Too often, businesses sign whatever terms a customer puts in front of them, eager to close the deal and move on. But no deal is always better than a bad deal. According to the World Commerce and Contracting, the average business loses almost 9% of its annual revenue through poor contract management. For worst performers, that figure climbs to 15-20%. A landmark 2024 study by Deloitte and DocuSign put the global cost of poor agreement management at approximately $2 trillion per year.
These are not abstract numbers. They represent real margin erosion, avoidable disputes, and commercial relationships that sour because nobody scrutinised the small print. Whether you are a supplier entering a new customer contract or a buyer formalising a procurement arrangement, understanding what to look for before you sign is one of the most commercially valuable skills your organisation can develop.
This guide walks through six critical areas every business should examine in any commercial contract, along with practical advice on how to protect your position.
1. Contract Term Period and Renewal Mechanisms
Why It Matters
The contract term defines your commercial commitment. Get it wrong, and you could find yourself locked into unfavourable arrangements for years, or caught off guard by an auto-renewal you never intended to accept.
Research from Sirion AI and GatekeeperHQ reveals that 56% of businesses miss contract expirations monthly, and 71% of businesses cannot locate at least 10% of their contracts. These missed deadlines frequently trigger unwanted auto-renewals that create unexpected costs.
What to Check
- Start and end dates: Confirm the contract clearly states both. The service commencement date may differ from the contract effective date, so ensure both are defined.
- Extension clauses: Are extensions mutual, or can the customer extend unilaterally? Extensions should require agreement from both parties.
- Auto-renewal provisions: 69% of software contracts contain an auto-renew clause with a cancellation notice period between 30 and 90 days. If you miss the notice window, you are locked in for another term at potentially inflated rates. One technology company discovered that 15 of its SaaS contracts had auto-renewed at inflated rates, costing over £200,000 annually.
- Break clauses: Can either party exit before the end of the term, and under what conditions?
Practical Tip
Implement a calendar system to track all key contract dates, including renewal notice deadlines, at least 90 days before they fall due. This single step can prevent thousands of pounds in unnecessary expenditure.
2. Payment Terms and Late Payment Protections
Why It Matters
Cash flow is the lifeblood of any business, and vague or one-sided payment terms are a common source of commercial friction. Your contract must define precisely when and how you get paid.
What to Check
- Payment timelines: The standard is payment within 30 days of invoice. The UK Government's Prompt Payment Code requires signatories to pay 95% of invoices within 60 days and to work towards 30-day payment as standard.
- Invoice requirements: What documentation must accompany each invoice? Purchase order numbers, timesheets, delivery confirmations -- understand precisely what is needed to trigger payment.
- Disputed invoices: What happens if the customer disputes an invoice? The contract should define a clear dispute process that does not allow the customer to withhold payment on the undisputed portion.
- Late payment interest: Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses have a statutory right to charge interest on late payments at 8% above the Bank of England base rate, plus a fixed sum for recovery costs. Ensure your contract does not waive these statutory rights.
Procurement Act 2023 Context
For public sector contracts, Section 70 of the Procurement Act 2023 now requires publication of payment information on the Central Digital Platform, increasing transparency over public sector payment practices. This is a welcome development for suppliers who have historically struggled with late payment from public bodies.
3. Termination Clauses
Why It Matters
Every contract must eventually end. The question is whether it ends on your terms or someone else's. Poorly drafted termination clauses leave businesses trapped in failing relationships or exposed to sudden exit without adequate protection.
What to Check
- Termination for convenience: This allows either party to exit the contract by giving notice, without needing to demonstrate fault. As a supplier, having this clause protects you if the relationship deteriorates. As a buyer, it provides flexibility if your needs change.
- Termination for material breach: This is reasonable, but "material breach" must be clearly defined. Avoid vague language that allows the other party to claim almost any performance shortfall as grounds for termination.
- "Death by a thousand cuts" clauses: Watch for clauses that allow termination based on an accumulation of minor breaches. These can be used to build a case for exit even when individual issues are trivial.
- Notice periods: How much notice is required, and does the terminating party need to give the other side an opportunity to remedy the breach before termination takes effect?
- Wind-down obligations: What happens after termination? The contract should address data return or destruction, transition assistance, and final payments.
Key Termination Triggers to Monitor
Beyond breach and convenience, watch for termination rights triggered by change of control (mergers and acquisitions), insolvency events, regulatory non-compliance, and data breaches. In an era of frequent corporate transactions, change of control provisions are increasingly important.
4. Liability Caps and Indemnities
Why It Matters
Liability and indemnity clauses define your financial exposure if something goes wrong. The Harvard Business Review estimates that anywhere between 5-40% of a contract's value can be lost due to poor management of these provisions.
Liability Caps -- What to Check
- Overall cap: Your liability should be capped at a reasonable level, typically aligned with your insurance coverage at 100-150% of the contract value.
