Top 10 Contract "Gotchas" That Could Cost You Millions

Even the most experienced legal professionals can miss critical details in complex contracts. These overlooked clauses and provisions—often buried in dense legal language—can lead to significant financial consequences and protracted disputes. Here are the top ten contract "gotchas" that could potentially cost your organization millions.

1. Automatic Renewal Clauses with Onerous Terms

Automatic renewal provisions (also known as "evergreen clauses") can perpetuate unfavorable contract terms if not carefully monitored. These clauses often include:

• Short cancellation windows (sometimes as brief as 30-60 days)
• Automatic price increases upon renewal
• Extended renewal periods that exceed the original term

Real-world impact: A manufacturing company missed a 45-day cancellation window in a software license agreement and was automatically locked into a three-year renewal with a 20% price increase, costing them an additional $1.2 million for software they had planned to replace.

2. Unlimited Indemnification Obligations

Indemnification clauses that lack appropriate limitations can create virtually unlimited liability. Watch for:

• Absence of liability caps
• Broad indemnification language covering "any and all claims"
• Indemnification for matters outside your control
• One-sided indemnification obligations

Real-world impact: A technology company agreed to uncapped indemnification for IP infringement in a customer contract. When the customer was sued for patent infringement related to the technology, the company faced a $15 million settlement despite the contract value being only $500,000.

3. Inadequate Limitation of Liability Provisions

Limitation of liability clauses that contain critical carve-outs or exceptions can render the protection ineffective. Be wary of:

• Exclusions for data breaches or confidentiality violations
• Carve-outs that effectively swallow the limitation
• Limitations tied to insurance coverage rather than contract value

Real-world impact: A SaaS provider with a $50,000 contract included a standard limitation of liability capped at fees paid, but with an exception for "data security incidents." When a breach occurred, they faced $3.5 million in remediation costs and customer claims with no contractual protection.

4. Change of Control Provisions with Hidden Consequences

Change of control provisions can significantly impact corporate transactions if not properly identified. Look for:

• Termination rights triggered by ownership changes
• Consent requirements for assignment
• Acceleration of payment obligations
• Anti-assignment clauses that function as change of control provisions

Real-world impact: A company being acquired failed to identify change of control provisions in key customer contracts representing 40% of their revenue. Post-acquisition, these customers exercised termination rights, reducing the company's valuation by $25 million and triggering earnout disputes.

5. Vague Service Level Agreements (SLAs)

Imprecise SLAs can lead to disputes about performance standards and remedies. Problematic SLAs often include:

• Undefined or subjective performance metrics
• Lack of measurement methodologies
• Inadequate or unenforceable remedies
• Missing exclusions for factors outside your control

Real-world impact: A cloud services provider agreed to a 99.99% uptime SLA without clearly defining how uptime would be measured. When the customer calculated availability differently and claimed substantial credits, the dispute resulted in litigation costing over $2 million in legal fees alone.

6. Problematic Intellectual Property Rights Allocations

IP clauses with overbroad assignments or licenses can have far-reaching consequences. Watch for:

• Assignment of background IP or core technology
• Broad licenses that extend beyond the contract's purpose
• Unclear ownership of derivative works or improvements
• Failure to address third-party IP

Real-world impact: A software development company inadvertently assigned ownership of its core algorithms to a customer through an overbroad IP clause. Reacquiring the rights cost $4 million and delayed a planned acquisition.

7. Termination Clauses with Unintended Consequences

Termination provisions can contain hidden traps that make exit difficult or costly. Be alert to:

• Extended notice periods
• Substantial early termination fees
• Post-termination obligations that create ongoing liability
• Limited termination rights for the customer

Real-world impact: A company attempted to terminate an underperforming vendor but discovered their contract required six months' notice and payment of all fees for that period. Additionally, the termination assistance provisions required the vendor's cooperation for transition but without specific deliverables, creating a costly and difficult exit.

8. Data Use and Privacy Compliance Gaps

Data-related provisions that fail to address regulatory requirements can create significant compliance risks:

• Outdated privacy compliance language
• Unclear data ownership and usage rights
• Insufficient data security requirements
• Missing breach notification obligations

Real-world impact: A company's vendor contract lacked specific GDPR compliance requirements and clear data processing terms. When the vendor experienced a breach affecting EU customers, the company faced regulatory penalties of €2 million for failing to have appropriate contractual safeguards in place.

9. Most Favored Nation (MFN) Clauses

MFN provisions can create unexpected pricing obligations and administrative burdens:

• Broad language covering all customers rather than similar customers
• Lack of materiality thresholds
• Retroactive application requirements
• Difficult compliance verification mechanisms

Real-world impact: A service provider agreed to an MFN clause with its largest customer. When the provider later offered a temporary discount to a smaller customer, the large customer demanded the same discount applied to their much larger volume, resulting in an unplanned $3.5 million revenue reduction.

10. Dispute Resolution Provisions That Create Disadvantages

Poorly drafted dispute resolution clauses can place you at a significant disadvantage when conflicts arise:

• Unfavorable jurisdiction and venue selections
• Waiver of jury trial rights without consideration of implications
• Arbitration provisions that specify costly procedures or biased forums
• Limitations on available remedies

Real-world impact: A company based in California agreed to a contract with dispute resolution in a foreign jurisdiction under unfamiliar laws. When a dispute arose, they faced not only the substantive disagreement but also the need to hire foreign counsel and navigate an unfamiliar legal system, increasing legal costs by 300% and resulting in an unfavorable outcome.

How to Protect Your Organization

To avoid these costly contract pitfalls:

1. Implement systematic contract review processes that specifically target these high-risk provisions
2. Utilize contract analysis technology to identify problematic clauses across your contract portfolio
3. Develop a playbook of acceptable terms and fallback positions for negotiation
4. Maintain a contract calendar to track key dates such as renewal notice periods
5. Conduct regular contract audits to identify and remediate risky provisions in existing agreements

Conclusion

The most dangerous contract provisions are often those that seem standard or are buried deep within lengthy agreements. By understanding these common "gotchas" and implementing systematic review processes, organizations can significantly reduce their contractual risk exposure and avoid costly disputes.

Remember that contract review is not merely a legal formality—it's a critical risk management function that can protect your organization from potentially devastating financial consequences.