Common Contract Terms Explained

A contract is an agreement between two or more parties to exchange goods, services or both for a certain value. All parties involved should comply with the rules of the contract and should agree to the terms that have been laid out. Typically, a contract mentions the parties involved, the goods or services exchanged, the price and payment terms, the time of completion, a dispute resolution term, the applicable law under which the contract is laid out and other special terms and conditions. However, contracts often include contract terms such as indemnification, breach, force majeure and others that are hard to understand by people who are not lawyers.

The following are common contract terms explained.

# Indemnification

An indemnification clause forces one party to hold another party harmless against future legal claims. For example, you sign a contract with a car rental company agreeing that you will hold them harmless against future legal claims. If you get involved in a car accident where third parties sustain injuries, the car rental company is not responsible for their compensation due to the indemnification clause included in the contract. In case the car rental company is sued by the third parties for the injuries sustained, you will be responsible to compensate them and to assist in the car rental company’s legal defense. This happens because you have caused the accident – so you are responsible against the third parties – but you have agreed to indemnification clause with the car rental company – so the latter cannot be held responsible for the claim of the third party.

In fact, indemnification is an effective way to protect oneself against financial liabilities as a result of another party’s actions or negligence. Therefore, it is extremely important that any limitations of the indemnity are clearly stated before signing a contract.

# Severability

Often, legal contracts are not clearly and accurately written and the language used has mistakes that raise the risk of voiding the entire contract. A severability clause is included in a contract either for modifying the portion that does not accurately reflect one party’s accurate intentions or for keeping the contract in force and validity in spite of potential language problems. For instance, a severability clause typically states that “invalidity or unenforceability of one or more provisions of this contract shall not affect any other provision of this contract. If possible, any unenforceable provision within this contract will be modified to reflect the parties’ original intentions.”

# Acceleration

An acceleration clause allows one party to demand full payment immediately if the other party breaches the contract. An acceleration clause is effective when the contract involves installment payments that should be made over a specific period of time. If an installment plan involves an acceleration clause and one party misses an agreed installment, the other party has the right to demand the entire amount outstanding immediately. For instance, an acceleration clause typically states “In the event of default in the payment of any of the agreed installments or interest when due, the holder of this contract, may without notice or demand claim the unpaid sum immediately payable.”

# Force Majeure

A Force Majeure clause excuses a party from liabilities that as a result of an unforeseen event beyond the control of the party. Force majeure clauses involve natural disasters (earthquakes, hurricanes, floods), terrorist attacks, riots and war or any sort of performance failures (labor actions, server failures, telephone disruptions, software glitches) that prevent a party it from meeting its obligations under the contract.

Force majeure clauses apply equally to all parties of the contract and are intended to excuse a party only if the failure to meet its obligations was unavoidable. Also, it is helpful to include specific examples of acts that could fall under a force majeure clause to make it clear to all parties involved that force majeure is intended to excuse failures that are not within the control of the party.

# Breach

Breach of contract occurs when one party fails to meet its obligations under the contract, precisely and exactly, without a legitimate legal excuse. This may include the failure of delivering goods or performing a service as agreed. Breach of contract may be actual where one party performs incompletely without notice or anticipatory where one party announces in advance of the due date that its obligations cannot be met. The statute of limitations for breach of contract is four years if written, and two years if oral.

In conclusion, before signing a contract make sure to use a clear and concise language and to include all terms and conditions that apply to your business. Also, have in mind that contract terms and conditions are negotiable. Therefore, before signing any contract, make sure to research the meaning of a term you’re not sure about to avoid potential consequences with the law. Ignorance of the law is not a legitimate excuse to breach a contract.