Commercial contract basics every founder should know

Why it matters

The contracts you sign in the early years of a business have a long reach. A badly drafted supplier agreement, an unclear statement of work, or a customer contract with no liability cap can create obligations — and risks — that outlast the relationship.

You do not need to be a lawyer to read a contract usefully. You need to know what to look for and what questions to ask when something does not look right.

The clauses worth reading carefully

Not every clause in a commercial contract carries equal weight. These are the ones where the risk concentrates:

1. Liability cap. The maximum amount one party can recover from the other for a breach. If there is no cap, your exposure is unlimited. If the cap is set at the value of the contract, ask whether that is proportionate to the actual risk.
2. Indemnity clauses. An indemnity is a promise to cover a specific loss — and unlike a damages claim, it does not require the other party to prove what they lost or mitigate. Read every indemnity carefully and ask whether the risk being allocated to you is one you can manage.
3. IP ownership. Who owns anything created under the contract? If you are engaging a contractor or agency, make sure the agreement assigns intellectual property to your business — not just grants a licence to use it.
4. Termination and notice. Under what circumstances can either party end the contract, and on what notice? A long notice period in a bad relationship or a contract you cannot exit without cause can be expensive.
5. Exclusivity and non-compete. Are you agreeing not to work with competitors of the other party? What counts as a competitor? For how long? These clauses are often broader than they appear at first reading.
6. Auto-renewal. Many service contracts renew automatically unless cancelled within a specific window. Missing the window can lock you in for another year. Note every renewal date in your calendar when you sign.
7. Governing law and jurisdiction. If a dispute arises, which country's law applies and in which courts will it be resolved? For UK businesses, a contract governed by the law of a distant jurisdiction can make enforcement prohibitively expensive.

Your own standard terms

If you supply goods or services, you should have your own standard terms and conditions — and you should understand what they say. Standard terms serve two purposes: they set out the rules on which you are prepared to trade, and they limit your exposure when things go wrong.

Key things your standard terms should cover:

1. Payment terms and what happens when a client does not pay on time.
2. A clear liability cap — typically the value of the contract, sometimes less.
3. Exclusion of consequential loss — loss of profit, loss of data, reputational damage.
4. Intellectual property ownership for anything you create.
5. The right to terminate for non-payment or material breach.

Off-the-shelf standard terms are better than nothing. Professionally drafted terms are significantly better than off-the-shelf ones — and for a business doing meaningful commercial volume, the cost is worth it.

The battle of forms

When both parties have standard terms, a question arises: whose terms apply? English law uses the "last shot" rule — in a simplified form, the terms issued last before the contract is formed usually prevail. This matters when a customer sends a purchase order on their terms after you have issued a quote on yours.

The practical solution is to make it clear at the outset whose terms apply and to get written agreement — even a brief email acknowledgement — before the work starts.

When to get a lawyer involved

Not every contract needs a lawyer to review it. A standard supply agreement for a modest value, on familiar terms, from a reputable counterparty, probably does not.

Get advice when:

1. The contract value is material relative to your annual revenue.
2. The counterparty is significantly larger than you and the terms heavily favour them.
3. There is an indemnity clause covering a risk you do not fully understand.
4. There are post-termination restrictions on who you can work with.
5. Intellectual property ownership is genuinely important to the relationship.

A short contract review — an hour with a good lawyer — is often enough to identify the issues and suggest the changes worth pushing for. It is almost always cheaper than a dispute.