Compliance

What is a clause in a contract?

Rachel Lee
October 20, 2021

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Contracts are built upon clauses. It is what makes them effective. A clause is a condition that influences a document’s validity. Each clause provides detail on what is required of each party to uphold the contract as a whole. The use of clauses - and the amount of them - in a contract can make them intimidating. However, by breaking down the document into smaller parts, which clauses do, it makes contracts far more effective as parties should understand them more readily. 

Here, we look at what exactly is a clause in a contract and some standard contract clause examples so that you can be sure you are using and understanding them correctly. Doing so means that you will not find yourself in a legal predicament or dispute - instead, you follow the contract quickly and simply garner the results that the contract was set out for initially. 

What is a contract clause?

A clause in a contract is what can limit or cancel a contract’s validity. Technically speaking, a contract can be made up of only one or two sentences. However, a contract with clauses outlines the terms and conditions that support a contract’s validity. If a party does not abide by one or more clauses in a contract, the contract is at risk of being invalid. A breach of contract may have further ramifications for the person who broke the clause, which another clause will detail. Clauses will describe who gets paid when entering into an agreement, what the work expected is, who does that work, and what happens should one party want to cancel or terminate the contract. 

They are probably most widely seen by people in their employment agreements with their company. In this scenario, a contract clause will detail how much an employee is to be paid and what the company expects in return for that - among any other required clauses necessary for that particular role, company, and industry. 

However, every single well-constructed and well-written contract will include a clause. So if your company enters into a sales agreement with another entity, that agreement should be made up of clauses to help delineate responsibilities for the future working relationship.

A contract clause example

Here are some common examples of clauses often included in a contract. 

Non-compete clause

A non-compete clause is a condition set within a contract that requires one party not to attempt to do business in the same way or sphere as the other party. For that reason, they are widespread in employment contracts. By including a non-compete clause, employers can prevent employees from using insider knowledge to go off and set up a similar business. Or, it can prevent them from going to work for a competitor within a certain amount of time. 

Non-solicitation clause

A non-solicitation clause is another standard clause in an employment contract, but it can be used elsewhere. In essence, a non-solicitation clause stops one party from approaching clients of a company and poaching them. They are common in employment contracts as it prevents employees from leaving a firm, and directly calling up past clients to see whether they would, instead, like to do business with the former employee. It is a way that employers can protect their client books and customer lists. Client lists are intangible assets that a company can take a long time to build up. Some believe that non-solicitation clauses are difficult to uphold as they can be seen to be subjective. However, their inclusion may do something at least to minimize the number of clients a company may lose to past employees. 

Customer clauses

A customer clause in an employment contract is a clause that prevents an employee from going to work for a customer or entity with which their current company does business. They usually have a timespan on them so that after a certain period after an employee’s resignation, they are free to do work for a customer. 

Non-disclosure clause

A non-disclosure clause is a fairly standard inclusion in a whole host of broader agreements. A non-disclosure clause is inserted when one party does not want any confidential information disclosed, which the other party is privy to through their dealings with one another. They are often seen in employment contracts when a company does not want an employee to share company confidential data or information - either during or after their employment. 

Non-waiver clause 

A non-waiver clause is one where one party excuses the other if other conditions stipulated in the rest of the contract are not met. It is a form of protection for both parties involved as it stops them from inadvertently waiving their rights through their actions. 

Overall takeaways to contract clauses

Clauses are the building blocks of contracts. They help build up a broader and stronger picture which helps to detail a future relationship between two parties. For that reason, they can be used to strengthen the contract as a whole by inserting stipulations within clauses, so there is no room for misinterpretation of the obligations upon both parties.

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