15 Contract Red Flags That Could Cost Your Business Thousands
That contract you're about to sign? There might be a clause buried on page 12 that could cost you everything.
Most business owners skim contracts or rely on "it looks standard" without understanding the actual terms. Then 18 months later, they discover they're locked into auto-renewal, their vendor's liability is capped at $100, or they accidentally signed away rights to work they created before the contract even existed.
This guide breaks down 15 contract red flags that every business owner should watch for — whether you're reviewing an NDA, vendor agreement, employment contract, or commercial lease.
Why Contract Red Flags Matter#
The stakes are real:
- Lost IP: A poorly worded "work-for-hire" clause could give clients ownership of work you created before you even met them
- Payment delays: Net-60 or Net-90 payment terms with no late fees means you're financing their business
- Trapped in bad deals: Auto-renewal clauses you missed can lock you in for another year with 30 days' notice
- Unlimited liability: Some contracts make you responsible for damages with no cap — even if it wasn't your fault
Reading contracts thoroughly takes hours. But knowing what to look for takes minutes.
The 15 Contract Red Flags#
1. Unlimited Liability#
What it looks like:
"Contractor shall indemnify and hold harmless Client from any and all claims, damages, losses, and expenses..."
No cap. No exclusions. You're on the hook for everything.
Why it's dangerous: If something goes wrong — even due to circumstances outside your control — you could be liable for unlimited damages. One lawsuit could bankrupt your business.
What to ask for instead: "Contractor's total liability shall not exceed fees paid under this agreement in the 12 months prior to the claim."
2. Broad Indemnification#
What it looks like:
"You agree to indemnify Company for any claims arising from your use of the service."
You're covering their mistakes, not just yours.
Why it's dangerous: Indemnification means you pay their legal costs if they get sued — even if it's their fault. Broad language can make you liable for things you didn't do.
What to ask for instead: Limit indemnification to breaches YOU actually caused: "arising solely from Contractor's breach of this agreement."
3. Auto-Renewal Traps#
What it looks like:
"This agreement automatically renews for successive one-year terms unless either party provides 30 days' written notice prior to renewal."
Miss the window by one day? Locked in for another year.
Why it's dangerous: 30 days' notice before renewal (sometimes it's 60 or 90) is easy to miss. If you don't cancel in time, you're committed to another year at whatever price they set.
What to ask for instead: Longer notice periods (90 days minimum) or opt-in renewal instead of opt-out.
4. Vague Scope of Work#
What it looks like:
"Contractor shall provide services as reasonably requested by Client to achieve project goals."
"Reasonably requested" and "project goals" mean whatever the client says they mean.
Why it's dangerous: Vague scope = infinite work. Clients can claim anything is "part of the project goals." You end up doing 10x the work you quoted for.
What to ask for instead: Specific deliverables: "Contractor shall design 5 social media graphics in PNG format, deliver by March 15, with 2 rounds of revisions included."
5. Work-for-Hire Overreach#
What it looks like:
"All work product created during the term of this agreement shall be considered work-for-hire owned by Client."
"During the term" could mean EVERYTHING you create — even unrelated projects.
Why it's dangerous: If you're working with multiple clients or building your own products, this language could give them ownership of work that has nothing to do with their project.
What to ask for instead: "Work product created specifically for Client under this Statement of Work shall be owned by Client."
6. Payment Upon Satisfaction#
What it looks like:
"Payment due upon Client's satisfaction with deliverables."
There's no objective standard for "satisfaction."
Why it's dangerous: The client can delay payment indefinitely by claiming they're "not satisfied" — even if you delivered exactly what was specified. You have no recourse.
What to ask for instead: "Payment due within 30 days of delivery, with one round of reasonable revisions."
7. No Liability Cap for Vendor#
What it looks like:
"Vendor's liability shall not exceed fees paid under this agreement in the prior three months."
For a critical SaaS service costing $500/month, their max liability is $1,500 — even if they cause a security breach that costs you $500,000.
Why it's dangerous: Vendors cap their liability at a fraction of the actual damage they could cause. For mission-critical services, this is inadequate.
What to ask for instead: Negotiate higher caps for critical services: 12 months of fees or actual damages, whichever is greater.
8. Unilateral Modification Rights#
What it looks like:
"Company may modify these terms at any time by posting updated terms on the website."
They can change anything, anytime, and you're bound by it.
Why it's dangerous: The vendor can increase prices, reduce service levels, or add restrictions — and you have no say. If you don't like it, your only option is to cancel (and lose your data).
What to ask for instead: "Material changes require 60 days' notice and Customer may terminate without penalty if changes are unacceptable."
9. Hidden Non-Compete#
What it looks like:
"During the term and for 2 years after, Contractor agrees not to provide similar services to any business in the same industry."
Buried in an NDA or services agreement, not disclosed upfront.
Why it's dangerous: Non-competes limit who you can work with and can devastate your income. "Same industry" is often interpreted broadly — you might be blocked from 80% of potential clients.
What to ask for instead: Remove it entirely, or narrow it: "Direct competitors only, limited to 6 months."
10. Perpetual Terms#
What it looks like:
"This confidentiality obligation shall continue in perpetuity."
You're bound forever, with no expiration date.
Why it's dangerous: Perpetual obligations are unreasonable for most business relationships. Information becomes outdated, businesses change, but you're still legally bound.
What to ask for instead: "Confidentiality obligations shall continue for 5 years from the date of disclosure."
11. No SLA or Weak Uptime Guarantee#
What it looks like:
"Vendor will use commercially reasonable efforts to maintain service availability."
