A contract provision is a stipulation within a contract, legal document, or a law. It often necessitates action by a specific date or within a stipulated period. The primary purpose of these provisions is to safeguard the interests of one or both parties involved in the agreement.
Key Takeaways
- A contract provision is a requisite within a contract or legal document.
- It often mandates action by a certain date or within a specific time frame.
- A common example is a bond’s call provision, which allows a company to recall and retire the bond after a defined period.
- A sunset provision dictates that a law or sections of it will expire on a set date, unless reenacted.
How a Contract Provision Works
Provisions can be found in a country’s laws, loan documents, and contractual agreements, including the fine print of stock purchases. For instance, an anti-greenmail provision prevents a board of directors from paying a corporate raider premiums to abandon a hostile takeover.
In loan documents, a loan loss provision allocates funds to cover potential uncollected loans or payments, thereby shielding against possible losses.
Special Considerations
Many laws include a sunset provision to repeal sections or entire laws on specified dates unless reapproved by legislators. This can especially benefit the public by preventing obsolete or potentially harmful laws from staying in effect indefinitely.
A prime example is the expiration of the National Security Agency’s (NSA) authority to collect bulk telephone metadata under the USA PATRIOT Act in June 2015. Extensions and specific modifications through the USA Freedom Act highlighted how such provisions could adapt to changing governmental and public needs.
In business, sunset provisions often appear in insurance policies, limiting the timeframe in which claims can be submitted for covered risks. Failing to act within the prescribed period results in forfeiture of the claim rights.
Example of a Contract Provision
One familiar instance of a contract provision is a bond’s call provision. For example, a company may issue a 12-year bond with the option to call it after five years. During these initial years, the bond has hard call protection, ensuring investors receive interest until the first call date. If a soft call provision follows, any calling before the maturity date incurs a premium.
What Are Some Typical Contract Provisions?
While contracts vary based on contexts, the following basic provisions are commonly present:
- Payment terms and schedule
- Obligations of the parties
- Representations and warranties
- Liability issues, disputes, and remedies
- Confidentiality
- Termination conditions
Difference Between a Contract Provision and Clause
A provision stipulates a specific condition or requirement within a contract, while a clause denotes a section or subsection that may encompass multiple provisions.
Sunrise and Sunset Provisions
A sunset provision enables automatic termination of a contract or parts of it after a specified period. Conversely, a sunrise provision extends coverage to events happening before contract signing, providing broader, more affordable security for the insured.
Related Terms: contract, bond call provision, sunset provision, loan documents.
