This paper provides an accessible overview of seven common contract clauses encountered in everyday legal documents, including rental agreements, employment contracts, and loan forms. The clauses examined are: the escalation clause, arbitration clause, mediation clause, choice of law clause, non-competition clause, entire agreement clause, and force majeure clause. For each clause, the paper explains its legal definition, practical purpose, and the advantages or protections it offers to the contracting parties. The paper concludes by noting that multiple such clauses frequently appear together in a single agreement, making it important for anyone signing a contract to understand their meaning and implications.
Over the years, various contracts have existed to help maintain order in society. Understanding the specific clauses that appear in these contracts is essential for anyone who signs legal agreements. The following seven contract clause types are among the most commonly encountered in rental agreements, loan documents, and employment contracts, and each serves a distinct legal purpose.
1. Escalation Clause
An escalation clause is a provision of a contract that calls for an increase in price in the event of an increase in certain costs. For example, an escalation clause may specify that rent due will increase in line with inflation. This clause is often used in rental agreements, loan agreements, and other monetary contracts. It helps to protect the lender, landlord, or other contracting party from incurring additional costs in situations where inflation or a rise in the cost of living would otherwise cause them financial loss. In effect, this provision ensures that any additional fees arising from such economic changes fall on the contract signer rather than on the bank or landlord.
2. Arbitration Clause
A business contract, lease, or other written contract may contain an arbitration clause. By including such a clause, the parties to the contract agree to arbitrate any future disputes rather than immediately pursuing litigation. As with any clause, all parties must agree to its use before the contract is signed. The following arbitration clause language may be modified to suit the needs of the parties, or used as is, in order to utilize the services of an affiliated United States Arbitration & Mediation office if arbitration is ever needed. This type of clause is commonly used in contracts to help reduce legal fees for the contract originator. In the case of an arbitration agreement, both parties are generally required to go through proper arbitration channels before bringing a legal suit. This clause can, in some instances, decrease the legal responsibilities of parties entering into a contract.
3. Mediation Clause
The mediation clause works hand in hand with the arbitration clause, and the two terms are often loosely intermingled. In practice, mediation is frequently used when arbitration has not been effective. It functions as a second step in the event that arbitration did not help the involved parties reach a resolution. A business contract, lease, or other written contract may contain a mediation clause, by which the parties agree to mediate any future disputes. As with any clause, all parties must agree to its inclusion, and sample mediation clause language does not have to be used exactly as written in order to access the services of a mediation provider.
4. Choice of Law Clause
A choice of law clause is a provision in a contract in which the parties stipulate that any dispute arising from the contract shall be determined in accordance with the law of a particular jurisdiction. If the dispute is litigated in court, the choice is not strictly binding but is normally honored by the court hearing the lawsuit. The choice becomes binding if the dispute is arbitrated. This clause helps to determine in which state litigation will take place. The advantage of including such a clause is that it allows a contract originator to select a jurisdiction whose laws may be more favorable to their position, giving them a strategic advantage if litigation becomes necessary.
"Protecting intellectual capital and finalizing agreements"
"Liability excused for unforeseeable events"
It is easy to find examples of these clauses in various documents encountered in daily life and on the web. Auto loan agreements, student loan forms, apartment rental agreements, mortgage papers, personal loan documents, employment agreements, and tax forms are all examples of documents that may contain one or more of these clauses. Indeed, it is entirely possible to find several of these clauses within a single agreement. For example, a typical employment document may include not only an arbitration clause, but also a non-competition clause and an entire agreement clause simultaneously. Understanding what each clause means and how it affects one's rights is an important step toward informed contract signing.
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