What Are Contract Clauses? 24 Examples & Key Uses

Clauses: The DNA of legal agreements

Think of contract clauses as the DNA of legal agreements—they’re the essential building blocks that define how contracts work and what they mean. For finance and business professionals, understanding these crucial components isn’t just about legal compliance—it’s about creating agreements that protect your interests and clearly communicate expectations.

According to the American Bar Association, well-crafted clauses serve as your first line of defense against misunderstandings and disputes. As businesses grow increasingly complex and global, having properly structured clauses becomes even more critical for risk management and relationship clarity.

In this comprehensive guide, we’ll explore what contract clauses are, why they matter, and examine 24 essential clauses you should know about. We’ll also look at how contract management software is transforming how organizations handle these vital components in 2025.

What are contract clauses and why do they matter?

Contract clauses are specific sections within an agreement that define rights, responsibilities, and obligations. They form the structure of a legally binding document, serving as the rulebook that governs the relationship between parties.

According to Thomson Reuters Legal, indemnification provisions appear in nearly all commercial agreements and are “among the most commonly and heavily negotiated provisions in a contract.” This highlights the critical role that well-crafted clauses play in modern business dealings.

Contract clauses generally fall into three main categories:

1. Interpretation clauses: These tell you how to read and understand the contract’s terms
2. Enforcement clauses: These establish what parties must do and what happens if they don’t
3. Execution clauses: These handle the mechanics of signing and implementing the agreement

Many organizations maintain a library of pre-written clauses (often called “boilerplate”) to ensure consistency across their contracts. While these standard clauses provide a solid foundation, every agreement may also need custom provisions tailored to specific situations.

The evolution of contract clauses in 2025

The way businesses approach contract clauses continues to evolve, especially with the rise of artificial intelligence and contract automation software. According to Docusign, a key trend for 2025 is that “generative AI is transforming the process by analyzing a company’s standard agreement templates and historical negotiations to generate tailored playbooks automatically.”

This technological evolution is allowing organizations to:

1. Identify common clauses and suggest optimal language
2. Flag areas requiring special attention
3. Accelerate the development and maintenance of legal playbooks
4. Ensure reviews remain aligned with evolving business and regulatory requirements

Aavenir notes that “A Gartner report predicts that by 2025, 50% of CLM platforms will integrate AI-driven analytics to enhance productivity.” This indicates the growing importance of leveraging technology to manage contract clauses effectively.

Why contract clauses deserve your attention

In today’s complex business environment, well-crafted contract clauses serve multiple critical purposes:

Risk management

According to Cornell Law School’s Legal Information Institute, clear contract clauses help prevent disputes by explicitly defining terms and conditions. They act as your insurance policy against misunderstandings and potential legal issues.

For example, a properly written force majeure clause can protect businesses from liability when unforeseen circumstances prevent fulfillment of obligations. Investopedia explains that force majeure “is a clause included in contracts to remove liability for unforeseeable and unavoidable catastrophes that prevent participants from fulfilling obligations.”

Legal compliance

Clauses ensure your agreements align with current laws and regulations. The International Association for Contract & Commercial Management emphasizes that proper clause construction is essential for maintaining regulatory compliance.

This has become increasingly important with new AI regulations. ByteBack Law points out that “with the emergence of state and international laws regulating the use of AI such as the EU AI Act and Colorado AI Act, companies that engage in activities subject to those laws will need to add contractual obligations that address the laws’ requirements.”

Business relationship clarity

Well-written clauses set clear expectations for all parties, reducing the likelihood of disputes and strengthening business relationships. According to Volody, “By setting these boundaries, liability and indemnification clauses help both parties understand their responsibilities. Negotiating these points thoughtfully can protect your client while keeping the terms fair and manageable.”

How should you use contract clauses?

You can use clauses to shape almost any aspect of a legal agreement. Although clauses can appear in any part of a contract, they’re most commonly placed toward the end, after the main terms of the agreement. In fact, clauses often make up the bulk of a contract because they have to cover every possible way a person might try to interpret the agreement’s language.

Many organizations cover their bases by including a library of pre-written clauses — known as “boilerplate” — across a wide range of different contracts. At the same time, many contracts also need to include special provisions that are custom-tailored to the specific type of agreement.

