This article has been written by Jasmeet Kaur pursuing a Paralegal Associate Diploma course from LawSikho.

 This article has been edited and published by Shashwat Kaushik.

Introduction 

While reading or drafting agreements or contracts, have you ever witnessed that there are some clauses that are standard while others specify the actions of parties and are different in every agreement or contract? These are boilerplate and operational clauses, respectively. Now, the question arises, why are these clauses necessary? The answer to this question is because of their intent. There is a common intent among all these clauses, which is ‘clarification’.

So, let’s discuss the practical insights of these clauses further in this article.

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Operative clauses

Operative clauses are the ones that identify actions, i.e., what is to be done or what is not to be done. These are the heart of a contract, as they outline the rights, obligations and responsibilities of the contracting parties and specify the actions that parties must take to fulfil their contractual obligations. They set forth the precise actions that must be undertaken to fulfil the contractual obligations. These clauses are essentially the “to-do” or “not-to-do” list of the contract. They provide the framework for the performance of the contract and establish the expectations of the parties.

The significance of operative clauses cannot be overstated. They create legally binding commitments that the parties are required to adhere to. These clauses define the scope of the contract, specify the terms of payment, outline the delivery or service requirements, and address any other essential elements relevant to the agreement. In essence, the operative clauses are the heart of the contract, giving it purpose and substance.

When drafting operative clauses, precision and clarity are most important. Ambiguous or imprecise language can lead to disputes and misunderstandings down the line. It is crucial to ensure that the actions to be performed or avoided are clearly defined, leaving no room for interpretation. Additionally, the operative clauses should be consistent with the overall intent and purpose of the contract, aligning with the recitals and boilerplate provisions.

By carefully crafting operative clauses, parties can establish a solid foundation for their contractual relationship. These clauses serve as the compass guiding the parties’ actions and responsibilities throughout the duration of the contract. They provide a clear roadmap for the performance and fulfilment of contractual obligations, ultimately facilitating a successful and harmonious business relationship.

Types of operative clauses

Operative Clauses are divided into four categories

Essential operative clauses

As the name suggests, these are the essential clauses in operative clauses that form the core of a contract’s obligations. These clauses ensure to clearly define the purpose of contract and encompass provisions related to essential aspects of work like scope of work, performance standards, deliverables, etc.

Typically, essential clauses cover a number of key areas, including but not limited to:

  • Scope of work: This clause outlines the specific tasks, activities, and services to be performed under the contract. It defines the boundaries of the project, clearly delineating what is expected from the contractor or service provider.
  • Performance standards: These clauses set forth the specific criteria that must be met in terms of quality, accuracy, and timeliness. They establish benchmarks against which the contractor’s performance can be evaluated and measured.
  • Deliverables: Essential clauses often specify the deliverables to be provided as part of the contract. This includes tangible items such as products, reports, or software, as well as intangible outputs like services or outcomes achieved.
  • Acceptance criteria: Acceptance criteria define the conditions under which the deliverables or services provided by the contractor will be deemed satisfactory and accepted by the client or organisation.
  • Payment terms: These clauses outline the terms and conditions related to payment, including the amount, method, and schedule of payments to be made.

By incorporating essential clauses into a contract, parties can effectively communicate their intentions, reduce uncertainties, and minimise the potential for misunderstandings. These clauses serve as a solid foundation upon which the entire contract is built, ensuring a clear and legally binding agreement between the parties involved.

Performance related operative clauses

In every contract, it is important to determine the schedules, milestones, quality, and benchmarks to articulate the performance of each party and performance-related operational clauses deal with the same. These clauses provided a basis for evaluating performance, thus safeguarding the interests of both parties.

Performance-related operational clauses address various aspects that are critical to the successful execution of the contract. These clauses may include provisions related to the following:

  1. Reporting and communication: These clauses outline the specific reporting requirements and communication channels to be used by the parties involved. They ensure that both parties are kept informed about the progress, issues, and any changes related to the contract.
  2. Inspection and testing: These clauses specify the procedures and criteria for inspecting and testing the deliverables or services provided under the contract. They ensure that the deliverables meet the agreed-upon quality standards and specifications.
  3. Warranties and guarantees: These clauses provide assurance from one party to another regarding the quality, performance, or specific characteristics of the deliverables or services. They protect the interests of the party receiving the deliverables by ensuring that they meet the specified standards.
  4. Remedies and penalties: These clauses outline the consequences and actions that may be taken in the event of a party failing to meet the performance standards or breaching the terms of the contract. They provide a mechanism for seeking remedies or imposing penalties to safeguard the interests of the non-breaching party.

