Everything You Need to Know About Contract Terms 

What are contract terms?

Contract terms are the legally binding provisions within an agreement that establish the rights, obligations, and responsibilities of the involved parties. These terms define how the contract will be executed and outline the consequences of non-compliance, including potential breaches and legal remedies.

Well-defined contract terms help mitigate risks, ensure enforceability, and provide a clear framework for business transactions.

Some heavily negotiated contract terms are indemnity protection, limited liability, price, and termination. Each directly affects the transaction.

Commonly negotiated contract terms

Certain contract terms hold more weight due to their impact on the transaction and are often heavily negotiated:

• Indemnity – Determines liability protection between parties.
• Limitation of Liability – Caps financial exposure in case of a breach.
• Payment Terms – Specifies price, due dates, and penalties for late payments.
• Termination – Defines how and when a contract can be ended prematurely.

Types of contract terms

Contract terms protect the business interests. They primarily:

• Record the rights, obligations, and responsibilities of parties involved
• Provide protection and remedies in the event of a dispute
• Offer a framework for mutually successful business outcomes

There are three general types of contract terms which are classified according to the basis of remedies in the event of a default. These distinctions directly impact the contractor’s ability to terminate the contract, claims, and manage high-stakes deals. They are as follows:

1. Conditions

Conditions are the heart of a contract. If a condition is breached, it undermines the contract’s purpose, and the innocent party has the right to seek the following remedies:

• Terminate: Future obligations are discharged,d and the contract is treated as though it never existed, releasing parties from their duties under the contract.
• Claim damages: Monetary compensations for losses from the contract breach are met to put the innocent party in the position they would have been in if the contract had been performed as agreed.
• Affirm: The innocent party can conversely choose to continue performing contractual obligations and sue for losses concurrently.

The role of conditions in contracts:

• Conditions are fundamental terms that dictate the performance of an agreement.
• They are strategically crafted to align with business objectives and minimize disputes with clear, preferably standardized language.
• They can further be classified into precedent, concurrent, and subsequent terms, each serving specific roles in performance.

Examples of condition terms

• In e-commerce contracts, some critical conditions would be conditions of sale, payment options, delivery procedures, cancellation polices, and consumer rights.
• In real estate, the buyer may make an offer subject to a home inspection clause.

2. Warranty terms

Warranty terms are statements that affirm that specific facts and conditions of a contract are true and reliable. It serves as an assurance of promise regarding the condition, nature, quality, and quantity of goods and property. In case of issues that may arise, the seller offers repairs, refunds, or exchanges as per the terms outlined in the policy.

Warranties are typically valid for a specified period, after which the issuing entity is no longer obligated to address issues related to the product or service.

They may be further categorized into the following:

• Express warranty: This is an explicit, straightforward commitment from the issuer confirming that the product or service will perform according to specifications documented, verbally communicated, or advertised. This may or may not be a legal warranty.
• Implied warranty: This type is not explicitly stated but assumed. They guarantee that the purchased product functions as designed.
• Extended warranty: This kind of warranty includes additional coverage plans to extend protection beyond the manufacturer’s or seller’s warranty. Product insurance policies usually offer these extended terms and conditions.

Impact of breach of warranty

A warranty breach occurs when the product or service does not fulfil the promised standards. This can happen when there are defects in materials or workmanship or a simple failure to perform as advertised. In any case, consumers can seek legal remedies in the form of repairs, replacements, or refunds depending on the nature of the warranty or applicable consumer protection laws.

Examples of Warranty terms

• A SaaS agreement may offer a 99.9% warranty that the software will perform as documented. Any downtime exceeding the limit can result in service credit.
• An agreement for a physical product can offer a 1-year limited warranty against defects, excluding damage from misuse but including repair and replacement from the issuer.

3. Innominate terms

This class of contract terms are those that are neither conditions nor warranties. The court determines the appropriate remedy when a party brings legal action for the breach. While a breach of conditions allows for contract termination and a breach of warranties allows for damages, a breach of innominate terms requires a more nuanced approach.

How courts decide remedies for innominate terms

If not explicitly a condition or a warranty, a term is considered innominate, which the courts will consider textually or contextually. The remedies for breach of this term depend on whether or not the breach fundamentally deprives the injured party of the whole or substantial benefit of the contract. In the case of the former, the party is entitled to terminate, and in the case of the latter, the injured party is entitled to damages only.

Let’s look at the key differences between conditions, warranties, and innominate terms in a nutshell.

Difference between conditions, warranties, and innominate terms

Common contract terms in business agreements

Any business agreement will typically include the following frequently used terms:

1. Confidentiality

This term is aimed to protect sensitive business information, assets, trade secrets, personally identifiable information about employees or clients, and IP from the public, third parties, and competitors.