Although most customers and contractors may not read most of the terms of an agreement, clauses become essential in the realm of dispute resolution. If someone takes legal action against your organization, carefully worded clauses can protect you from having to pay damages — while some boilerplate sections, like arbitration clauses, can actually help protect you from having to go to court at all.

For maximum effectiveness, contract lifecycle management systems are increasingly being used to maintain, update, and implement clauses across an organization’s contracts.

Examples of contract clauses

To help clarify what they can do, let’s take a closer look at some of the most common types of contract clauses.

24 essential contract clauses you should know

The following table outlines the most commonly used contract clauses, their purpose, and why they matter for your agreements:

Clause Type	Purpose	Why It Matters
Arbitration	Requires parties to resolve disputes through arbitration rather than court litigation	Can save 20-30% in legal costs according to the American Arbitration Association
Assignment	Governs the transfer of contractual rights and obligations to others	Ensures continuity and protects against unauthorized transfers
Cancellation	Allows parties to terminate the agreement under specific conditions	Provides an exit strategy when circumstances change
Change control	Establishes processes for managing contract modifications	Reduces project overruns by formalizing change procedures
Choice of law	Specifies which jurisdiction’s laws govern the contract	Critical for cross-border agreements to avoid jurisdictional conflicts
Confidentiality	Protects sensitive business information from disclosure	Safeguards trade secrets and proprietary information
Conflicts of interest	Requires disclosure of potential conflicts	Ensures transparency and ethical conduct throughout the relationship
Data protection	Ensures compliance with privacy laws and data handling requirements	Increasingly important with GDPR, CCPA, and other regulations
Dispute resolution	Establishes procedures for resolving disagreements before litigation	Promotes amicable resolution and saves legal costs
Exclusion	Limits or excludes liability for specific events or damages	Defines boundaries of responsibility and risk allocation
Escalation	Allows for automatic adjustments based on external factors	Particularly relevant in long-term contracts affected by inflation
Force adjustment	Permits modifications based on market conditions	Provides flexibility for changing economic circumstances
Force majeure	Excuses performance due to events beyond parties’ control	Critical protection during pandemics, natural disasters, etc.
Indemnity	Requires one party to cover another’s losses under specific circumstances	Allocates risk and provides financial protection
Intellectual property	Establishes ownership and usage rights for intellectual property	Protects innovations, creative works, and proprietary information
Liability limitation	Caps the total liability exposure under the contract	Quantifies maximum risk exposure for both parties
Non-compete	Restricts competitive activities for a specified period	Protects market position and competitive advantages
Payment	Establishes payment terms, timing, and methods	Ensures clear understanding of financial obligations
Penalty	Establishes consequences for specific breaches	Deters non-compliance and quantifies remedies
Severability	Preserves the remainder of a contract if specific provisions are invalidated	Prevents entire contract invalidation if one section is problematic
Statute of limitations	Sets time limits for bringing claims under the contract	Provides certainty by limiting the timeframe for potential claims
Subcontracting	Governs the use of third parties to perform contract obligations	Controls quality and maintains accountability
Termination for convenience	Allows contract termination without cause	Provides flexibility with changing business needs
Warranty	Establishes guarantees about products or services	Sets expectations for quality and performance

Detailed explanation of key contract clauses

Let’s explore some of the most critical contract clauses in greater detail:

1. Force majeure clauses

Force majeure clauses protect parties when extraordinary circumstances prevent contract fulfillment. According to Investopedia, force majeure “means ‘greater force’ and is related to an act of God, an event for which no party can be held accountable.”

These clauses typically cover events like:

• Natural disasters (hurricanes, earthquakes, floods)
• War or armed conflict
• Government actions or regulations
• Epidemics and pandemics

The COVID-19 pandemic highlighted the importance of well-crafted force majeure clauses. The World Bank’s Public-Private Partnership Resource Center provides a comprehensive checklist and sample wording for force majeure clauses in various contexts.