Time-sensitive operative clauses

‘Time is an essence’, is important to take into account while drafting clauses. So, time-sensitive operative clauses contribute to the smooth execution of a contract by establishing timeframes and deadlines to fulfil the contractual obligations and allowing for remedies in case of delays or breaches.

Dispute resolution operative clauses

Defining the dispute resolution mechanism in the contract helps parties in case a dispute arises in the future. The dispute resolution operative clauses serve as a vital tool for preventing and managing disputes. They define whether the parties will opt for litigation or alternative dispute resolution like arbitration, mediation, negotiation, etc.

Important operative clauses

Some of the important operative clauses are:

Service levels clause

Service levels address the performance level of services. Performance here indicates uptime, latency, etc. and can be present in a cloud service or an IT professional services agreement. Service levels would either address the specifications in a separate document or incorporate them into a service level agreement. Its major sub-clauses are:

  • Response, repair and remedy- It acknowledges service requests to fix or provide credits or other resolutions. Response refers to email, telephone or in person acknowledgement of a support request, and remedy refers to the solution. Repair is the process by which a remedy will be performed. 
  • Material breach and termination- It protects the vendor from being outright terminated and remedies the breach.
  • Revision of service levels- It should be mutual.

Also, in this clause, errors and targets should be clearly defined. Error means any failure of the system to perform as required in technical specifications and target refers to the minimum performance level.

Confidentiality clause

To protect Intellectual Property, confidentiality clauses play a very important role because they protect know-how, trade secrets, sensitive business information, manuals, pricing information, etc. It puts restrictions on its use, which means no one will be allowed to pass the information. 

Data management and security clause

The data management and security clause is a very important clause in a contract as it states that the vendor cannot access, process, or otherwise use customer data other than as necessary to facilitate the services and shall manage and protect the data of its customers. Also, only the customer retains all rights, titles, and interests in and to customer data. 

Disaster recovery clause

A disaster recovery clause in any contract is a must. It is the creation of backup data so that, in case a site experiences a crash, backup data can be used. The disaster recovery plan might be anything from a set of steps for getting a crashed system running to a whole backup data centre ready to take over on a minute’s notice.

Schedule and milestone clause

Schedule and Milestone Clause describe the ‘When’ scenario in a contract and help remove uncertainty with regards to deadlines. If it provides measurability for assessing completion/compliance, you would be held liable. Fixing the schedule and milestone clause is a win-win situation for both the vendor and the customer. While a vendor can get his work done on time by specifying a schedule clause, the customer can get his payment on the completion of each milestone. The essence of this clause is that if for any reason, the vendor is not able to deliver the deliverables on time or the technical specifications are not up to par, the customer can sue the vendor for such breaches and will not be liable to pay him further.

Delivery, acceptance and rejection clause

Let’s think of a scenario where the parties haven’t laid down or clarified to each other the delivery of the goods/product, as to when the party will deliver the product (deadline), at which location, etc. What will happen? It will result in utter chaos. So, the acceptance and rejection clause gives the authority to accept and reject the delivered products/goods under certain conditions, like what condition the goods should be in, Time and place of delivery, Quality, Time-bound delivery, etc. It throws light on the ‘How’ scenario connecting the ‘When’ scenario.

Warranty clause

A warranty is a clause that can never be neglected. Generally speaking, whenever we buy a new product, the first thing we ask is what its warranty period is. Therefore, every contract must have a warrant clause because it guarantees that something is true or will happen. It is a stipulation that provides that if the guaranteed fact doesn’t turn out to be true, the promisor will be on the hook for some remedy. Warranties shift legal risk and can cover any topic, and they can come from either the customer or the vendor, though warranties from vendors come more often.

Indemnity clause

In the Indemnity Clause, two terms are needed to remember- Indemnifying the indemnifying party and the indemnified party, in which the indemnifying party demands payment from the indemnified party, which the latter is required to pay. In short, one party needs to take responsibility for the other party. Now, that other party can be the opposite party or commonly, it is a third-party.

For instance, the customer risks a patent, copyright, or trade secret claim or lawsuit by using the vendor’s technology, and the vendor/ indemnitor promises to protect the customer against such a claim.

Mutual Indemnity

In mutual indemnity, each party promises to protect the other against the same type of claim.  For instance, in data breach indemnity, each party promises to provide protection against claims related to data breaches that party caused or breaches it is accused of causing. 

In an IP indemnity, each party promises to provide protection against infringement claims related to technology or content that the other party provided.