"Reasonable efforts" means nothing. No penalties. No refunds.
Why it's dangerous: For critical SaaS services, downtime costs you money. Without an SLA, you have no recourse if they have frequent outages.
What to ask for instead: "99.9% uptime guarantee, with service credits for any month below 99.5%."
12. Inconvenient Jurisdiction#
What it looks like:
"Any disputes shall be settled exclusively in the courts of [distant state/country]."
All legal disputes must be resolved where THEY are, not where YOU are.
Why it's dangerous: If you need to sue them, you have to hire lawyers in their jurisdiction and travel for court appearances. Legal action becomes impractical and expensive.
What to ask for instead: Neutral jurisdiction or your home state if you have more bargaining power.
13. Automatic Attorney's Fees#
What it looks like:
"In the event of any breach, breaching party shall pay the non-breaching party's attorney's fees."
Sounds fair — but it's almost never enforced equally.
Why it's dangerous: Large companies have lawyers on retainer. You don't. If there's a dispute, they can threaten massive legal fees to force you to back down — even if you're right.
What to ask for instead: "Each party responsible for own legal costs" or mutual fee-shifting only for frivolous claims.
14. No Data Portability or Export Rights#
What it looks like: Contract is silent on what happens to your data if you cancel.
Some vendors hold your data hostage.
Why it's dangerous: If you cancel the service, you might not be able to export your data — or they charge expensive export fees. You're locked in because switching would mean losing everything.
What to ask for instead: "Customer shall have the right to export all data in standard format at no additional cost upon termination."
15. Assignment Clause (One-Sided)#
What it looks like:
"Vendor may assign this agreement to any third party without notice or consent."
They can sell your contract to someone else without telling you.
Why it's dangerous: You might end up working with or paying a company you never agreed to do business with. They might have different practices, worse support, or higher prices.
What to ask for instead: "Neither party may assign this agreement without the written consent of the other party."
How to Spot These Quickly (Without Reading Every Page)#
Reading every page of every contract isn't realistic. Here's how to speed up the process without missing critical issues:
Use AI Contract Review#
Tools like Denser's AI Contract Review let you upload any contract and ask questions in plain English:
- "Is there an auto-renewal clause?"
- "What are the liability caps?"
- "Are there any non-compete terms?"
- "What are my termination rights?"
You get cited answers with exact page numbers — no need to manually hunt through 40 pages.
Focus on High-Risk Sections#
Not every clause matters equally. Focus your manual review on:
- Termination & Renewal (Section 8-10 typically)
- Liability & Indemnification (Section 12-15 typically)
- IP Ownership (Section 4-6 for service agreements)
- Payment Terms (Section 5-7 typically)
- Scope of Work (Statement of Work or Exhibit A)
These sections contain 90% of the landmines.
Ask These 5 Questions#
For any contract, quickly ask:
- Can I get out? What's the termination process?
- What am I liable for? Is there a cap?
- How much do I pay and when? Net-30, upfront, milestone-based?
- Who owns what? IP, data, work product?
- What happens if they breach? Remedies, damages, SLA penalties?
If you can't quickly find answers to these 5 questions, read more carefully or get help.
What to Do When You Find Red Flags#
Finding red flags doesn't automatically mean "don't sign." It means negotiate or get legal advice.
Negotiate First#
Most contract terms are negotiable, especially if:
- You have multiple vendor options (competition)
- You're a significant customer (revenue matters to them)
- The clause is standard (non-competes, liability caps, payment terms)
How to negotiate:
"I reviewed the contract and have concerns about [specific clause]. Industry standard is [alternative]. Can we revise Section X to [proposed change]?"
Be specific. Offer alternatives. Don't just say "this is bad."
When to Walk Away#
Some red flags are dealbreakers:
- Unlimited liability with no cap
- Payment only upon satisfaction (no objective criteria)
- Overly broad work-for-hire claiming unrelated IP
- Non-compete that would eliminate 50%+ of your income
If they won't negotiate on dealbreaker terms, walk away. A bad contract is worse than no contract.
When to Hire a Lawyer#
Get legal advice if:
- The contract value is high (typically $50k+)
- It's your first time seeing this type of contract
- The vendor refuses to negotiate on red flags
- You're signing something that could materially harm your business if it goes wrong
Lawyers cost $300-500/hour for contract review, but that's cheap compared to the cost of signing a bad agreement.
Conclusion: Read Before You Sign#
"It looks standard" is not a risk assessment strategy.
The 15 red flags above appear in contracts every day. Some are dealbreakers. Some are negotiable. But you can't negotiate or walk away from terms you don't know about.
Three ways to protect yourself:
- Know what to look for — Use this checklist to focus your review on high-risk areas
- Use AI tools — Get instant answers about specific clauses without reading 40 pages manually
- Get legal help when it matters — For high-value or unfamiliar contracts, hire a lawyer
The 15 minutes you spend reviewing a contract could save you thousands in bad terms or legal disputes.
Try AI Contract Review#
Stop hunting through contracts manually. Upload any contract and ask questions like:
- "What are the red flags in this agreement?"
- "Is there an auto-renewal clause?"
- "What am I liable for?"
- "Can I terminate early?"
Get cited answers with exact page numbers. Try it free at denser.ai/solutions/legal-contract-review.
Related Resources#
- AI Contract Review Tool — Upload and analyze any contract in minutes
- AI NDA Review — Specific guidance for confidentiality agreements
- AI Vendor Contract Review — Review supplier and SaaS agreements
- AI for Freelancer Contracts — Protect your IP and payment rights
- AI vs. Lawyer for Contract Review — When to use AI, when to hire a lawyer