Sample clause: “Neither party shall be liable for any failure to fulfill its obligations under this Agreement due to causes beyond its reasonable control, including acts of God, war, strikes, lockouts, riots, acts of war, epidemics, governmental regulations superimposed after the fact, fire, communication line failures, power failures, earthquakes or other disasters.”

2. Indemnification clauses

Indemnification clauses establish who bears responsibility for losses or liabilities arising from the contract. They’re particularly important for risk management and are among the most heavily negotiated clauses.

Thomson Reuters Legal explains that indemnification provisions “serve as an essential tool for allocating risk between parties and are, therefore, among the most commonly and heavily negotiated provisions in a contract.”

These clauses typically cover:

• Third-party claims
• Breaches of contract
• Intellectual property infringement
• Negligence or misconduct

Sample clause: “Vendor shall indemnify, defend, and hold harmless Client from and against any and all claims, damages, losses, liabilities, and expenses (including reasonable attorneys’ fees) arising from or relating to any third-party claim based on Vendor’s breach of this Agreement or negligent acts or omissions.”

3. Confidentiality clauses

Confidentiality clauses (also called non-disclosure agreements or NDAs) protect sensitive information shared during business relationships. According to Volody, these clauses “help protect valuable data, such as trade secrets, customer lists, and business plans, from being shared or misused by the other party.”

A well-drafted confidentiality clause will:

• Clearly define what constitutes confidential information
• Specify permitted uses of the information
• Outline exceptions to confidentiality requirements
• Establish the duration of confidentiality obligations
• Detail remedies for breach

Sample clause: “Recipient shall maintain the confidentiality of all Confidential Information and shall not disclose any Confidential Information to any third party or use such Confidential Information for any purpose other than as explicitly permitted under this Agreement.”

4. Payment clauses

Payment clauses establish the financial terms of the agreement, including amounts, schedules, and methods of payment. Clear payment terms help prevent disputes and ensure proper cash flow.

These clauses typically address:

• Payment amounts and currency
• Payment schedules and due dates
• Acceptable payment methods
• Late payment penalties or interest
• Conditions for payment (e.g., deliverable acceptance)

Sample clause: “Client shall pay Vendor the sum of $10,000 within 30 days of receipt of Vendor’s invoice. Any payment not received within 30 days shall accrue interest at a rate of 1.5% per month until paid in full.”

The impact of AI on contract clauses in 2025

The rise of artificial intelligence is transforming how organizations approach contract clauses. According to ContractPodAI, “AI contract management systems can pore over agreements, and their data points, with speed and proficiency.” This technological evolution is allowing for more sophisticated clause management.

Key AI applications for contract clauses include:

Automated clause extraction and analysis

Contract compliance management software now uses AI to automatically identify and categorize clauses within contracts. According to Icertis, contract AI can “analyze contract terms and conditions and compare them against a database of accepted norms and previous agreements.”

This capability enables organizations to:

• Quickly identify non-standard or risky clauses
• Compare clauses across multiple contracts
• Ensure consistency in clause language
• Flag potentially problematic terms

Intelligent clause libraries

Contract analytics software increasingly incorporates AI-powered clause libraries that can suggest appropriate language based on contract type, jurisdiction, and risk profile.

Conga notes that “AI-powered contract solutions use a range of contract templates and generation wizards to enable sales, procurement, legal, and other teams to generate new documents—contracts, quotes, and more—with just a few clicks.”

Proactive risk identification

AI systems can now analyze clauses for potential risks or compliance issues. Superlegal observes that “AI contract review software also speeds up the contract review process, scanning documents to identify key clauses and flag potential risks.”

This proactive approach helps organizations:

• Identify high-risk clauses before they become problems
• Ensure regulatory compliance across jurisdictions
• Standardize risk management across the organization
• Reduce the likelihood of disputes

Managing contract clauses with CLM software

Effective contract management increasingly relies on digital tools to standardize and optimize clause usage. Modern contract lifecycle management platforms can:

• Automatically suggest appropriate clauses based on contract type
• Track clause performance and effectiveness
• Ensure consistency across all company agreements
• Flag potentially problematic or outdated clause language

A contract repository is essential for maintaining a comprehensive clause library. According to industry pricing data, CLM solutions start at around $399 per month, with implementation possible in as little as a single day compared to platforms like Ironclad which can take 6+ months.

