The Most Important Clauses in a Contract

icon-contractCommercial contracts define business relationships across a wide variety of industries. These legally binding documents include a detailed description of expectations, obligations, guarantees, and terms that structure business relationships. With a well-crafted contract, businesses can create conditions for a smooth and hassle-free execution of duties.

A legal team considers the most important clauses in a contract

Conversely, a contract riddled with vague clauses and loopholes opens a company to liability. Should either party fail to abide by the basic ground rules, a standard agreement includes the process for dispute resolution, termination, penalties, and contract enforcement through legal action. 

Each contract is subject to a lengthy review and negotiation process that can take weeks or even months to complete. Fortunately, innovations in legal technology are streamlining this work. 

Knowing which clauses to include in a template—and to concentrate on during review—is one of the first steps toward efficient contract negotiation. Whether you are negotiating a Non-Disclosure Agreement or a Master Service Agreement, some of the most important clauses will be common to both.

Three of the Most Important Clauses in a Contract

1. Confidentiality Clause

The exchange of information can be a sensitive subject. The right information in the wrong hands can compromise a company’s competitiveness. A confidentiality clause is a restrictive clause designed to prevent parties from misusing proprietary information by outlining how trade secrets may be kept safe. 

A confidentiality clause may may provide language that covers:

  • Employee personal data.
  • Client databases. 
  • Intellectual property. 
  • Financial data.
  • Brand guidelines. 
  • Medical information. 
  • Software code.

Often these clauses are broadly written to ensure comprehensive coverage. Businesses entering long-term relationships may find the specific information they need to secure changes, but a well-written clause will guarantee protection nevertheless.

An agreement may list exceptions for publicly available information, disclosures required by law, cases of expressed consent, or dealings with legal teams bound to confidentiality. While confidentiality may be one-way or mutual, any breach is enforceable in a court of law. 

2. Force Majeure Clause

The “force majeure,” or “greater force,” clause details what to do when circumstances arise that are beyond anyone’s control. Sometimes parties cannot perform their obligations due to unprecedented and unexpected events. 

Examples include natural disasters, weather disturbances, wars, terrorism, virus outbreaks, civil unrest, labor strikes, fires, curtailment of transportation facilities, embargoes, and the passage of new laws or declarations made by civil authorities. 

The force majeure clause relieves the party in default from its obligation to perform. Therefore, this section must be worded carefully. Courts tend to interpret force majeure clauses narrowly, so any possible circumstance that could prevent the contract’s fulfillment must be enumerated here. 

Parties should also consider a circumstance where reduced performance is acceptable. All too often, force majeure clauses only include cases where it is “impossible” to perform at all. This establishes a high threshold that does not cover situations where performance is inadvisable, commercially impractical, or illegal. When complete cancellation is not the preferred course of action, flexibility for underperformance should be included to help parties navigate these contingencies.

3. Dispute Resolution Clause 

Disagreements will inevitably arise during some business relationships. Contracts with a well-planned dispute resolution clause can provide guidelines for a swift and amicable remedy to the matter. 

Typically, parties try to settle disputes by negotiating, seeking an expert opinion, or through mediation, followed by arbitration. A particular service agent is named to handle the formal dispute proceedings to save time, money, and hassle should a resolution become necessary. 

If the dispute cannot be resolved through conventional methods, the contract may allow for escalation through the courts. In such cases, the dispute resolution clause may include jurisdiction and note which party is responsible for costs and what steps to take before initiating litigation.

Using AI and NLP to Identify the Most Important Clauses in a Contract

A good clause is precise—adhering only to the needs of the parties without being excessively burdensome. Clauses should neither be too flexible or too stringent. Increasingly, corporate legal departments are creating negotiation playbooks to detail ideal positions and preferred standard language.  

LexCheck is a groundbreaking platform that leverages Natural Language Processing (NLP) and an AI Digital Playbook to identify the most important clauses in a contract and ensure those clauses adhere to company standards. Identified passages are redlined and annotated with context-based suggestions for revision. 

AI and NLP in legal technology enable platforms like LexCheck to imitate a skilled human attorney and accomplish routine contract review and negotiation tasks faster and without bias or error. As a result, legal departments receive fully-reviewed agreements in a matter of minutes.

LexCheck’s AI-powered contract negotiation platform performs a full contract review, identifying the most important clauses in a contract and suggesting any necessary revisions in a matter of minutes. Reach out to us at sales@lexcheck.com to learn more, or request a demo to experience the technology first-hand.

gary-sanghaGary Sangha | Founder & CEO

Gary Sangha is the Founder and CEO LexCheck. He's a serial entrepreneur and an academic. Gary previously founded Intelligize, a legal technology company that was acquired by LexisNexis. He's affiliated with the University of Pennsylvania and Stanford University and started his career as an attorney at Shearman & Sterling and White & Case.