Contract Red Flags: 10 Clauses to Review Before You Sign

Before signing any contract, certain clauses deserve careful attention. These provisions can significantly affect your rights and obligations.

The 10 Red Flags

1. Limitation of liability
2. Indemnification obligations
3. Termination provisions
4. Auto-renewal terms
5. Governing law and venue
6. Arbitration clauses
7. Non-compete restrictions
8. IP assignment
9. Confidentiality scope
10. Force majeure

The Indemnification Trap

"Indemnification" means you agree to pay for the other party's legal losses if something goes wrong. Broad indemnification clauses can bankrupt a small business. You should only indemnify for your own negligence or misconduct, never for the other party's mistakes or "any and all claims" arising from the relationship. Always push for "mutual indemnification."

Limitation of Liability

This is your shield. A fair contract should cap your total liability at the amount you were paid (e.g., "Liability shall not exceed the fees paid in the 12 months prior to the claim"). Without this cap, a $10,000 contract could expose you to multimillion-dollar lawsuits.

Force Majeure in a Post-COVID World

Old "Act of God" clauses were boilerplate. Now, they are critical. Does your clause explicitly cover pandemics, government lockdowns, or supply chain collapses? If you cannot deliver due to a new variant or lockdown, you need the contract to say you are excused from performance, not in breach.

Indemnification: The "Bet the Company" Clause

Indemnification basically means "If I get sued because of you, you have to pay for my lawyer and the damages."
Red Flag: One-way indemnification. You should almost always ask for mutual indemnification. Also, watch out for "uncapped" liability with indemnification. An IP indemnification clause usually *should* be uncapped, but general negligence should be capped at the contract value.

"Work for Hire" Hidden in Consulting Deals

If you are a consultant, never sign a contract that says "Work Made for Hire" unless you intend to lose ALL rights to what you create—even things you built prior to the relationship. We often see broad IP clauses that claim "anything created during the term of this agreement." If you code a side project on the weekend, the client might technically own it.

Does a contract have to be notarized?

No. A signature (even electronic via DocuSign) is sufficient. Notarization is only needed for specific documents like real estate deeds or wills.

What happens if we didn't sign but started work?

You likely have an "implied-in-fact" contract or a verbal contract. These are enforceable but much harder to prove terms for. Get it in writing immediately.

Disclaimer: This article is for general information only and is not legal advice.