Industry-specific considerations for contract clauses

Different industries often require specialized contract clauses to address their unique challenges and regulatory environments.

Healthcare contract clauses

Healthcare contract management software must account for specific regulatory requirements like HIPAA compliance. Key clauses for healthcare contracts include:

• Protected health information (PHI) handling
• Business associate agreements
• Regulatory compliance representations
• Insurance and liability provisions
• Quality of care standards

Legal department contract clauses

Legal contract management software focuses on helping legal departments standardize and manage clauses across the organization. Legal teams typically prioritize clauses related to:

• Risk allocation and limitation of liability
• Intellectual property rights
• Governing law and jurisdiction
• Dispute resolution procedures
• Confidentiality and data protection

Procurement contract clauses

Procurement contract management software helps organizations manage supplier relationships efficiently. Critical clauses for procurement contracts include:

• Delivery terms and acceptance criteria
• Performance metrics and SLAs
• Pricing and payment terms
• Termination rights
• Warranties and representations

Best practices for contract clause management

To make the most of your contract clauses:

1. Maintain a centralized clause library

A central repository of approved clauses ensures consistency and reduces legal review time. Modern contract management software makes this easier than ever by providing:

• Searchable clause databases
• Version control for clause evolution
• Permission-based access to clause libraries
• Categorization by risk level and purpose

2. Regularly review and update standard clauses

Laws and business practices change, and your clauses should evolve accordingly. Schedule regular reviews to:

• Incorporate changes in legislation
• Reflect lessons learned from disputes
• Address emerging risks
• Update based on industry best practices

3. Ensure clear, plain-language writing

Complex legal jargon can create ambiguity and misunderstanding. When crafting clauses:

• Use simple, straightforward language
• Define technical terms clearly
• Avoid excessive qualifiers
• Structure clauses logically
• Use headings and subheadings for readability

4. Include specific examples where helpful

Abstract clauses can be difficult to interpret. Where appropriate:

• Provide examples that illustrate how the clause applies
• Include scenarios that clarify boundaries
• Use appendices for detailed examples
• Consider visual aids for complex concepts

5. Consider cultural and international implications

For international contracts, be aware of how clause interpretation may vary across cultures and legal systems:

• Research local laws and customs
• Consult with local legal experts
• Clearly establish governing law
• Address language differences explicitly
• Consider international standards and conventions

Frequently asked questions about contract clauses

The future of contract clauses

Contract clauses continue to evolve with changing business needs and technological capabilities. As we move further into 2025, several trends are emerging:

1. Greater standardization through AI

Artificial intelligence is driving greater consistency in clause language while allowing for customization when needed. This balanced approach helps reduce risk while maintaining flexibility.

2. Integration of ESG (Environmental, Social, Governance) clauses

According to Aavenir, “Businesses are increasingly adding clauses that mandate environmentally friendly practices or adherence to sustainability standards, such as carbon neutrality targets.”

3. More sophisticated data protection clauses

As data privacy regulations continue to evolve globally, contract clauses addressing data protection are becoming more complex and comprehensive.

4. Visualization of clause interrelationships

Modern contract management software increasingly offers visual representations of how different clauses interact and affect each other.

5. Dynamic clauses that adapt to changing conditions

Smart contracts and blockchain technology are enabling clauses that can automatically adjust based on predefined conditions and external data sources.

Conclusion: Building stronger agreements through effective clauses

Contract clauses are the building blocks of effective agreements, defining rights, responsibilities, and remedies for all parties involved. By understanding the different types of clauses and their functions, you can create contracts that protect your interests while fostering productive business relationships.

In 2025, the intelligent application of contract clauses—powered by advanced contract management software and artificial intelligence—will continue to be a competitive advantage for forward-thinking organizations. Those who master the art and science of effective clause management will enjoy clearer agreements, reduced risks, and stronger business relationships.

Remember: While standard clauses provide a foundation, each agreement deserves careful consideration of its unique requirements. The goal is to create clear, enforceable contracts that protect all parties’ interests while fostering productive business relationships.

Want to see how Concord can help you manage contract clauses more effectively? Request a demo today to learn more.