Five Minutes Before You Sign: A 7-Point Toxic Clause Checklist

OPUS 법무팀 · Contract Review & Automation ·

Key takeaway: Most contract disputes start with a clause someone read but didn't understand. Auto-renewal, one-sided termination rights, excessive penalties, IP assignment, confidentiality scope, jurisdiction, and liability caps are the seven points to check before you sign.

Contracts are long and written to be hard to finish. But disputes almost always start in a handful of specific clauses. Checking just the seven below screens out most of the risk.

Seven things to check before signing

  • Auto-renewal: are the notice deadline and method for cancelling unreasonably burdensome?
  • Unilateral termination: can only the other side walk away freely?
  • Penalties: does the contract state whether it's predetermined damages or a penalty for breach — the effects differ (see below)?
  • IP assignment: does ownership of everything you create transfer wholesale to them?
  • Confidentiality (NDA) scope and term: is it excessively broad or open-ended?
  • Jurisdiction and governing law: does a dispute land in a distant, unfavorable court?
  • Liability caps: is only the other side's liability capped?

Not all "penalties" are the same penalty

The "penalty" language common in contracts splits into two legal categories, and whether it's predetermined damages or a penalty for breach changes the outcome dramatically.

  • Penalty type 1 — predetermined damages (the most common; Korean Civil Act Article 398): the damages amount is fixed in advance. You can claim it without proving actual loss, and a court can reduce it if it's unreasonably excessive.
  • Penalty type 2 — penalty for breach (rare but powerful): it's a punishment for the violation, separate from damages. Even after paying it, the other side can still claim actual losses on top, and courts generally cannot reduce it.

Same clause, "KRW 100 million (~$75K) on breach" — but if it's construed as a penalty for breach, the other side can claim actual damages on top of that KRW 100 million, and your exposure is far larger.

The "it's a standard form, so it's fine" trap

Even with standard or sample templates, the other side often rewrites individual clauses in their own favor. The credibility of the template and the fairness of any given clause are two different things.

What to take away

  • Keep: Read the auto-renewal, termination, and penalty clauses yourself before signing — "It's a standard contract" does not mean that clause is fair.
  • Promote: Clean contracts let you close with bigger clients faster — The fewer clauses their legal team can object to, the faster review ends.
  • Do now: Find and flag those three clauses in the contract you're negotiating right now

Frequently asked questions

Which contract clause is the most dangerous?

Start with these seven: auto-renewal, unilateral termination rights, excessive penalties, IP assignment, confidentiality scope, jurisdiction and governing law, and liability caps.

Can I just sign if it's a standard contract?

Even with a standard template, individual clauses may have been edited in the other party's favor. Template credibility and clause fairness must be checked separately.

Is every penalty clause the same?

No. Predetermined damages can be reduced by a court, and losses beyond that amount generally can't be claimed separately. A penalty for breach allows additional claims on top of damages, and courts in principle cannot reduce it.

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