What is a contractual clause?

A contractual provision is a stipulation in a Contract, legal document or law. A contractual provision often requires action on a specific date or within a specific time frame. Contract provisions are intended to protect the interests of one or both parties in a contract.

How a contract clause works

Contractual provisions can be found in the laws of a country, in ready documents and in contractual agreements. They can also be found in the fine print accompanying purchases of certain stocks.

For example, an anti-greenmail provision is a type of contractual provision contained in the charters of some companies that prevents the board of directors from paying a bounty to a corporate thief to abandon a hostile takeover bid. .

In loan documents, a loan loss allowance is a type of contractual provision that details an expense set aside to allow for uncollected loans or loan repayments. This provision is used to cover a number of factors associated with potential loan losses.

Special Considerations

Many laws are written with a timeout provision which repeals them automatically on a specific date unless the legislator re-enacts them. A sunset provision provides for the repeal of the entire law – or sections of the law – once a specific date is reached.

Sunset clauses can help the general public in several ways. What may be most common is when a government agency writes a provision into law that benefits the public for a certain period of time, usually during a specific period of party power. When power dynamics change, the clause may no longer be in the public’s best interest, and will be triggered and may free the public from the undesirable repercussions of a power shift, such as a tax increase or regulation.

For example, the authority of the National Security Agency (NSA) to collect bulk telephone metadata under the USA PATRIOT Act expired at midnight on June 1, 2015. Any investigation started before the expiration date could be terminated. . Many lapsed portions of the Patriot Act were extended through 2019 with the USA Freedom Act. However, the provision allowing the bulk collection of telephone data by government agencies has been replaced with a new provision that such data must be held by telephone service providers.

This practice of procrastination has its parallel in business. For example, a sunset provision in an insurance policy limits the time a claimant has to submit a claim for a covered peril. If the plaintiff does not act within the defined period, the right to make the claim is lost.

Sample Contract Clause

One of the most common uses of a contract term is to call provision. The call clause of an obligation refers to a specific date; after this date, the company may recall and withdraw the bond. The bond investor can surrender it for payment of the nominal capital (or the nominal capital plus a premium).

For example, a 12-year bond issue can be called after five years. This first five-year period has a hard call protection. Investors are guaranteed to earn interest until at least the first redemption date. When an investor buys a bond, the broker generally provides yield to redemption as well as yield to maturity. These two yields show the investment potential of the bond.

If a bond has a soft call clause, the procedure will come into effect after the hard call clause period has expired. Indirect call protection is usually a premium to face value that the issuer pays to redeem the bond before maturity. For example, once the redemption date is reached, the issuer may pay a premium of 3% for redeeming the bonds the following year, a premium of 2% the following year and a premium of 1% for redeeming the bonds more than two years after the hard call expires.