Business Law Chapter 8: Contract Clauses

Introduction to Contract Clauses A contract clause is simply a statement contained in a contract. –Clause: A statement or sentence that is part of a legal document such as a contract, a will or a legal pleading.

Conditions A condition is a contract clause that modifies the basic agreement between the parties. It is perfectly legal –and very common— for a contract to contain conditions.

Conditions do not create rights; they limit them.

Distinguishing Conditions from Promises A condition is different from a promise. A condition modifies, alters or even rescinds the agreement. A promise is the party’s pledge to be bound by the contractual agreement.

Types of Conditions Conditions come in many different forms. It is not necessary to actually label a specific clause as a condition; it can be implied by the actions or the intentions of the parties.

Implied Condition An implied condition is one that is presumed to exist from the conduct of the parties.

Express Condition An express condition is one that is stated in the contract. When an express condition exists, courts will usually attempt to follow the stated intentions of the parties, unless this is impossible.

Condition Precedent A condition precedent is a condition that must be met or performed before the agreement takes effect.

Limitations on Conditions Precedent One party cannot prevent the other party from meeting the condition. Courts do not favor conditions precedent.

Condition Subsequent Under a condition subsequent, the parties agree to be bound by the contract until a particular condition occurs.

Conditions subsequent always refer to future events.

Contract Exclusions An exclusion is a particular item or subject that is not covered by the contract.

Proving Contract Conditions When a contract contains a condition, it is up to the judge to determine the legal effect of the wording.

Interpreting Contract Provisions Judges (or juries) interpret contract provisions. Judges have wide discretion in their interpretations.

Rule Number 1: Reconcile Conflicts The first rule of construction is to find a way to reconcile them, unless that is clearly impossible.

Rule Number 2. The Parties’ Intentions Are Controlling The court must interpret the contract in such a way as to effectuate the intention of the parties, at least as far as that can be determined.

Rule Number 3. When there is a conflict between an express condition and an implied condition, the express condition wins.

Rule Number 4. Words are to be given their normal, ordinary meaning.

Strict Construction Strict construction of a law means taking it literally or “what is says, it means” so that the law should be applied to the narrowest possible set of situations.

Rule Number 5. Was a Condition Intended? Before a contract will be considered to have a specific condition, the parties must manifest that intention by their choice of wording.

Rule Number 6 Oral testimony about written promises is usually not permitted.

Parol Evidence Rule When a written contract purports to embody the entire agreement between the parties, no oral testimony will be permitted that seeks to modify or change the interpretation of the written contract provision.

Exceptions to Parol Evidence Rule Oral testimony is permissible when the actual circumstances surrounding the making of the contract are in dispute.

Specific Contract Provisions There are certain provisions that are frequently seen in drafting contracts.

“Time is of the essence” When a contract contains a “time is of the essence” provision it means that the date set for the action contemplated in the contract is fixed.

“Trade or business secrets” Employers wish to safeguard their secrets from their competitors. Trade/business secret clauses are conditions that forbid employees from revealing business secrets.

Unfair Restraint of Trade Courts have consistently ruled that any contract that unfairly restrains trade is ultimately bad for the country and will not be enforced.

“Noncompete” Noncompete clauses bar a former employee from working for a direct competitor, within a specified geographic region, for a specified time.

“Arbitration” If the parties ever have a disagreement about the contract, they must first present their case to an arbitrator, rather than simply filing a lawsuit.