Most business owners know that contracts should cover the basics: who does what, when, and for how much. What they miss are the clauses that only matter when something goes wrong — and those are precisely the clauses that determine the financial consequences of a dispute, a failed delivery, or a parting of ways.
1. Limitation of Liability
A limitation of liability clause caps the amount one party can claim from the other — typically at a multiple of the fees paid under the contract, or at the level of relevant insurance coverage.
Without one, your liability to a commercial customer is in principle unlimited. If your software fails and your customer loses significant revenue, or your professional advice leads to a costly decision, you can be pursued for the full extent of the loss.
The most common error is having a limitation clause that does not work — because it fails to cover all heads of loss (direct, indirect, consequential), applies only to one type of claim, or contains exceptions that swallow the rule. Drafting a limitation clause that is genuinely protective requires care.
2. Intellectual Property Ownership
Who owns the work product created under the contract?
Under UK copyright law, the creator owns copyright unless the work is created by an employee in the course of employment. Freelancers and contractors are not employees. Unless there is a written agreement assigning the IP to the client, the contractor owns it — the code, the design, the content — even if you commissioned and paid for it.
The fix: every professional services contract should specify who owns IP created under the contract; what happens to background IP the contractor brings to the engagement; and what licence (if any) the client receives in background IP incorporated into the deliverables.
3. Termination Rights
Most SME contracts either have no termination clause (leaving the common law to apply, which is often unclear) or have one that is too one-sided to be useful.
A well-drafted termination clause should address:
- Termination for breach: the right to end the contract if the other party fails to perform a material obligation, after notice and a cure period
- Termination for convenience: the right to end the contract for any reason on specified notice — essential in professional services where you need to exit a relationship that is not working, even without a breach
- Termination triggers: insolvency of the other party, change of control, regulatory events
- Consequences of termination: what is owed — accrued fees, costs incurred, deliverables completed to the termination date, any cancellation charges
Without clear termination provisions, disputes about whether a party was entitled to end a contract are resolved in litigation. That is always more expensive than getting the clause right upfront.
4. Indemnities
An indemnity is a contractual obligation to compensate the other party for a specific category of loss, operating differently from a damages claim. Common indemnities in SME contracts include: third-party IP infringement (the supplier indemnifies the client if deliverables infringe a third party's rights); data protection (indemnity for losses from a party's data breach); and employee misclassification.
The danger: indemnities can override limitation of liability clauses. If your contract limits liability to the contract value but contains a broad indemnity, the indemnity may sit outside the limitation — creating uncapped exposure that the limitation was meant to prevent. Ensure indemnities are subject to the overall cap, or expressly exclude them only where there is specific reason.
5. Governing Law and Dispute Resolution
Where is a dispute resolved, and under which legal system? For UK businesses contracting with UK counterparties, the answer is usually "England and Wales, in the English courts" — and the contract should say so.
The dispute resolution mechanism also matters. Options range from litigation (public, time-consuming, expensive) to arbitration (private, often faster) to mediation (non-binding, usually cheaper) to expert determination (binding decision on a specific question). A poorly drafted arbitration clause that refers to non-existent rules, or a jurisdiction clause naming a jurisdiction where neither party can enforce a judgment, can make the clause unworkable.
6. Confidentiality
Almost every commercial relationship involves sensitive information. Almost every SME contract contains a confidentiality clause. The problem is that most are either too narrow (protecting only specific categories) or too broad (protecting everything in a way courts may not uphold).
A practical confidentiality clause should: define what is confidential; specify the obligations of the receiving party; state the duration — including post-termination; and list permitted exceptions (disclosure to professional advisers, disclosure required by law).
Post-termination confidentiality is the most commonly overlooked element. If confidentiality obligations expire with the contract, the information remains unprotected from the day the relationship ends — which is often the moment it is most at risk.
Is your IP protected in your contracts?
Most SME contracts don't deal with IP ownership properly — especially when freelancers or contractors are involved. An IP audit identifies ownership gaps before they become disputes.
Talk to Sharon about an IP audit
Bonsai Law drafts and reviews commercial contracts for SMEs and founder-led businesses. If you have contracts in use that have never been reviewed by a solicitor, contact us for a fixed-fee contract review.
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