When to use a confidentiality clause

A range of business relationships involve the exchange or disclosure of classified information. Some agreements that typically need confidentiality terms are:

• Employee and contractor agreements
• Intellectual property license agreements
• Purchase and sale agreements

2. Termination

Contracts automatically terminate when the predetermined events occur without the need for further action by either party. However, the termination clause makes a provision for situations that allow premature termination of a contract. It details the circumstances and grounds on which the contract comes to a close and how potential disagreements are to be remedied.

Key factors to consider in termination clauses

• Termination clauses foster accountability, reduce uncertainty, and enable smooth transitions
• They help prevent disputes, manage risks and obligations, and influence contract flexibility and exit strategies

3. Dispute resolution

While resolution clauses are often dismissed as boilerplate and pushed until the end of negotiations, they have profound implications on how contract rights and obligations are enforced and how disputes are resolved. It outlines if a potential dispute is to be resolved through mediation, arbitration, and litigation options in court proceedings, their jurisdictional impact, enforceability of judgement or arbitration, and so on.

Benefits of resolving disputes by alternative methods

Negotiation, arbitration, and mediation are less time-consuming and expensive than litigation while keeping the relationship between parties intact. It is more beneficial in the following ways:

• Enforceability: They are easier to enforce than court judgements with greater scope for parties to adapt procedures
• Confidentiality: They can be held privately, and documents and awards issued stay confidential
• Trust: They preserve the relationship between parties also relieving anxiety from litigation.
• Efficiency: They can be both cost and time-effective, reducing court formalities, court fees, and other expenses while reducing the burden on the judicial system and making sure neither party is subject to negligent representation.

4. Force majeure

This legal term makes a provision to protect parties from liability in the event of unforeseeable and unavoidable catastrophes that can either interrupt promised timelines and prevent participants from fulfilling obligations. It covers natural disasters like natural disasters, political conflict, or unnatural diseases.

5. Jurisdiction and governing law

This term defines the legal jurisdiction that governs and enforces the contract. It is a clear statement of the court that will hear and resolve any disputes. It becomes particularly important if the parties are located in different states or countries. So, the term is decided after considering factors like the location of parties, where the performance of the contract will take place, the remedies available, and the ability to enforce the agreement.

Ensuring compliance in multi-region contracts

In the case of cross-border contracting, understanding and managing jurisdictional issues is paramount to avoid conflict around which court or arbitration tribunal governs the contract. To avoid compliance issues and disputes, some best practices include:

• Legal expertise: Hire legal experts with deep knowledge of international trade laws to draft and review contracts
• Clear terms: Specify application laws and mechanisms for a smooth path without the need for expensive legal battles
• Compliance check: Conduct thorough due diligence and compliance audits within the legal frameworks of each jurisdiction so the businesses are equipped to comply with the laws of different countries responsibly and ethically.
• Risk management: Anticipate contingency plans and proactively mitigate risks from currency fluctuations, geopolitical uncertainties, and cultural differences

6. Indemnity

Indemnification aims to shift liability between parties in case of losses, damages, and liabilities. It safeguards the innocent party with compensation for incurred losses. The indemnification provision allows the contracting party to:

• Customize the liability limits and the risk that the is willing to undertake in the transaction
• Protect the business from lawsuits that the counterparty can bear more reasonably
• Recover certain types of losses, such as reasonable attorney’s fees
• Reduce its risk by enforcing caps on liability, material qualifiers, and liability basket

Examples of indemnification in contract

• In a unilateral indemnification clause, the seller agrees to protect and pay for any losses the buyer may incur from damages, claims, judgements, penalties, fines, lawyer fees, and other costs that come from a contract breach, false statements, or broken promises made by the seller
• In a bilateral indemnification clause, both parties agree to pay for losses that the other party incurs.

Other common contract terminology include consideration, liability, breach of contract and so on. Frequently negotiated clauses around these terms are usually based on their direct impact on the transaction.

Let’s see how contract terms are different from clauses next.

Contract terms vs. contract clauses

Here are the differences between clauses and terms.

More examples of clauses are below.

Examples of key contract clauses

Here are real examples of the six key contract clauses you mentioned:

1. Confidentiality

“Each party agrees to maintain in confidence all non-public information received from the other party that is marked or identified as confidential (‘Confidential Information’). The receiving party shall not disclose Confidential Information to any third party and shall use it only for purposes of performing this Agreement. This obligation shall not apply to information that: (a) is or becomes publicly available through no fault of the receiving party; (b) was known to the receiving party prior to disclosure; (c) is independently developed by the receiving party; or (d) is required to be disclosed by law or court order.”

