s expected actions and specifying available remedies for breaches as the climax or providing a safety net to avoid any problems as a happy ending.

If you weren’t able to connect with the story, let’s take a job contract as an example to make things clearer.

• The employment contract includes sections on the employee’s duties, payment terms, termination conditions, and more.
• Each provision under a section covers a different aspect of employment, but when read all together, they give a clear idea of what is expected from both parties.

Provisions are important in deciding what actions will be taken if the commitment is broken, and if there is a breach, the non-breaching party can terminate the contract, sue for damages, or force the breaching party to fulfill their obligations.

Example: If one party fails to fulfill their obligations, they shall pay the other party a specific amount in liquidated damages.

Note: Any type of consequence depends on the severity of the breach and the contract terms, but it needs to be fair and make business sense; otherwise, it would not be enforceable.

How do Provisions Work in Practice?

Clear language is crucial while drafting provisions because if there’s a disagreement, the courts will refer to the contract to decide what each party is responsible for, and they interpret them based on their plain meaning.

Contract Provisions in Practice

• One of the most common provisions in employment contracts is the confidentiality (non-disclosure). It prohibits the sharing of the company’s proprietary information, like how it works or who its clients are. So, this provision protects the employer’s interests by keeping trade secrets and other useful information secret.

• Dental insurance companies use the missing tooth clause to reduce liability claims from people who only buy insurance for expensive procedures. It implies that the insurer will not pay for any treatment to get a bridge, implant, or dentures to replace a tooth you lost before the policy start date.

• A subordination clause in a multi-lender scenario for a real estate development project helps determine the order in which debts are repaid. If the borrower cannot pay back the loan, the primary lender gets their money first from selling the property. This makes sure the secondary lender does not get ahead and keeps things fair and organized.

• Real estate purchase agreements often use a contingency provision to clarify that the sale is dependent on the buyer getting a mortgage; if the buyer cannot get a mortgage within a specific period of time, their deposit would be refunded by deducting “x” amount as compensation for the holding fee, and the contract would be deemed void.

• In a business example, the manufacturer includes a provision that the supplier needs to deliver raw materials on specific dates, and if the supplier fails to meet the deadlines, they shall have to pay the manufacturer for any losses caused by the delay. So, this provision guarantees timely delivery and ensures that the manufacturer receives compensation if the delivery is late.

• The incontestability provision in life insurance policies protects policyholders. It ensures that if they made a mistake or left out information on their application, the insurer cannot deny their claim or cancel their coverage after a certain period, usually two to three years. This gives policyholders peace of mind and security.

• A non-circumvention clause in joint ventures protects the interests of all parties. It prevents one party from using unique resources brought by others to develop similar products or provide services independently to ensure fair and mutually beneficial collaboration for all.

• The completion provision outlines how a deal will come to an end, while the renewal and automatic renewal terms say when and how the contract can be renewed.

• A limitation of liability clause is added to limit the amount a party pays in case of a contract breach, protecting the interests of both businesses.

• The force majeure clause is a helpful provision in a contract that allows a party to pause or end their obligations in unforeseen situations like natural disasters or pandemics.

What if there are unclear provisions or disputes?

If a contract between two businesses has unclear payment terms, for example, one side thinks payment is due 45 days after goods are delivered while the other thinks it’s due 45 days after the invoice date,

In such a case, the dispute may go to court, and their job is to interpret the provision based on the contract, past interactions between the parties, and legal principles.

They can also interpret a contract by looking at the rest of it or using a legal rule called ‘contra proferentem‘, which interprets any ambiguity in a provision against the party who drafted it.

Courts use contracts to decide who is right or wrong in a case, so one should try their best to draft a well-written, clear contract.

Even though I’ve tried to cover the maximum in this post, it still cannot replace the advice of a professional. Whenever you aren’t sure, please talk to a lawyer.

Over to you

What has your experience been with contract provisions?

Any interesting stories you have or questions that are still lingering?

I’d love to hear from you!

And BTW, being a contract drafter myself, you can also ask me anything by leaving a comment below right now!