Wondering what is a contract term?
Perhaps you are negotiating a contract term clause and you are looking for information on how to handle it.
We’ve got great news!
This article is all about contract term!
We will get to know what is a contract term, the different types of contractual terms and when contracts will end.
We’ve divided this contract into the following sections:
- What does contract term mean
- Types of contract terms
- What is the minimum contract term
- Components of a contract term clause
- Effective date of a contract
- Term and termination of a contract
Let’s get started.
What does contract term mean
A contract term is the time period the parties agree to have a contract to be in effect and produce legal effects.
The contract term is typically mutually negotiated by the parties.
Law Insider provides the contract term definition as “the length of time the contract shall remain in effect”.
In some business contracts, a party will impose the contract duration.
The contract term in most cases may not be the most contentious part of contractual negotiations as it has an important commercial value although it is important from a legal point of view.
Some contracts have a term of one year, some other contracts can even be of indefinite term.
When negotiating a contract, the contract term will depend on the commercial context surrounding the business transaction.
Types of contract terms
There are several types of contract terms typically present in a commercial context.
We can summarize the different types of contract terms as follows:
- Fixed-term contract without renewals or extension
- Fixed-term contract with automatic renewals for a fixed number of renewal terms
- Fixed-term contract with options to renew granted to one contracting party
- Fixed-term contract with automatic renewals unless terminated by a party
- Indefinite term contract ending upon notice of a party
- Indefinite term contract ending on the condition of the happening of an event, fulfillment or completion of the obligation of the parties
For a business to decide which contract term is more beneficial, they’ll need to consider the business transaction holistically.
If the value of the contract makes sense, the terms and conditions of the contract allow for a fixed-term commitment or a perpetual commitment, possible future market risk and opportunities and so on.
What is the minimum contract term
Is there a minimum contract term that is required from a legal perspectiveÉ
In every jurisdiction, the local substantive contract laws will govern the parameters surrounding the contract term, if any.
Typically, in commercial and business contracts, in most cases there are no minimum contractual terms to respect unless there is a specific law that the business must observe such as a consumer protection law.
Aside from a specific statutory requirement, the minimum term of a contract will be typically negotiated by the parties.
Your business may have an incentive in requiring a minimum contract term to make the business transaction worth it.
That’s a commercial decision more than a legal decision.
Components of a contract term clause
The contract term clause must be well-drafted to ensure the parties have clarity as to how the agreement will produce legal effects in time and when it is anticipated to terminate.
You should read your contract term clause along with any language or clause relating to the effective date of the contract along with the termination or renewal conditions.
The contract term clause will typically state in clear terms as of when it will take effect and as of when it will terminate or on the basis of what conditions it will terminate.
The components are:
- Calling out the start date of the legal effects of the contract
- Calling out if the contract will terminate with the passing of time and when
- Calling out if the contract will terminate based on the arrival of an event, condition or fulfillment of some obligations
- Calling out if the contract term will have automatic renewal provisions or not
The simplest contract term clause is merely linked to the passing of time.
For example, a contract term clause will state that the contract will terminate within one year from the execution of the agreement.
If your contract term is subject to a condition, you must ensure that your conditions are clearly called out so both parties will have a clear understanding of when the contract will end.
In such cases, it may be useful to consult with a contract lawyer experienced in the domain and contract drafting to ensure the contractual clauses related to the term are clear.
Effective date of a contract
The effective date of a contract is crucial to understand the contract term.
Essentially, the contract term starts from the effective date of the contract.
In most business contracts, the parties will mutually agree on the definition of the effective date.
This means that you can sign a contract today but agree that it will take effect in a week or a month.
This is up to the parties to negotiate.
The parties will mutually define when the contract will start producing legal effects and the time starts ticking for the contract term perspective.
In the absence of an effective date expressly defined in the contract, the contract is formed at the moment a party formally accepts the offer of another.
The legal effective date will be the moment of acceptance.
Term and termination of a contract
The term and termination clause of a contract will also have an incidence on the contract term.
In some cases, a contract will define a fixed term of say three years.
On the other hand, a party may negotiate a termination right such as a termination for convenience allowing them to send a notice to the other party and exit the contract at any time.
If you have a fixed-term contract and combined with a termination for convenience, you are pretty much in control of the actual or effective term.
Even though at its face value you’ve committed to a three-year term, you may nonetheless opt-out at any time.
Make sure you look the mechanics of how your contract can be terminated so you can assess the true potential term of your contract.
There you have it folks, all you need to know about the contract term.
The contract term is duration or time period that a contract will be in effect and produce legal effects.
The contract term will start as of a specific point in time and end at a defined point in time as well.
The parties can negotiate how long their contract will last by negotiating different types of contract term clauses.
For example, you can have a fixed-term contract or even an indefinite one.
We hope that this article has helped you better manage the contract term and the contract term clause.
We wish you good luck with your contract!