- Reciprocity: Liability limits must apply to both parties. If only your liability is capped while the customer's remains undefined, you are accepting a fundamentally unbalanced position.
- Exclusions from caps: Certain liabilities are typically carved out from caps, including fraud, wilful default, death or personal injury, intellectual property infringement, data breaches, and confidentiality breaches. Understand what sits outside the cap.
- Direct vs indirect losses: Contracts often exclude liability for indirect or consequential losses. Ensure you understand what each party considers "indirect" and whether this exclusion is mutual.
Indemnities -- What to Check
Indemnities function as contractual insurance provisions for future events. They require one party to compensate the other for specific losses.
- Avoid unlimited indemnities: Every indemnity should be subject to a cap, ideally aligned with the overall liability limit.
- Common indemnity areas: Confidentiality breaches, intellectual property claims, data protection violations, and legal infractions.
- Scattered clauses: Indemnity obligations are frequently scattered throughout a contract rather than consolidated in one section. Search the entire document -- do not assume they are all in the liability clause.
5. Force Majeure and Data Protection
Force Majeure
Post-COVID, force majeure has become one of the most scrutinised clauses in commercial contracts. Numerous disputes arose during the pandemic because many contracts contained force majeure provisions too narrowly drafted to cover a pandemic.
Best practice for force majeure clauses includes:
- Ensuring the clause lists specific triggering events (pandemics, natural disasters, wars, government actions) rather than relying on general language
- Defining notification requirements and timelines -- how quickly must the affected party notify the other?
- Specifying the consequences: suspension, extension, or termination of obligations
- Including a materiality threshold so minor disruptions do not trigger the clause
- Addressing whether partial performance is acceptable during the force majeure event
Data Protection and GDPR
Any contract involving the processing of personal data must address data protection obligations. Under UK GDPR and the Data Protection Act 2018, Article 28 requires a Data Processing Agreement (DPA) that sets out:
- Which party is the data controller and which is the data processor
- The subject matter, duration, nature, and purpose of processing
- The type of personal data and categories of data subjects
- Security measures required of each party
- Sub-processor provisions and approval mechanisms
- Breach notification timelines (72 hours under UK GDPR)
- Data return or destruction obligations upon contract termination
This is a mandatory legal requirement, not an optional addition. If your contract involves personal data and lacks a DPA, both parties face regulatory risk.
6. Dependencies, Intellectual Property, and Dispute Resolution
Dependencies
Dependencies represent what the other party must do to enable you to perform your contractual obligations. These are frequently overlooked but are commercially critical.
If you are contractually obligated to deliver a service, the customer should have corresponding obligations -- providing access, supplying information, making decisions within agreed timescales, and allocating their own resources. Without clearly defined dependencies, you risk being held responsible for delays that are not your fault.
Intellectual Property
If your contract involves the creation of work product, software, or creative outputs, IP ownership must be clearly defined:
- Background IP vs foreground IP: Background IP (what each party brings to the contract) should remain with the originating party. Foreground IP (what is created during the contract) needs clear ownership provisions.
- Licence grants: If one party retains ownership, what licence does the other party receive? Define the scope, duration, and any restrictions.
- Sub-licensing rights: Can the licence holder grant rights to third parties?
Dispute Resolution
Establish a structured escalation process before disputes reach the courtroom:
1. Project level: Issues raised and addressed between operational teams
2. Management level: Escalation to senior management with defined timescales
3. Executive level: Final internal escalation to directors or executives
4. Mediation: Alternative dispute resolution before litigation
5. Litigation or arbitration: The last resort, with choice of law and jurisdiction clearly specified
Mediation is typically faster, less expensive, and less damaging to the commercial relationship than court proceedings. Your contract should require parties to attempt mediation before pursuing litigation.
Building a Contract Review Checklist
A structured approach to contract review ensures consistency and prevents important clauses from being overlooked. As Spellbook's 2025 Contract Review Checklist Guide notes, "A clear checklist strengthens collaboration across legal, sales, finance, and procurement by creating a shared review standard."
Your checklist should cover, at minimum: term and renewal; payment terms; termination rights; liability and indemnity; force majeure; data protection; IP ownership; dependencies; insurance requirements; change control; confidentiality; and dispute resolution.
89% of organisations feel their contract process is ineffective, according to the World Commerce and Contracting. A simple checklist is the first step toward changing that.
How Athena Commercial Can Help
Contracts do not need to be intimidating. With the right guidance, your organisation can negotiate balanced terms, protect its commercial interests, and enter agreements with confidence. Athena Commercial provides practical, affordable contract review and commercial advisory services as an alternative to traditional legal counsel. We help businesses of all sizes understand their contracts, identify risks, and negotiate better outcomes.
To discuss how we can support your contract management processes, visit www.athena-commercial.co.uk (add link - https://www.athena-commercial.co.uk) or contact our team directly.
