Seven Hidden Clauses in Standard Contracts That Could Be Costly
In the fine print of standard contracts, there often lurk clauses that can lead to unforeseen expenses or obligations. These hidden clauses, while legal and binding, can catch signatories off guard if they are not meticulously scrutinized before signing. Here are seven such clauses that could prove costly:
- Automatic Renewal Clauses
Also known as “evergreen clauses,” these provisions automatically renew a contract for a set period unless one party cancels within a specified timeframe. This can lead to unexpected costs, especially if the renewal terms are not favorable or the service is no longer needed. To avoid this, mark renewal dates on your calendar and review the terms well in advance.
- Early Termination Fees
Many contracts include hefty penalties for early termination. These fees can sometimes equal the total cost of the contract, making it expensive to exit an agreement prematurely. It’s crucial to understand these terms, especially in long-term contracts like leases or service agreements, and to negotiate for more reasonable exit terms when possible.
- Indemnity Clauses
Indemnity clauses require one party to compensate the other for certain damages or losses. These can be broad and include costs arising from negligence or even third-party actions. This can lead to significant financial liability. It’s important to limit indemnity obligations as much as possible and to understand the scope of these clauses fully.
- Limitation of Liability Clauses
These clauses limit the amount one party can claim from the other in the event of a breach or other issues. While they might seem to cap your exposure, they can also cap the compensation you can receive if the other party fails to fulfill their obligations. Carefully assess whether the limitations are reasonable and consider negotiating higher caps if necessary.
- Confidentiality and Non-Disclosure Agreements (NDAs)
While NDAs are common, some contain clauses that can restrict your business operations or limit your ability to share information with future partners. Overly broad confidentiality clauses can stifle business growth and innovation. Ensure that any confidentiality clauses are specific and reasonable, and do not unduly limit your business activities.
- Governing Law and Jurisdiction Clauses
These clauses determine which state or country’s laws govern the contract and where any disputes will be resolved. If a contract selects a jurisdiction far from your location, legal disputes can become costly due to travel, unfamiliar legal systems, and the need for out-of-state legal representation. Always consider the practicality and cost implications of these clauses.
- Change of Terms Clauses
Some contracts allow one party to unilaterally change the terms without the other party’s consent. This can lead to unexpected changes in pricing, services, or obligations. Such clauses are particularly common in service contracts and user agreements. It’s vital to understand how changes will be communicated and whether you have the option to terminate the contract if the new terms are unfavorable.
Conclusion
To avoid potential pitfalls hidden within standard contracts, it’s essential to read carefully. If you’re unsure about any terms, consult with our team at Woodward, Kelley, Fulton & Kaplan to ensure you fully understand your obligations and rights. Our Managing Partner, Brandon Woodward takes the time to thoroughly review and negotiate contract terms that can save you from costly surprises down the line. Our office can be reached at (772) 497-6544 Monday through Friday from 9 A.M. to 3 P.M. As always, if you have any questions about standard business comtracts or business law generally, please don’t hesitate to contact us!