A business contract should be reviewed as a system, not as a collection of isolated clauses. A favorable liability cap may exclude the claims most likely to create significant exposure. A termination right may be less valuable if important obligations survive termination. California law can also affect provisions that appear routine in agreements drafted elsewhere.

Before signing a significant business contract, companies should understand both the commercial deal and how the agreement allocates risk if the relationship does not go according to plan.

1. Confirm Exactly What Each Party Is Required to Do

The agreement should clearly identify the products, services, deliverables, deadlines, performance standards and dependencies involved in the transaction. If multiple documents govern the deal—such as a master services agreement, statement of work and purchase order—the contract should establish which document controls when terms conflict.

2. Understand the Entire Payment Structure

The contract price is only one component of the economics. Review invoicing requirements, payment deadlines, deposits, expenses, minimum commitments, price increases, late charges, disputed-invoice procedures, refunds, renewal pricing and obligations that continue after termination.

3. Read the Indemnification Provision Carefully

Indemnification provisions can create exposure far beyond the amount a company expects to earn from a contract. Under California Civil Code section 2778, default rules apply to indemnity agreements unless a contrary intention appears. Those rules can include defense costs and, upon request, a duty to defend proceedings embraced by the indemnity.

In Crawford v. Weather Shield Mfg., Inc. , the California Supreme Court explained that, unless the agreement provides otherwise, the statutory duty to defend can arise upon a proper tender before the underlying litigation determines whether indemnity is ultimately owed.

Review what triggers indemnification, whether it covers third-party claims or direct claims, who controls the defense and settlement, whether intellectual-property claims are covered, and whether indemnification is subject to the agreement's limitation of liability.

4. Determine What the Limitation of Liability Actually Limits

A liability cap should not be evaluated solely by its dollar amount. Determine which claims are capped, which are carved out, whether consequential or lost-profit damages are excluded, whether the provision is mutual, and whether indemnification, confidentiality, data-security or intellectual-property claims receive different treatment.

California Civil Code section 1668 restricts contractual efforts to exempt a party from responsibility for specified misconduct. In New England Country Foods, LLC v. VanLaw Food Products, Inc. (2025), the California Supreme Court held that section 1668 invalidates limitations on damages for willful injury to the person or property of another. The Court also made clear, however, that section 1668 does not prevent parties from limiting liability for a pure breach of contract absent a violation of an independent duty within the statute's scope.

5. Check Termination and Automatic Renewal Provisions

Review the initial term, renewal periods, notice deadlines, termination for cause, cure periods, termination for convenience, early-termination charges, post-termination obligations and provisions that survive. A contract may technically permit termination while making it commercially expensive.

6. Identify Any Personal Guaranty

Business owners should determine whether they are signing solely on behalf of an entity or also assuming personal obligations, particularly in leases, financing and credit arrangements. Review separate guaranties, exhibits and signature blocks—not just the main body of the agreement.

7. Review Intellectual Property Ownership

Contracts involving software, content, designs, inventions, technology or branding should distinguish pre-existing intellectual property from material created during the engagement and should address ownership, assignments, licenses and post-termination rights expressly where appropriate.

8. Examine Confidentiality, Data and Security Obligations

Review what information is protected, permitted uses and disclosures, security requirements, exclusions, return or destruction requirements and duration. If the relationship involves personal information, customer data or regulated information, a generic confidentiality clause may not be enough.

9. Check Assignment and Change-of-Control Restrictions

Ask whether either party may assign without consent, whether assignments to affiliates are permitted, whether assignment is allowed in connection with a merger or sale, whether a change of control is treated as an assignment, and whether consent may be withheld in the other party's discretion.

10. Do Not Ignore Attorneys' Fees

Under California Civil Code section 1717, when a contract provides for attorneys' fees to enforce the contract, the prevailing party in an action on the contract may be entitled to reasonable attorneys' fees even if that party was not the party expressly identified in the provision, subject to the statute's requirements. A seemingly one-sided fee clause therefore may not operate that way in California contract litigation.

11. Review Liquidated Damages and Similar Charges

California Civil Code section 1671 addresses contractual liquidated-damages provisions. For many non-consumer commercial contracts, a liquidated-damages provision is generally valid unless the party seeking to invalidate it establishes that it was unreasonable under the circumstances existing when the contract was made, subject to the statute's exceptions and other applicable law.

12. Read the Dispute-Resolution Provisions Before There Is a Dispute

Determine which law governs, where litigation may be filed, whether arbitration or mediation is required, which procedural rules apply, and how fees and costs are allocated.

California presents an important trap for forms borrowed from other jurisdictions. In Grafton Partners L.P. v. Superior Court , the California Supreme Court held that predispute contractual jury-trial waivers are not enforceable in California judicial proceedings under the state's existing statutory framework. Businesses using out-of-state forms should not assume a jury-waiver clause will operate in California as it might elsewhere.

13. Consider Restrictive Covenants

California Business and Professions Code section 16600 broadly restricts contractual restraints on lawful professions, trades and businesses, subject to statutory exceptions. The analysis depends heavily on context. Employee noncompetition restrictions are subject to particularly stringent California rules, while the California Supreme Court held in Ixchel Pharma, LLC v. Biogen, Inc. that a rule-of-reason standard applies to a contractual restraint by which one business is restrained from engaging in a lawful trade or business with another business. Sale-of-business transactions also have statutory exceptions. Restrictive language should therefore be reviewed in the context in which it will operate rather than copied from a form used elsewhere.

14. Read the Contract as a Whole

California Civil Code section 1641 provides that a contract should be considered as a whole so its provisions can be given effect together where reasonably practicable.

Consider an agreement containing a $100,000 liability cap, an indemnification obligation, a carveout excluding indemnification from the cap, and a duty to defend. If a covered third-party intellectual-property claim is tendered, defense obligations may arise before liability is finally determined and may sit outside the $100,000 headline cap. The practical exposure can therefore be many multiples of the number a reader sees in the limitation-of-liability section.

This interaction among provisions is one reason legal contract review should focus on the agreement as a whole rather than merely searching for obviously unfavorable language.

15. Ask What Happens If the Business Changes

Before signing a long-term agreement, consider future financing, acquisitions, a sale of the company, restructuring, expansion and changes in technology or intellectual-property use. Assignment restrictions, exclusivity provisions, minimum commitments, intellectual-property rights and change-of-control clauses can affect later transactions.

Before Signing a Significant Business Contract

There is no universal checklist that makes every agreement safe to sign. The importance of a provision depends on the economics of the transaction, the parties' leverage, the type of agreement and the consequences if the relationship fails.

Alex Nahai advises California businesses regarding the drafting, review and negotiation of commercial agreements and business transactions. Depending on the engagement, review may include identifying material legal and business issues, preparing or reviewing proposed revisions and redlines, and assisting with negotiations concerning significant contract terms.

For a material commercial agreement, have the agreement reviewed before you sign, while there is still an opportunity to negotiate the allocation of risk.

This article is for general informational purposes only and does not constitute legal advice. The application of California law depends on the particular agreement, transaction and circumstances. Reading this article does not create an attorney-client relationship.