Commercial contracts are a foundational element of any business. Whether you’re a startup, a well-established company, or somewhere in between, these agreements set the stage for how business will be conducted, outline roles and expectations and, when crafted carefully, protect all parties involved. But contracts can also be a minefield – one wrong clause or vague language can lead to possible conflicts down the road. By understanding the top issues to look out for in every contract, you can help ensure that your business interests are safeguarded.
The following five key areas are ones businesses should pay close attention to when dealing with commercial contracts.
1. Ownership and Licenses: Who Owns What?
One of the most frequent – and costly – points of contention in commercial contracts centers around ownership. This is especially true when it comes to intellectual property, software or content created during the course of a business relationship.
- Ownership — It’s critical to clearly define who owns the deliverables – whether that includes software, design work or other products created during the contract. If your business is commissioning custom software development, for instance, you need to know whether you’re simply getting a license to use it, or if you’re actually purchasing full ownership rights. If ownership is being transferred, it needs to be explicitly stated in the contract with the proper legal terms.
- Licensing — If ownership isn’t transferred, then you need to define the scope of the license. Are you allowed to modify the work, resell it, or simply use it internally? Understanding the specifics here will prevent issues like unauthorized use or future disputes over what you can and can’t do with the product.
Setting these terms upfront helps everyone involved understand their rights, reduces confusion and prevents costly legal disputes later on.
2. Warranty Terms: What Happens If Something Goes Wrong?
Warranties act as assurances that the product or service you’re purchasing will meet a certain standard of quality. But just like with ownership, unclear warranty terms can cause a lot of frustration. Here’s what to look for:
- Time Period — Warranties should have a clear time limit – whether that’s 30 days, 90 days, a year, or other cap. This will vary depending on the type of product. If you’re purchasing a product or service, you want to know how long you have to return or request repairs if something goes wrong.
- Remedies — If the product or service fails, what happens next? In most contracts, the available remedies are repair, replacement or a refund. Vendors will want to ensure these are the exclusive remedies to prevent further legal action. Customers, however, will want to ensure their rights aren’t too limited.
- Disclaimers — Often, contracts will contain disclaimers that limit any implied warranties, like those the law might automatically impose. Vendors often include this language to avoid unanticipated liabilities, but customers should be aware of these disclaimers and ensure they don’t leave them with inadequate protection.
3. Indemnity: Who Pays If Someone Else Sues?
Indemnity clauses are about determining who bears the financial responsibility if a third party sues. These clauses are particularly important in industries involving intellectual property, product liability and potential personal injury.
- Indemnity in Action — If you sell a product that causes harm to a third party, an indemnity clause could require you to defend your customer and pay any associated damages. This can include product liability issues and more serious claims, like bodily injury. Software licensors will indemnify their customers for intellectual property infringement claims based on the licensor’s software.
- Exceptions — It’s equally important to define the exceptions. For example, if your customer caused the harm themselves, then you shouldn’t be responsible for indemnifying them. These exceptions are typically tailored according to the indemnities that are provided.
- Procedures — Who will handle the defense? Who gets notified if a lawsuit is filed? These details should be clearly spelled out to avoid confusion if a lawsuit does occur.
4. Limiting Liability: How Much Can You Be Sued For?
One way to reduce your risk exposure in a commercial contract is through a limitation of liability clause. This clause sets a cap on the amount you can be sued for, which can help protect your business from catastrophic financial losses.
- Caps and Limits — Many contracts will have a cap, such as limiting liability to the total amount paid under the contract. Some contracts also include higher caps for certain areas, like indemnity claims or breaches of contract.
- Exclusions — Another common contract feature is the exclusion of specific types of damages, like lost profits or indirect losses. Vendors often want to exclude these, as they can be difficult to predict and might lead to excessive claims. But customers need to carefully consider these exclusions, as they could potentially expose them to financial risk if something goes wrong.
By setting clear limits on how much can be claimed, a limitation of liability clause helps prevent an otherwise manageable legal issue from turning into a financial disaster.
5. Data Usage, Content Ownership and AI: What’s Happening to Your Data and Content?
In the digital age, data and content are some of the most valuable assets a business holds. But with this value comes increased responsibility to handle that data and content appropriately. Contracts should clearly outline how both data and content are used, especially when it comes to the growing number of privacy laws, as well as the role of artificial intelligence (AI) in processing and analyzing these assets.
- Data Usage — The first thing to clarify is how the vendor will use any personal, business or sensitive data shared during the course of the contract. Will the data be used strictly to deliver the agreed services, or will it be utilized for other purposes – such as analytics, advertising or improving their product offerings? This distinction should be made clear so there are no surprises later on.
- Content Ownership — For businesses creating original content (such as articles, designs, videos or software code), defining ownership is critical. Who owns the content created during the contract? Is it the customer, or does the vendor retain some rights? This becomes especially important when third parties (like contractors or freelancers) are involved. It’s essential to define whether the customer has full ownership, or if they only have a license to use the content in certain ways.
- AI and Content Use — As AI continues to play a more significant role in business operations, understanding how AI interacts with your content is crucial. Will the vendor use AI to analyze, modify or learn from your content to improve and train their own services? For example, if the vendor is using AI to improve its products or services based on customer content, they should specify how this data or content is being used in this context. Are they retaining rights to any insights or products derived from your content? Will your content be used to train AI models or be shared with third parties for this purpose?
It’s essential to ensure that any AI-related use of content is disclosed, and that permissions are clearly outlined. As the customer, you should understand whether your content will be stored, reused or transformed in ways you may not have anticipated, and whether you retain control over how it is ultimately used.
- Compliance and Privacy Laws — Alongside content and data usage, make sure that vendors comply with relevant data protection laws (such as GDPR, CCPA or HIPAA). If AI is involved in processing data or content, ensure that the vendor follows strict security measures to protect sensitive information from breaches or unauthorized access.
- Transparency and Consent — Lastly, transparency is key. If AI is being used to process or learn from your content, you should be fully informed of how it’s happening and consent to it. This helps mitigate risks related to privacy violations, intellectual property concerns and compliance issues.
With data and content becoming even more central to business operations, especially in the context of AI, it’s crucial that contracts clearly address how both are used, protected and managed. This not only protects your business, but also ensures that customer relationships remain transparent and built on trust.
Conclusion
These five areas in commercial contracts – ownership, warranties, indemnity, liability and data usage – are often seen as legal jargon, but in reality are about managing practical, real-world risks. Understanding these key issues will help ensure you don’t get caught off guard by unexpected obligations or conflicts.
It’s also worth noting that contracts contain various other important clauses, including those related to revenue recognition, epidemic failure or return policies, which should also be carefully reviewed based on your role in the contract. Grasping these terms and knowing why they matter will make it easier to navigate contracts – and to negotiate terms that protect your business in the long run.
For more information on the importance of legal counsel in complex contract reviews and negotiations, please contact Chiara Portner, or your regular Lathrop GPM attorney.