10 Contract Red Flags That Could Kill Your Business (And How to Fix Them)

Contracts are the backbone of business relationships, but hidden within the fine print can be terms that create major risks for your company. These "red flags" might seem harmless at first glance, but they can lead to financial losses, loss of control, or legal disputes if left unchecked. Knowing how to spot these red flags and deal with them effectively is a critical skill for any business owner.

Here’s a guide to the most common contract red flags, how to identify them, and steps you can take to protect yourself.

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1. The "Perpetual License" Trap

When you see "perpetual," "irrevocable," or "unlimited" license terms, your alarm bells should ring. I once saw a startup accidentally give away perpetual rights to their core technology through a poorly worded client contract.

Quick Fix: Replace perpetual terms with specific time limits or project scope limitations. Use language like: "License granted for the duration of the project and 30 days thereafter."

2. Hidden Auto-Renewal Clauses

These sneaky provisions can lock you into contracts for years. The most dangerous ones require 90+ days notice for cancellation, meaning you might miss your window to exit.

Quick Fix: Add this paragraph to your contract redlines:"Any renewal requires written confirmation from both parties at least 30 days before the renewal date. Absent such confirmation, the agreement terminates at the end of the current term."

3. The "All Your IP Belongs to Us" Clause

Watch for broad intellectual property assignments, especially in client or vendor agreements. These often hide in innocent-looking "Work Product" definitions.

Quick Fix: Add this clarification: "IP assignment is limited to deliverables specifically created for and paid for by Client. Company retains ownership of all pre-existing IP, methodologies, and tools used in creating the deliverables."

4. Unlimited Indemnification Obligations

Never accept unlimited indemnification. I've seen companies forced into bankruptcy because they agreed to indemnify a larger partner for "any and all claims."

Quick Fix: Cap indemnification at the greater of (a) fees paid under the agreement or (b) available insurance coverage. Add: "In no event shall indemnification exceed [cap amount]."

5. The "Change Anything Anytime" Clause

Watch for unilateral amendment rights that let the other party change terms without your consent. These are especially common in SaaS agreements.

Quick Fix: Insert: "Material changes to this agreement require mutual written consent. Changes made without consent are void."

6. Silent Payment Terms

Vague payment terms are a recipe for cash flow disasters. If the contract doesn't specify when and how you get paid, you're asking for trouble.

Quick Fix: Add specific payment terms:

• Payment due within 30 days of invoice
• 1.5% monthly interest on late payments
• Right to suspend services if payment is 15+ days late

7. The Missing Exit Clause

Every contract needs a clear exit strategy. If you can't find the termination clause, that's a massive red flag.

Quick Fix: Include these termination rights:

• 30-day termination for convenience
• Immediate termination for material breach
• 60-day cure period for non-material breaches

8. Unrealistic Service Levels

Watch for performance guarantees that could bankrupt you. I've seen startups agree to 99.999% uptime without understanding it means only 5 minutes of downtime per year.

Quick Fix: Define realistic service levels with clear exclusions:

• Scheduled maintenance
• Force majeure events
• Third-party service failures

9. The "Gotcha" Jurisdiction Clause

If you're based in California, but the contract requires you to litigate disputes in Maine, you're at a massive disadvantage.

Quick Fix: Specify your home jurisdiction or add: "Disputes shall be resolved in the jurisdiction where the defendant is headquartered."

10. Silent Confidentiality Terms

If there's no confidentiality clause, or it's one-sided, your valuable business information could be at risk.

Quick Fix: Add mutual confidentiality obligations with:

• Clear definition of confidential information
• 3-year minimum protection period
• Standard exclusions for public information

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The Power Move: Your Contract Review Checklist

Here's my 2-minute contract review checklist that's saved companies millions:

1. Search for "perpetual," "unlimited," "any and all"
2. Check termination rights and notice periods
3. Review IP ownership and license grants
4. Verify payment terms and conditions
5. Confirm governing law and jurisdiction
6. Check confidentiality obligations

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Bottom Line

Remember: The best time to fix contract issues is before you sign. Keep this article handy when reviewing your next contract, and don't hesitate to push back on unfavorable terms. In my experience, 80% of unfair contract terms can be negotiated out if you spot them early and propose reasonable alternatives.

Your business success often depends more on the contracts you don't sign than the ones you do. Use these fixes to protect your business while keeping deals moving forward.

Need more contract hacks? Check out our free contract template library at LawHax.com.

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