How to Read a Contract Before Signing: Key Clauses to Watch For
7 min • Consumer Law
Contracts govern nearly every aspect of modern life — employment agreements, rental leases, loan documents, service agreements, and online terms of service. Yet most people skim contracts (or skip them entirely) before signing. This is a mistake. A signed contract is legally binding, and courts generally hold that you're bound by what you signed — even if you didn't read it. Understanding key clauses before you sign can prevent costly disputes later.
The most important clauses to scrutinize: (1) Payment terms — how much, when, and under what conditions. Look for hidden fees, automatic renewal clauses, and interest rates. (2) Duration and termination — how long does the contract last and how can either party end it early? Early termination fees can be substantial. (3) Liability and indemnification — who bears the risk if something goes wrong? Some contracts include broad indemnification clauses requiring you to cover the other party's legal fees.
Watch for these red flags in consumer contracts: mandatory arbitration clauses (you give up the right to sue in court and must use a private arbitrator, often chosen by the company), class action waivers (you can't join a class action lawsuit), choice of law clauses selecting a jurisdiction favorable to the company, and one-sided modification clauses allowing the company to change terms at any time without your consent. These clauses are common in consumer contracts and often enforceable.
Don't be afraid to negotiate. Many people assume contracts are take-it-or-leave-it, but especially in employment, service, and business-to-business contracts, terms are often negotiable. Cross out or amend terms you disagree with, initial the changes, and have the other party initial them too. If the other party refuses to negotiate important terms, consider whether the deal is worth the risk. A contract that heavily favors one side is a red flag for how disputes will be handled.
If a contract is complex or involves significant money, have an attorney review it before signing. The cost of a contract review ($200-500 typically) is trivial compared to the cost of a contract dispute. At minimum, use the 'grandma test': can you explain every clause to your grandmother in plain English? If not, you need to understand it better before signing. Never sign under pressure — if someone says 'it has to be signed now,' that's a major red flag.
Key Takeaways
- You're legally bound by contracts you sign — even if you didn't read them
- Scrutinize: payment terms, duration/termination, liability/indemnification clauses
- Red flags: mandatory arbitration, class action waivers, one-sided modification rights
- Negotiate terms you disagree with — cross out, initial changes, get other party's initials
- For complex contracts: attorney review ($200-500) is cheap compared to litigation costs
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