The Hidden Clauses Every Entrepreneur Should Understand Before Signing Anything
Contracts are full of “legal fine print” and it’s often in those hidden clauses where
business owners get trapped.
Whether you’re signing a lease, a supplier agreement, or a partnership deal,
understanding these clauses can mean the difference between a thriving business
and a costly mistake.
Here are the hidden clauses you should always look for and what they really mean.
The Indemnity Clause
What it does: Shifts responsibility for certain damages from one party to another.
Why it matters: You could end up paying for someone else’s mistakes.
Key Considerations:
Scope: Ensure the clause is specific about what losses are covered (e.g., legal fees, damages, or third-party claims). Vague terms like “all losses” can expose you to excessive risk.
Caps and Limits: Negotiate a cap on indemnity obligations to avoid unlimited liability.
Example: In a construction contract, an indemnity clause might require you to cover legal costs if a third party sues due to faulty materials supplied by your vendor. In 2023, a South African construction firm faced a R5 million payout due to an overly broad indemnity clause in a poorly reviewed contract.
The Jurisdiction Clause
What it does: Decides where disputes will be handled (e.g. Johannesburg vs. London).
Why it matters: You don’t want to be dragged into an overseas court battle.
Key Considerations:
Choice of Law: The clause should specify which country’s laws apply (e.g., South African law or English law). This affects how the contract is interpreted.
Venue: Ensure the chosen court or arbitration location is accessible and cost-effective for you.
Example: A South African tech startup signed a contract with a UK firm, only to discover disputes had to be resolved in London under English law. The startup spent over £50,000 on travel and legal fees for a single hearing in 2024.
Pro Tip: Negotiate for disputes to be handled in your home jurisdiction or a neutral one, like Singapore, known for efficient arbitration. Consider alternative dispute resolution (ADR) options like mediation to avoid court altogether.
The Non-Compete Clause
What it does: Restricts you (or the other party) from competing in a certain area or industry.
Why it matters: It can limit your future business opportunities.
Key Considerations:
Reasonableness: Courts often require non-compete clauses to be reasonable in scope, duration, and geography. For example, a clause banning you from working in your industry globally for 10 years is likely unenforceable.
Enforceability: In South Africa, non-compete clauses must balance protecting legitimate business interests with your right to earn a living, as per the Magna Alloys case (1976).
Example: A Johannesburg-based marketing professional was barred from working for competitors within a 100km radius for two years after leaving her employer. She successfully challenged the clause in court as overly restrictive, reducing the duration to six months.
Pro Tip: Negotiate narrow terms (e.g., limit the clause to one year or a specific region). Seek legal advice to ensure the clause complies with local laws.
The Escalation Clause
What it does: Allows prices or fees to increase under certain conditions.
Why it matters: Hidden price hikes can destroy your budget.
Key Considerations:
Triggers: Understand what triggers the escalation (e.g., Consumer Price Index increases or material cost spikes). Ensure triggers are objective and measurable.
Caps: Negotiate a maximum percentage increase to avoid runaway costs.
Example: A Cape Town retailer signed a lease with a 10% annual escalation clause tied to CPI. When inflation surged to 7.8% in 2024, the rent increase nearly doubled their operating costs, forcing a renegotiation.
Pro Tip: Request a fixed escalation rate or a cap (e.g., 5% per year) to maintain predictability. Review market trends before agreeing to variable escalations.
The Force Majeure Clause
What it does: Excuses performance in case of extraordinary events (pandemics, floods).
Why it matters: COVID-19 made this clause a lifeline for many businesses.
Key Considerations:
Covered Events: Ensure the clause lists specific events (e.g., floods, government restrictions) and includes a catch-all for “unforeseeable circumstances.” Vague clauses may not hold up in court.
Notice Requirements: Check if you must notify the other party within a specific timeframe to invoke the clause.
Example: During the 2020 lockdowns, a South African event company avoided penalties for canceling a festival due to a robust force majeure clause that explicitly included pandemics. In contrast, a competitor without such a clause faced R2 million in liabilities.
Pro Tip: Tailor the clause to include relevant risks for your industry or region (e.g., load-shedding in South Africa). Regularly update contracts to reflect new risks, like cybersecurity breaches.
Additional Clauses to Watch For
Beyond the five clauses above, keep an eye on these often-overlooked provisions:
Termination Clause: Specifies how and when the contract can be ended. A poorly worded clause might trap you in a bad deal or allow the other party to exit too easily.
Confidentiality Clause: Protects sensitive information but can restrict your ability to share project details with future clients or partners.
Limitation of Liability Clause: Caps the amount one party must pay for damages. Without this, you could face unlimited financial exposure.
Why Legal Review is Critical
Each of these clauses can have far-reaching implications for your business, finances, or personal career. Misinterpreting or overlooking them can lead to costly disputes, unexpected liabilities, or missed opportunities. Before signing any contract, consult a professional to ensure the terms align with your interests.
Need a contract reviewed before you sign? Speak to Legal Drafters first.
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