2. Termination:

“This Agreement may be terminated: (a) by either party upon thirty (30) days’ written notice to the other party; (b) by either party immediately upon written notice if the other party breaches any material term of this Agreement and fails to cure such breach within fifteen (15) days after receiving written notice thereof; or (c) automatically if either party becomes insolvent, makes an assignment for the benefit of creditors, or is placed into receivership, liquidation, or similar proceeding.”

3. Dispute Resolution:

“The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between executives with authority to settle the controversy. If negotiation does not resolve the dispute within thirty (30) days, the parties shall submit the dispute to mediation under the Commercial Mediation Rules of the American Arbitration Association. If mediation does not resolve the dispute within sixty (60) days after the first mediation session, either party may initiate litigation in accordance with the Jurisdiction clause below.”

4. Force Majeure:

“Neither party shall be liable for any failure or delay in performance under this Agreement due to circumstances beyond its reasonable control, including but not limited to acts of God, natural disasters, terrorism, riots, war, epidemics, labor disputes, utility failures, or actions from a government entity. The affected party shall promptly notify the other party of the event and resume performance as soon as reasonably possible. If the event continues for more than ninety (90) days, either party may terminate this Agreement upon written notice.”

5. Jurisdiction and Governing Law:

“This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any choice of law or conflict of law provisions. The parties consent to the exclusive jurisdiction and venue of the state and federal courts located in New Castle County, Delaware, for any action arising out of or relating to this Agreement. The parties waive any objection based on forum non conveniens.”

6. Indemnity:

“Supplier shall defend, indemnify, and hold harmless Client, its affiliates, and their respective officers, directors, employees, and agents from and against any and all claims, damages, losses, liabilities, costs, and expenses (including reasonable attorneys’ fees) arising out of or relating to: (a) any alleged or actual infringement of any third party’s intellectual property rights by the Services or Deliverables; (b) Supplier’s breach of this Agreement; or (c) the negligence or willful misconduct of Supplier or its personnel.”

7. Intellectual Property Rights:

“Supplier shall defend, indemnify, and hold harmless Client, its affiliates, and their respective officers, directors, employees, and agents from and against any and all claims, damages, losses, liabilities, costs, and expenses (including reasonable attorneys’ fees) arising out of or relating to: (a) any alleged or actual infringement of any third party who owns intellectual property rights by the Services or Deliverables; (b) Supplier’s breach of this Agreement; or (c) the negligence or willful misconduct of Supplier or its personnel.”

Clauses make up the anatomy of a contract. That said, there’s still information left to read between the lines. Some terms are expressed, and some are implied. Let’s learn about them in detail.

Expressed terms vs. implied terms

A contract is made up of both expressed terms and implied terms. Let’s go over their differences, purposes, and examples.

Expressed terms

These are terms that are overtly agreed upon, either orally or in writing. They cover a wide range of topics like scope of work, payment terms, and delivery schedules. Expressed terms are unambiguous and can be clearly documented, negotiated, and agreed upon.

Implied terms

These are terms that are not expressly or explicitly agreed upon because they are too obvious to be written and are implied through custom or practice. In commercial contracts, terms are implied if they are integral to business efficacy or business common sense or if they are unspoken standards of behaviour. They can be further classified into:

• Terms implied by law: These are statutory terms that are provided for in the law, like health and safety obligations.
• Terms implied by custom: These terms are often left unwritten as they include the duty not to destroy mutual trust and confidence like good will, duty of care, expected quality of service or goods for sale.

It’s impossible to manage all terms across all contracts without best practices, frameworks, and technology—all of which we’ll explore in the rest of this glossary.

How do you manage contract terms effectively?

Incorporate the following best practices while reviewing and negotiating contract terms:

• Draft clear, simple purposeful terms
• Prioritize organizational objectives and mutual interest
• Make sure you mutually understand motives and interests
• Do your homework and focus on what you can agree on
• Don’t hurry the process, but automate when you can

Negotiation tips for fair contract terms

Skillful negotiations are essential to prevent wasted resources, operational setbacks, or strained vendor relationships. Consider the following tips for win-win terms in the best interest of your organization:

• Clearly define expectations and deliverables based on your organizational goals
• Research market rates, industry standards, success metrics, and best practices
• Establish a strong negotiation team with stakeholders from legal, finance, sales, and other functional heads of relevance
• Let data analytics paint the picture and guide your decisions
• Negotiate key terms like pricing and payment terms, SLAs, termination, indemnity, etc
• Develop mechanisms for common challenges, risks, and liabilities
• Create clear exit strategies and renewal conditions
• Use technological tools like contract negotiation software for more efficiency
• Document meeting minutes, draft iterations, finalized contracts

Enforcing contract terms

Contract enforcement is the process of making sure that the terms agreed upon by parties are met and executed as intended. The enforceability of contracts is essential for smooth business operations. A violation of contract terms would be considered a breach.

