Contract Provision

What Is a Contract Provision?

A contract provision is an expectation inside a contract, legal document, or a law. A contract provision frequently requires action by a specific date or inside a predefined period of time. Contract provisions are planned to safeguard the interests of one or the two players in a contract.

How a Contract Provision Works

Contract provisions can be found in a nation's laws, in loan documents, and in contract agreements. They likewise can be found in the fine print accompanying purchases of certain stocks.

For instance, an anti-greenmail provision is a type of contract provision that is contained in certain organizations' sanctions that keeps the board of directors from paying a premium to a corporate raider to drop a hostile takeover bid.

In loan documents, a loan loss provision is a type of contract provision that subtleties an expense set to the side to consider uncollected loans or loan payments. This provision is utilized to cover a number of factors associated with potential loan losses.

Special Considerations

Numerous laws are written with a sunset provision that automatically nullifies them on a specific date except if lawmakers reenact them. A sunset provision accommodates a cancelation of the whole law — or segments of the law — when a specific date is reached.

For instance, the National Security Agency's (NSA) authority to collect bulk telephone metadata under the USA PATRIOT Act terminated at 12 PM on June 1, 2015. Any examinations began before the sunset date was permitted to be completed. Numerous sunsetted bits of the Patriot Act were extended through 2019 with the USA Freedom Act. In any case, the provision permitting the collection of monstrous telephone data by government agencies was supplanted with another provision that this data must be held by telephone suppliers.

This practice of sunsetting has its parallel in business. For instance, a sunset provision in an insurance policy limits a claimant's opportunity to present a claim for a covered risk. On the off chance that the claimant doesn't act inside the defined period, the right to make the claim is forfeited.

Illustration of a Contract Provision

One of the most natural purposes of a contract provision is a bond's call provision. A bond's call provision alludes to a specific date; after this date, the company might recall and retire the bond. The bond investor can hand it over for payment of the face amount (or the face amount plus a premium).

For instance, a 12-year bond issue can be called following five years. That initial five-year period has a hard call protection. Investors are guaranteed to earn interest until essentially the main call date. At the point when an investor purchases a bond, the broker typically gives the yield to call as well as the yield to maturity. These two yields show the bond's investment potential.

On the off chance that a bond has a soft call provision, the strategy will become real after the hard call provision period passes. Soft call protection is typically a premium to face value that the issuer pays for calling the bond before maturity. For instance, after the call date is reached, the issuer could pay a 3% premium for calling the bonds for the next year, a 2% premium the next year, and a 1% premium for calling the bonds over two years after the hard call lapses.

Features

• A contract provision frequently requires action by a certain date or inside a certain period of time.
• One of the most recognizable purposes of a contract provision is a bond's call provision, which alludes to a specific date; after this date, the company might recall and retire the bond.
• A contract provision is an expectation in a contract, legal document, or a law.