Table of Contents

Introduction

Contracts can look perfectly fine on the surface—until you’re in the middle of a deal and realize a critical clause was missing, expired, or never enforceable. If you’re a startup founder, consultant, investor, or legal advisor conducting due diligence, spotting risky clauses early can save you serious time, money, and future disputes.

This FAQ is for anyone involved in reviewing or preparing contracts for investment, mergers, partnerships, or regulatory filings. We’ll walk through the common contract risks flagged during due diligence—and explain what to do about them in plain English.

Q1: What are the most common contract risks flagged during due diligence?

The most common contract risks is unclear termination clauses. These clauses define when and how either party can end the agreement. If they are vague or missing entirely, you could be stuck in a contract you can’t legally exit—or worse, exposed to penalties for doing so.

✅ What to check:

Does the contract allow termination for convenience?
Are notice periods clearly defined?
Is there a termination for breach, insolvency, or force majeure?

📌 Tip: Make sure termination rights are mutual. One-sided clauses often raise red flags for investors or acquirers.

Q2: Why are missing or expired signatories a legal problem?

A contract is only valid if it’s been signed by someone with the legal authority to do so. During due diligence, we often find:

Documents signed by unauthorized individuals
Signatories who are no longer with the company
Outdated powers of attorney

These issues cast doubt on enforceability. If the person who signed the deal wasn’t authorized, the entire contract could be challenged in court.

📌 Tip: Always check corporate records and board resolutions that grant authority to sign.

Q3: How do automatic renewal clauses cause contract risks?

Contracts that automatically renew unless terminated in a narrow window can trap companies in long-term obligations. This is a huge issue if the renewal locks you into pricing, deliverables, or exclusivity that no longer aligns with your business model.

📌 What to watch for:

Auto-renewal terms buried in small print
Renewal periods that exceed one year
Clauses that don’t require both parties’ consent

✅ Pro tip: Always flag auto-renewals during diligence and negotiate opt-out rights in advance.

Q4: What’s the common contract risk with indemnity and liability clauses?

Overly broad indemnity clauses can leave your company exposed to unmanageable legal or financial risks. In due diligence, we often find one-sided clauses where one party assumes full responsibility—even for the other party’s mistakes.

⚠️ What to avoid:

Unlimited liability for indirect or consequential losses
Indemnities that don’t have any cap
Obligations to defend and hold harmless without conditions

📌 Tip: Negotiate caps on liability and exclude indirect losses unless necessary.

Q5: How do “governing law” clauses affect enforceability?

Contracts are only as enforceable as the laws that govern them. Common contract risks during due diligence are a mismatch between the governing law clause and the actual business location or transaction.

For example, if your contract applies UAE law but both parties operate in Egypt with no UAE presence, this may create complications for enforcement, court access, or dispute resolution.

📌 Best practice:

Align governing law with jurisdiction where the contract will be enforced
Ensure dispute resolution methods (e.g., arbitration, courts) are accessible and valid in the selected jurisdiction

Q6: Should I be worried about intellectual property (IP) clauses?

Absolutely. If your contract includes deliverables like software, creative work, or inventions, make sure IP ownership is clearly spelled out. During due diligence, vague or missing IP clauses can signal legal landmines.

Red flags include:

No assignment of IP rights from contractors or freelancers
Joint ownership without clear boundaries
Failure to transfer IP after project completion

📌 Always secure written IP assignments, especially in contractor or development agreements to avoid these common contract risks.

Q7: Are non-compete and non-solicit clauses enforceable?

Not always. Some jurisdictions limit or ban these clauses entirely, especially if they restrict workers from earning a living. That’s why we flag these during contract reviews—enforceability depends on where you operate.

📌 What to consider:

Does local law allow non-competes or non-solicits?
Are the scope, duration, and geography reasonable?
Is the clause tailored to protect legitimate business interests?

Tip: Use narrowly tailored language and avoid “template” clauses copied from foreign jurisdictions as they are among common contract risks.

Bonus Tip: Don’t Overlook Expired or Undated Contracts

Many businesses forget to check if contracts are still valid or legally binding. If the contract is undated or references outdated terms (e.g., pre-GDPR privacy policies or expired milestones), it weakens your legal position.

✅ Always verify:

Signature dates
Duration and expiry terms
Amendment history

Missing dates or amendments can also delay investment or acquisition due diligence thus among the common contract risks.

Closing Thoughts + Call-to-Action

Contract due diligence isn’t just about checking boxes—it’s about protecting your business, especially when investors, regulators, or partners are involved. By spotting the seven common contract risks above early, you can avoid legal headaches and negotiate from a position of strength.

💼 Still have questions about common contract risks in your contracts?

Book a consultation with our team
Download our free “Due Diligence Contract Checklist”
Or explore our case study on how we helped a startup avoid a $100K liability

5 Common Contract Risks We Flag in Due Diligence