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.