Provision

Contract Provisions

What is a contract provision?

A contract provision is a stipulation within a contract, legal document, or statute that sets out an obligation, right, condition, timeframe, or requirement intended to protect the interests of one or more parties. Provisions often require action by a specific date or within a specified period.

How contract provisions work

Provisions appear in many legal contexts: statutes, corporate charters, loan documents, insurance policies, and commercial contracts. They define what each party must do (or refrain from doing), allocate risks, and create remedies if obligations are not met. Examples include limits on liability, confidentiality duties, payment schedules, and dispute-resolution procedures.

Specific types of provisions serve specialized purposes:
– Anti-greenmail provisions: corporate charter terms that prevent boards from paying premiums to hostile bidders to abandon takeover attempts.
– Loan loss provisions: amounts set aside in lending documents to cover expected uncollected loans or payments.

Common types and examples

• Bond call provision: allows an issuer to redeem bonds before maturity after a specified date.
• Hard call protection: a period during which the bond cannot be called, guaranteeing interest to investors until the first call date.
• Soft call provision: permits calling after the hard call period, often requiring the issuer to pay a declining premium above face value for early redemption. Brokers typically provide both yield-to-call and yield-to-maturity to show investment potential.
• Insurance sunset clause: limits the time a claimant has to submit a claim; failing to act within the period can forfeit the right to claim.
• Statutory sunset provision: a law or portion of a law that automatically expires on a set date unless reenacted.

Special considerations: sunset and sunrise provisions

• Sunset provision: automatically terminates a law, regulation, or contract clause on a specified date unless extended. Sunsets can limit long-term entrenchment of policies and ensure periodic legislative review.
• Sunrise provision: can grant retroactive coverage for events occurring before a policy or contract takes effect (i.e., limited retroactive protection). The meaning and application vary by context, so wording matters.

Typical provisions found in most contracts

• Payment terms and schedule
• Obligations/duties of the parties
• Representations and warranties
• Liability allocation, dispute resolution, and remedies
• Confidentiality and non-disclosure requirements
• Termination rights and procedures

Provision vs. clause

A provision is a specific stipulation or requirement. A clause is a structural unit of a contract (a section or subsection) that may contain one or more provisions.

Key takeaways

• Contract provisions are specific terms that create obligations, rights, timeframes, or conditions within contracts, statutes, or legal documents.
• They appear across many documents—loans, securities, corporate charters, insurance policies, and laws—and allocate risk and remedies.
• Special provisions like sunset and call provisions have important practical effects and should be reviewed carefully for timing, scope, and potential costs.