Contracts are used in nearly every industry, and many of the terms and conditions used apply industry-wide. In fact, there are certain contract clauses that are likely to appear in nearly any draft contract. Financial contracts, in particular, usually contain a standard set of terms.
Below are six key clauses found in financial contracts.
When two or more companies enter into a contract, there is no doubt that important information is exchanged to enable both parties to fulfill their contractual obligations. Given the need to provide certain information about both parties’ financial and business practices, it is essential that the contract contains a strict verbal confidentiality clause. This clause was intended to ensure that both parties do not divulge the information exchanged during the course of the transaction. Of course, this is especially important when dealing with valuable intellectual property.
The term force majeure literally means “force majeure”. This clause should always be included in financial contracts as it can protect the parties from situations beyond anyone’s control. For example, when natural disasters such as earthquakes and hurricanes occur, delivery schedules can inevitably be disrupted. In general, the definition of force majeure is fairly broad, and many contracts contain language regarding acts of terrorism, force majeure, etc. This clause is important to ensure that failure to perform due to such unforeseen interruptions is not considered a breach of contract.
In business, things often don’t go as planned, so stakeholders need to be able to cut and walk when necessary. For contracts, this usually includes a termination clause. This section of the contract must clearly state the circumstances under which one or both parties may terminate the contract regardless of the remaining term of the contract. For example, if one party is acquired by another company, the other party may reserve the right to terminate the agreement.
Today, cross-border transactions are fairly common both domestically and internationally. If the parties are located in more than one state, and possibly more than one country, it may not be clear which state law governs the contract. Therefore, financial contracts should always state the state of jurisdiction of the contract so that the applicable law is clear.
Even the best deals tend to clash. Therefore, it is of utmost importance to clarify the parties’ dispute resolution plans in the event of a dispute. In many contracts today, it is common for companies to include an arbitration clause requiring the parties to submit to arbitration before, or in lieu of, legal remedy. It’s a quicker and cheaper way to resolve, but some contracts still allow traditional legal channels.
Given the frequency of contract breaches, it is also common to include indemnification clauses in financial contracts to prevent breaches. Penalty clauses are usually included. This is generally a prescribed amount that is payable in the event of default by either party. Of course, the court may award other types of damages beyond this amount, depending on the nature and impact of the violation.