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Contract Analysis 101: Common Contract Clauses Explained

Apr 6, 2021 Contract Analytics

Contracts are not the most riveting reads – but they are enormously important and are the lifeblood of your business. Failing to review and understand the legal agreements you sign is a surefire way to paint yourself and your organization into a corner. Today, AI can expertly handle repetitive, often monotonous tasks such as reading and managing business documents. Document Understanding with Contract Analytics technology allows humans to make the best use of their creativity and judgment – it’s not a human replacement tool.

13 Common Contract Clauses Explained for Non-Lawyers

The clauses below are among the most frequently used provisions in legal drafting. You will see them everywhere, from labor contracts and service agreements to your contract with your mobile network provider. ThoughtTrace quickly extracts these provisions and hundreds more from thousands of documents, so you can quickly and holistically grasp your business’s obligations and opportunities.

1. Indemnity Clauses

In an indemnity clause, one of the parties answers for the losses and/or liability the other party may incur following a specified event. Depending on the context, the indemnifying party may defend the other party from litigation or compensate them for any ensuing losses or damages. In that sense, an indemnity clause is a sub-type of the exemption clause.

2. Arbitration Clauses

The parties to an arbitration clause agree to resolve potential disputes arising from the contract through an arbitration process. Arbitration is a mechanism for alternative dispute resolution in which a neutral third-party – the arbitrator –can make a decision about the dispute after reviewing evidence and hearing arguments. The process is less formal than traditional litigation. Nevertheless, the arbitrator’s rulings can be legally binding and may not always be appealed in court.

3. Force Majeure Clauses

Force majeure is French for “greater force.” These contract clauses exempt the parties from liability for losses suffered as a result of “acts of God” or unforeseeable circumstances beyond the parties’ control. Examples include natural disasters such as earthquakes, hurricanes, landslides, and human-made emergencies like wars, riots, or acts of terrorism.

For instance, when COVID-19 hit, many organizations experienced a sense of helplessness in how to respond. With AI contract review software, organizations can quickly understand their coverage, risk exposure, and maximum resulting liability triggered by the pandemic or any future socio-economic situation.

Watch ThoughtTrace find all instances of ‘Force Majeure’ clauses and related agreements across thousands of documents in seconds

4. Escalation Clauses

An escalation clause – also known as an escalator – allows a party to increase the originally agreed prices, wages, or rates in response to certain specified conditions. These can include changes in inflation rates or the consumer price index, market shifts, increases in labor or materials price, and more.

5. Cancellation Clauses

Cancellation or termination clauses allow one or both parties to terminate the contract before it has been fulfilled. A cancellation clause will typically specify the exact terms and conditions that must be met before a party can terminate the agreement. It is also standard practice to require the terminating party to provide written notice.

6. Non-Compete Clauses

You will often see non-compete contract clauses in employment contracts. These provisions ban employees from directly competing with their employers or working for a competitor within a specified time frame.

7. Insurance Clauses

An insurance clause requires one or both parties to a contract to take out a specified insurance cover. The clause will also typically set forth additional requirements related to the insurance’s duration and minimum limits. The party taking out the insurance may also be obliged to produce evidence of the coverage’s existence and notify the other party whenever the cover is amended, denied, or canceled.

8. Limitation of Liability

As their name suggests, these contract clauses limit the liability of one or both parties and protect them from excessive losses in the event of litigation and/or contractual disputes.

9. Confidentiality Clauses

A confidentiality clause defines what is to be considered confidential information for the purposes of the agreement and restricts the parties’ ability to disclose that information to third parties.

10. Consent Clauses

Some agreements require that one party obtain the other’s consent or approval before taking a particular step. Also known as consents-and-approvals clauses, these provisions specify how a party may give or withhold consent or approval. The purpose of such clauses is to uphold the parties’ original intent and resist subsequent interpretations in bad faith or otherwise in contradiction with the spirit of the contract.

11. Notice Clauses

Notice clauses specify what constitutes valid notice under the contract. They also set out the acceptable methods for issuing and serving notice and the minimum notice period and means of delivery.

12. Payment Terms

A payment terms clause contains provisions regarding various billing matters, from the acceptable payment methods and the issuing of invoices to handling returns, refunds, missed or late payments, and more.

13. Intellectual Property Clauses

These types of clauses protect the parties’ exclusive rights to their intellectual property assets, including trade secrets, patents, copyrights, and trademarks. A typical clause will define the intellectual property subject to the contract and stipulate that the original owner retains ownership.

Better Contract Analysis and Data Extraction

Understanding the purpose of the different contract clauses can help you get a better grasp of any agreement you sign.

However, if you still aren’t particularly excited about poring over pages and pages of complex legal texts (and the risks inherent in doing so), you’d be happy to learn that manual contract review is becoming a thing of the past. With AI rapidly enhancing our document understanding and how we review and analyze contracts, people are empowered to focus less on data mining and more on high-value analysis.

 

 

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