Limitation of liability clause

Have you ever seen a clause in an agreement that is written in caps and bold? That’s the limitation of the liability clause. The limitation of liability clause says that if one party injures the other, it is not liable for the full damages. This clause can be a bit hard to swallow. In fact, courts often will not enforce the clause if they think the customer didn’t grasp its importance, particularly if the customer is a consumer. That’s why the limitation of liability usually stands out, printed in capital letters.

But the vendor wants to establish that if the customer didn’t notice the clause or recognise its importance, it is the customer’s own fault.

Term and termination clause

A term and termination clause describes when a contract or agreement can be terminated and under what conditions. The usual cause for termination is breach of contract but the breach must be material. That means a minor breach, like delivering software a day late, will not authorise termination. Often, terminations for breach clauses require advance notice, usually 30 days, and an opportunity to cure.

But some contracts allow immediate termination without an opportunity to cure, for particularly important deadlines, usually through terms saying “time is of the essence” for that particular performance. Nevertheless, termination triggers certain clauses. They go into effect the moment the contract terminates. Termination can trigger a variety of obligations. For instance, in some contracts, each party should promise to return the other’s property upon termination or shortly after.

Payment mechanisms clause

In a software development agreement, payments can be made based on achieving different milestones, whereas in some cases, there may be stricter clauses stating that ownership of the software will only be transferred to the client once full payment is received. If payment is not made, the vendor is not obligated to transfer ownership of the software. In an outsourcing agreement, the payment structure can vary. It can be a fixed fee, a payment per transaction, or based on the number of resources dedicated by the service provider. The chosen payment model depends on the business’s needs and the type of service provided. In some cases, a profit-sharing approach may be used if the outsourced process is crucial for the customer’s overall business success.

Boilerplate clauses

Boilerplate clauses are the standard or general clauses, which are non-negotiable and can be found in various documents. These are usually stated at the end of an agreement, inviting very limited or no attention. The reason that these clauses go without negotiation is because they have been intact for such a long time that even if one party tries to change them, the other party gets sceptical of losing something important.

Important boilerplate clauses

Some important boilerplate clauses are:

Entire agreement

The agreement clause constitutes the entire agreement, along with exhibits, schedules, annexures, and attachments. Since the parties exchange a lot of pre-contractual statements that do not form part of the agreement, the entire agreement clause ensures that the parties have certainty of the agreed terms and conditions and limits the outside of the agreement dealings. This clause supersedes any prior discussions, understanding or agreements between the parties.

Notice

The legal vocabulary of communication is notice. The Notice Clause provides the mechanism by which communications are to take place between the parties or how the notices are to be served. It is pertinent to note here that the notice shall be in writing and sent to the proper address of the party. Also, compliance with the notice is a must, the absence of which negatively affects the enforceability or validity of the notice.

Force majeure

Before going ahead with the force majeure clause, let’s answer a simple yet complicated question.

What if a party is not able to comply with the contract due to a flood, war, strike or lockout? Will that party be liable for breach of contract?

The answer is no; all such events, including acts of God, invasion, armed conflict, earthquakes, lighting, cyclones, etc., are part of the force majeure clause. Therefore, the Force Majeure Clause provides immunity to the parties from performing any contractual obligation, thereby preventing them from any liability that could arise from the non-performance of such events that are beyond the control of the parties. Although its detailing has to be done by the parties themselves since this clause has not been explained anywhere in the law.

Severability

We all might have seen the parties arguing in court on the enforceability of a contract, claiming one of its clauses is invalid, prohibited or unenforceable by the changes or amendments in the law. 

Therefore, to counter such a situation, the parties add a severability clause in the contract, which means that in case of any question about the invalidity, prohibition or enforceability of any provision, the enforceability of the rest of the contract will remain unaltered. 

Reliance or no reliance

Reliance or no-reliance clause refers to the binding or non-binding of the parties. This clause operates depending upon the nature and circumstances of the agreement in the respective fields of the parties and works in a similar manner as an Entire Agreement Clause, so that parties do not rely on what’s written in the agreement only and don’t go beyond the scope of the same.

No waiver

This clause specifies that there should be no waiver due to a material breach of technical or functional specifications outright; instead, the defaulting party should be given some time to cure the breach.

Governing law and jurisdiction

To avoid any dispute in the future, the parties clearly state the law by which they will be governed and the jurisdiction of the court. For instance, parties use the arbitration clause to save time and money on litigation expenses.

Also, between cross-border transactions, let’s say between India and the USA, it would be convenient to decide first by which law they will be governed and whether the jurisdiction will be the Indian or USA Court.

Conclusion

The operative and boilerplate clauses play a significant role in the drafting of a contract by taking into account all the possibilities that are taking place or could take place amongst the parties. Further, this article discussed which clauses can be standard and which are to be put in place as per the needs of the parties. 

References

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