The contract clauses that hurt later

Imagine a growing business that signs up for a software service. The price is right, the demo was impressive and the contract is the provider's standard terms, accepted with a click. A year later the business wants to switch to a different provider. It discovers that the contract renewed itself for another full term, that cancelling early means paying for the remaining months, and that the provider's responsibility for a data problem the business suffered is limited to a small fraction of what it paid.

None of these clauses was hidden. They were simply never read. Most contracts spend pages on the things everyone expects, such as price, delivery and scope. The problems usually come from a handful of shorter clauses that only matter when something changes or goes wrong.

Automatic renewal

An automatic renewal clause, sometimes called an evergreen clause, means the contract continues for a further period unless someone cancels it in time. That can be convenient. It can also lock you in if you miss the window for giving notice.

• How long is each renewal period, and is it the same as the original term?
• How much notice is needed to stop a renewal, and in what form: email, letter or a specific portal?
• Can the price change on renewal, and how will you be told?

Some places have consumer rules about automatic renewals, but businesses often have fewer protections. Put the cancellation window in your calendar on the day you sign.

Limits on liability

A limitation of liability clause caps how much one side has to pay the other if something goes wrong. It may set a maximum amount, often linked to the fees paid, and it may exclude whole categories of loss, such as lost profits or lost data.

These clauses are normal, and both sides often have them. The question is whether the cap is realistic for the risks involved. If the worst that could happen is far larger than the cap, you may be carrying risk you did not expect. Whether and how a cap applies can also depend on the law of the place, and some types of liability may not be limitable at all.

Read a contract for the worst realistic day, not the best one. That is the day its terms will matter.

Termination

Termination clauses say how and when the contract can be ended. Look at both sides: can you leave if the service is poor, and can the other side leave at short notice, leaving you without something you depend on?

• Can either side end the contract for convenience, meaning without giving a reason?
• What counts as a serious breach that allows the contract to be ended, and is there a chance to fix the problem first?
• What must be paid on termination, such as fees for the rest of the term or the cost of unused commitments?
• What happens to your data, materials or work in progress when the contract ends?

Indemnities

An indemnity is a promise to cover the other side's losses if a particular thing happens, such as a claim by a third party. Indemnities can be much broader than ordinary liability, and they sometimes sit outside the liability cap. Read who is indemnifying whom, for what, and whether there is any limit.

Other clauses worth a second look

• Exclusivity: are you agreeing to buy only from this supplier, or to sell only through this partner?
• Changes: can the other side change the terms or the price during the contract by simply notifying you?
• Governing law and disputes: which place's law applies, and where would a disagreement be heard?
• Assignment: can the other side transfer the contract to someone else, such as a buyer of its business?

A simple way to review

1. Find and read the renewal, liability, termination and indemnity clauses before anything else.
2. For each one, ask what happens if things go badly, and whether you could live with that.
3. Note what you would like changed and why, in plain terms.
4. Raise the changes before signing, when you have the most room to negotiate.

In the example above, a short review before signing might have produced a shorter renewal period, a longer cancellation window and a more realistic cap. Those are ordinary requests, and they are much easier to make before a contract is signed than after.

When a second pair of eyes helps

How these clauses are interpreted depends on the wording and on the law that governs the contract. For contracts that matter to your business, ArieFirm's lawyer contract review looks at the terms with you before you commit, and points out the clauses that deserve attention.