Guide • Contract Negotiation
Reading Contracts Before You Sign
The five clauses business owners misread most often — and what to look for before initialing the signature page.
Updated April 2026
Most commercial disputes trace back to something the parties signed without fully understanding. Contracts read densely on purpose — but a business owner who knows where the risk lives can spot trouble in minutes, not hours. This guide covers the five provisions that cause the most post-signing regret.
1. Indemnification
An indemnification clause shifts risk from one party to the other. Who is indemnifying whom, for what kinds of losses, and with what caps or carve-outs are the questions that matter. Watch for:
- Uncapped indemnification. Fine for narrow, high-confidence obligations (IP ownership, for instance). Dangerous for broad ones.
- Third-party claims vs. direct losses. Broader direct-loss indemnities are far more expensive in practice.
- Mutuality. If only one side indemnifies, ask why.
2. Limitation of Liability
This clause caps what either party can recover in a dispute. A common formulation limits liability to fees paid in the prior twelve months and excludes consequential damages. The cap is often more aggressive than it first appears — if you’re paying $10,000 a year for a service and the service fails, your entire recovery may be $10,000.
Read the exclusions carefully. Consequential-damages exclusions can wipe out recovery for lost profits, business interruption, and lost data — often the losses that hurt most.
3. Termination
Termination clauses answer three questions: when can either party end the contract, how much notice is required, and what happens after termination. Key variations:
- Termination for convenience. Either party can walk with notice, typically thirty to ninety days.
- Termination for cause. Requires a material breach and usually a cure period.
- Auto-renewal. The contract renews unless terminated before a deadline. Miss the window and you’re locked in for another term.
PRACTICE TIP
If the contract auto-renews, calendar the termination deadline the day you sign. The most common way businesses overpay is by letting renewals run on autopilot for years after the vendor relationship soured.
4. Dispute Resolution, Venue, and Governing Law
These contract clauses tell you where a fight would happen and under what state’s law. A Michigan business that signs a contract specifying arbitration in Delaware under New York law has agreed to litigate far from home, under rules a Michigan court may never see.
Push for Michigan governing law and Michigan venue when possible. If arbitration is non-negotiable, confirm the rules, the location, and who pays the arbitrator’s fees.
5. Confidentiality and IP Assignment
The two quietest but highest-stakes clauses in most commercial contracts. Confidentiality obligations that extend indefinitely after termination can foreclose future business relationships. IP assignment language can hand over rights to work your team hasn’t even started yet — especially in broadly-worded service agreements. Read both sections slowly.
The Five-Minute Pre-Sign Checklist
- Is the scope of work described in enough detail to hold the other side accountable?
- What are the payment terms, and what triggers a late fee or right to suspend?
- Who bears what risk (indemnification, limitation of liability)?
- How does this contract end — and what happens after?
- Where and under what law are disputes resolved?
- What is the term, and does it auto-renew?
- Who owns the work product, and what carve-outs apply?
A contract you understand is one you can negotiate. A contract you don’t is one you’re trusting to behave as the other side describes it.
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