Top 5 Risk Clauses You Should Never Skip in a Contract

Every contract is a tool to manage expectations—and risks. When businesses form agreements without clearly allocating risks, even a small misunderstanding can escalate into a costly legal dispute. That’s why including the right risk clauses in commercial contracts is essential for legal protection and business clarity.

In this article, we explore the five most important risk clauses you should never skip when drafting or reviewing a commercial contract. These provisions form the legal foundation for managing financial exposure, liability, and unexpected disruptions.

1. Limitation of Liability Clause

A limitation of liability clause sets a cap on how much one party has to pay if something goes wrong. This is one of the most critical risk clauses in commercial contracts because it helps prevent catastrophic financial losses.

Key points to include:

• A maximum liability amount (e.g., capped at the contract value)
• Exclusion of indirect or consequential damages
• Separate treatment for intentional misconduct or gross negligence

Example: A SaaS provider may limit its liability to the fees paid in the last 12 months to avoid lawsuits over lost profits from service interruptions.

Without this clause, parties may be exposed to unlimited damages, including those beyond their control.

2. Indemnity and Hold Harmless Clause

An indemnity clause requires one party to compensate the other for losses or legal claims caused by specific actions or events.

What to clarify:

• Scope of indemnity (e.g., third-party claims, IP infringement)
• Procedures for defending claims
• Whether the indemnified party has the right to control legal defense

Hold harmless language often accompanies indemnity clauses, emphasizing that the indemnified party won’t bear financial responsibility.

These clauses are especially important in contracts involving intellectual property, licensing, construction, or subcontracting.

3. Force Majeure Clause

A force majeure clause frees both parties from liability when unexpected events beyond their control prevent them from fulfilling their obligations.

Common covered events:

• Natural disasters (earthquakes, floods)
• Pandemics and public health emergencies
• Government shutdowns or embargoes
• Wars or civil unrest

What to include:

• Clear definitions of qualifying events
• Notice requirements
• Suspension vs. termination of obligations

The COVID-19 pandemic taught many companies the value of a well-drafted force majeure clause. Without it, parties may still be held accountable despite impossible circumstances.

4. Governing Law and Jurisdiction Clause

When a contract dispute arises, which country’s laws apply? Which courts will handle it? A governing law and jurisdiction clause provides clarity and avoids forum shopping.

Considerations for this clause:

• Choose the legal system that aligns with your commercial interests
• Specify whether disputes will be resolved in court or through arbitration
• Distinguish between governing law (which laws apply) and jurisdiction (where disputes are heard)

This clause becomes especially important in cross-border or international contracts. Without it, litigation can become expensive, confusing, and lengthy.

5. Insurance and Risk Allocation Clause

Contracts often involve physical goods, data, employees, or third parties—all of which carry risk. That’s where insurance and risk allocation clauses come in.

Key elements:

• Who is responsible for insuring the project, product, or property
• Minimum insurance coverage levels (e.g., general liability, cyber liability)
• Requirement to name the other party as an additional insured

In construction and supply chain contracts, for example, these clauses reduce disputes when property is damaged or someone is injured.

By clearly assigning responsibilities and insurance duties, both parties are financially protected if something goes wrong.

Conclusion

Commercial contracts are more than just business agreements—they are legal shields. Including essential risk clauses in commercial contracts ensures your business is protected against liability, losses, and uncertainty.

From limiting financial exposure to clearly defining legal obligations in unexpected situations, these five clauses—limitation of liability, indemnity, force majeure, governing law, and insurance—are fundamental. Skipping them can leave your company vulnerable.

So before signing your next deal, make sure your contract isn’t missing these vital protections.