In plain English, this clause says "We use open source code, and if I happen to improve an open source library during the course of this contract, it's understood that I might turn it into a patch and submit it, as long as the patch won't violate the client's confidentiality or other proprietary IP".
Basically it makes explicit the two-way social contract of open source code. Since most of the work we do these days rests on an enormous mountain of value provided gratis to the client by legions of open source developers, it's only fair.
The Free and Open Source Clause is for clients who are paranoid about GPL virality.
The Open Source Clause is preferred.
Note that the "at X's discretion" phrase is important: "at Consultant's discretion" means the Consultant will use his or her professional/ethical judgement and can incorporate open source libraries and/or submit patches at will; "at Company's discretion" might be interpreted to mean that the Company needs to be notified prior to or concurrent with adding a library or submitting a patch.
Note also that this does not mean the client agrees to pay for you to work on arbitrary open source projects or for unreasonable amounts of time. But it should make both of you feel that the chore of submitting a bug report or workaround or patch, especially if that fix helped solve a work problem, is as valid a use of billable time as installing software or waiting for a test suite to run.
Open Source Clause
Open Source Software means publicly available software that may be utilized pursuant and subject to the terms of an "open source" or similar license, including without limitation the "Ruby License," the "MIT License," the "Apache License" and the "GNU General Public License." Company understands and agrees that Consultant may, at Consultant's discretion, make use of libraries from various Open Source Software products during the course of work. Consultant may submit back to such libraries any improvements ("patches") made to the Open Source Software during the course of work, as long as the submission of such patches violates neither the conditions in this Section, nor the Confidentiality provisions in Section XXX.
Free and Open Source Clause
Free and Open Source Software. It is understood that Consultant may, at Company’s discretion, make use of libraries from various “open source” software products during the course of work, and that some such products may be subject to a license that requires, as a condition of distribution of such products, that such software or other software combined and/or distributed with such software be (x) disclosed or distributed in source code form; (y) licensed for the purpose of making derivative works; or (z) redistributable at no charge ("Free Software"). In no event shall the source code from such Free Software be incorporated into the source code of any Work Product (including without limitation any unit test) or any other Deliverable without the prior written consent of Company. Further, Consultant may submit back to such libraries any improvements ("patches") made to the Free Software during the course of work, as long as the submission of such patches violates neither the conditions in this Section, nor the Confidentiality provisions in Section XXX.