Legal implications of a breach of contract

A breach of contract arises when one party fails to fulfil obligations as outlined in the contract. Breaches can vary in types and severity of violation. They can be classified in two broad types:

1. Minor breach: Also known as partial breaches, minor breaches occur when a party performs most contract terms but fails to fulfil a minor term that does not bear a significant impact on other contract terms.
2. Material breach: These, on the other hand, occur when a party fails to deliver or fulfil a critical obligation that undermines the purpose of the contract, justifying termination.
3. Actual breach: This occurs when a party fails to fulfill its obligations within the specified timeline. Actual breaches can take on several forms like non-performance, defective performance, and late performance.
4. Anticipatory breach: They occur when a party expressly indicates in advance that they won’t fulfil obligations. This can happen through clear verbal or written statements, actions that make performance impossible or when there’s no clear intention to perform, and when essential resources are transferred to another party.

While no contract is bullet-proof, setting clear expectations and coherent terms helps prevent contract breaches. Next, let’s see how they can be remedied.

Legal remedies and damages for breach of contract

Legal remedies can be sought out at a governing court of law or with an independent tribunal. Here’s a detailed breakdown of common remedies for breach of contract:

1. Compensatory damages are an award of a sum of money to claim damages and put the aggrieved party in a position they would have been in had the contract been fulfilled properly.
2. Consequential damages refer to significant, situation-specific losses that occur as a consequence of the breach, such as lost business relationships, profits, or reputation.
3. Liquidated damages refers to a sum of money or consideration stipulated in the contract in case of breach.
4. Specific performance refers to a court order that requires the breaching party to fulfil their contractual obligations. They are used when monetary compensation is inadequate.
5. Rescission is when the contract is cancelled and rendered no longer legally binding, returning parties to their pre-contractual positions.
6. Reformation is when the court exercises its power to modify a contract to reflect the parties’ true intent.

How can businesses ensure compliance with contract terms

1. Standard framework
Legally approved automated templates with conditional logic for standard contracts like NDAs and vendor contracts can minimize errors and remove room for ambiguity. Streamlined approval workflows can further ensure that internal compliance meets legal standards. Other frameworks include periodic compliance audits, clear escalation and remedies for potential breaches, documentation of all compliance efforts, and compliance risk assessment protocols for contract obligations.

2. Assign roles and responsibilities
Keeping a keen eye on contracts, their progress, and performance is always a good practice. Assigning specific roles for the job can make sure critical issues are not overlooked. For instance, responsibilities like contract owners for specific agreements, cross-functional teams for complex contracts, reporting structures for complex contracts, and escalation paths for potential breaches. Other specific roles like legal responsibility and buyer’s responsibility can be predetermined.

3. Implement processes and procedures
The contract compliance process begins even before the contract is executed. It starts with process protocols for contract reviews and approvals, execution, monitoring and reporting, issue resolution, and periodic audits to identify areas of improvement and implement corrective measures.

4. Adopt CLM technology
Manual contract compliance monitoring is inefficient. Contract lifecycle management solutions do the heavy lifting so you can focus on what matters most. They offer a centralized contract repository for better visibility, automated milestone tracking and alerts, performance analytics and reporting tools, and integrations to existing business tools.

Compliance with contract terms is an ongoing endeavor and is best done with CLM technology. Let’s look at how this is done at every contracting step.

Using contract management software

CLM software today transforms the contracting process with the following features:

• Creation: Streamlines contract creation and approvals with templates, clause libraries, and workflows.
• Execution: Establishes secure ways to execute the contract.
• Storage: Centralizes all contracts in a single repository.
• Tracking: Automates tracking of compliance with contract terms.
• Reminders: Monitors and notifies key stakeholders on renewals and obligations.

Best practices for drafting strong contract terms

Drafting full, clear, and precise contract language is integral to making sure contract terms are understood and that there’s little room for ambiguity or conflict.

• Ensure precision in contract language: Use plain English where possible, define technical or industry-specific terms, and structure documents logically.
• Avoid vague or overly broad terms: Specify key deliverables, deadlines, standards, and obligations. Quantify performance metrics and make provision for mechanisms that address ambiguity.
• Include necessary legal safeguards: Protective provisions like force majeure clauses for unforeseen circumstances, conflict resolution mechanisms, and severability clauses preserve contract validity through time, protect the rights of parties, and make room for remedies in case of a breach.

Manage your contract terms effortlessly with HyperStart CLM

HyperStart’s AI-powered contract management software gives business and legal teams the tools to handle every aspect of your contract and contract lifecycle without the heavy lifting. It puts best-in-class AI, keeps all your contracts compliant, and makes contracting intuitive from start to finish.