Contracts
Contract Risk Guide
Ten common contract terms that create significant risk for businesses. Understanding these provisions before signing helps you negotiate better terms or seek qualified review when needed.
How to use this guide
This guide explains ten high-risk contract provisions in plain language. For each term, you will find what to look for, why it matters, and what questions to ask before accepting the language as written. This is informational content — it is not legal advice, and significant agreements should be reviewed by qualified legal counsel.
Hidden obligations
Contracts frequently embed obligations in exhibits, schedules, and addenda rather than the body of the agreement. Always read all attached documents — they carry the same legal weight. Common examples include service level requirements, data handling mandates, and reporting obligations buried in statements of work.
Automatic renewals
Many service and software agreements include evergreen clauses that automatically renew the contract unless you provide written notice before a specific deadline — often 30 to 90 days before expiration. Missing this window can lock you into another full term with no exit. Set calendar reminders as soon as you sign.
Indemnification clauses
Broad indemnification language may require you to defend and pay for claims arising from a wide range of scenarios, including actions by your own employees, contractors, or customers. Pay close attention to whether indemnification is mutual or one-sided, and whether it includes attorney fees and consequential damages.
Governing law and jurisdiction
Contracts specify which state's or country's laws apply and where disputes must be litigated. A vendor in another state can require you to bring or defend any lawsuit in their local courts, significantly increasing the cost and complexity of any dispute. Consider whether the governing jurisdiction creates meaningful disadvantage.
Payment schedules and triggers
Milestone-based payments tied to vague deliverables create disputes about when payment is owed. Fixed-date payments may require funds to be available before work is complete. Net payment terms (Net 30, Net 60) affect cash flow. Review whether payment obligations survive termination and whether disputed invoices carry penalties.
Termination rights
Understand the conditions under which each party can exit the agreement. Termination for convenience (without cause) is often only available to one party. Termination for cause may require cure periods — time to fix a breach before termination is effective. Early termination fees can equal the remaining contract value.
Confidentiality and non-disclosure
Confidentiality clauses may extend beyond the agreement's term for years or indefinitely. They often include non-solicitation of employees and customers. Broad definitions of 'confidential information' can inadvertently cover ordinary business knowledge. Check whether your existing obligations to other parties could create conflicts.
Liability limitations
Most commercial contracts cap liability at the total fees paid under the agreement, which may be far less than your actual damages. Look for carve-outs — situations where liability caps do not apply, such as gross negligence, fraud, intellectual property infringement, or data breaches. Asymmetric caps favor the drafter.
Insurance requirements
Vendor agreements, leases, and service contracts often specify minimum insurance coverage levels, required policy types, and additional insured endorsements. Failure to maintain required coverage can be a material breach even if no claim occurs. Verify your policies meet contract requirements before signing.
Escalation clauses
Price escalation provisions allow vendors to raise prices annually, often tied to CPI or a fixed percentage. Over a multi-year contract, a 5% annual escalator compounds substantially. Some clauses allow the vendor to pass through cost increases without limit. Understand the escalation mechanism before signing long-term agreements.
Important notice
This guide provides general educational information about common contract provisions. It is not legal advice and does not create an attorney-client relationship. For contracts with significant financial or legal consequences, consult a qualified attorney licensed in your jurisdiction.
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