Spot the 9 Red Flags in Your Supply Agreements
Read more to understand what you should keep an eye out for when looking through your supply agreements - whether you’re the client or the supplier.
In 2024 alone, 7,895 government entities and large businesses reported procuring from small business suppliers, with an average of 30.2% of procurement value flowing to small businesses.
Despite this, many startups and SMEs face cash flow pressures and legal risks due to poorly drafted contracts, unfair payment terms and hidden red flags. Understanding what to look out for in these agreements is essential not just to avoid disputes, but to ensure enforceability and long-term sustainability.
While some risks in supplier agreements come from oversight, others are deliberately built into contracts in the form of one-sided clauses. These red flags often appear subtle, but they can seriously disadvantage small businesses if left unchallenged. Identifying them early allows businesses and startups to negotiate fairer terms or walk away before signing.
Businesses can avoid disputes involving supplier and commercial agreements by looking for the following nine red flags in their contracts:
Unilateral termination rights
Automatic renewal clauses
Uncapped indemnities
Unfair payment terms
Restrictive exclusivity clauses
Ambiguous definitions
Jurisdiction clauses in distant locations
Unilateral variation clauses
Excessive termination fees or penalties
1. Unilateral Termination Rights
One of the most alarming provisions is a clause that allows the other party (often the supplier) to terminate the agreement at any time, for any reason. This creates complete instability for you as you may have invested in stock, staff or marketing in reliance on the contract. If the supplier can walk away without consequence, you bear all the commercial risk.
2. Automatic Renewal (“Evergreen”) Clauses
Many agreements quietly extend themselves at the end of the term unless notice is given, often months in advance. These clauses can lock you into long-term commitments, sometimes with unfavourable terms. It’s important that small businesses are diarising the expected renewal date to give themselves ample time to consider renewal or providing notice for termination. Prevention is better than a cure - you don’t want to be tied to suppliers you no longer want!
3. Uncapped Indemnities
To indemnify another party means to compensate them for any loss, damage or liability - an indemnity clause shifts risk from one party to another. It is reasonable for both parties to limit their liability, and typically to the contract value, or the amount owed by the small business to the supplier. However, when the liability is capped for the supplier but uncapped for you, that’s a big warning sign. This means that you would be exposed to potential claims larger than the contract value and your entire business would be at risk as you may be responsible for unlimited losses, even those caused by the supplier.
4. Unfair Payment Terms
Terms requiring payment from the small business within 24 hours or before close of business on the same day should ring warning bells. It may be unfeasible for small businesses to pay their suppliers within such limited time frames. In practice, this can choke cash flow and make it difficult for startups to cover wages and operating costs. The average small business payment term in Australia is already 35.1 days - anything shorter than 14 should raise immediate concern.
5. Restrictive Exclusivity Clauses
Some contracts prevent small businesses from buying goods or services from competitors, locking them into a single supplier regardless of price or performance. This restricts flexibility and bargaining power which is particularly dangerous for startups that need to remain agile.
6. Ambiguous Definitions
Clauses that require products or services to be of “good quality” without further clarification can create endless disputes over what a party was contractually obligated to deliver. What the supplier considers to be “good” may not meet your expectations. Without specific benchmarks, warranties, or acceptance criteria, enforcing quality becomes an uphill battle and it becomes difficult to hold suppliers accountable.
7. Jurisdiction Clauses in Distant Locations
Some agreements specify that disputes must be resolved in another state or even another country.
For example, if the contract is to be governed by unfamiliar laws of a different country, you would not only find difficulty complying with those laws, but also obtaining legal advice in Australia for disputes under those laws.
For a small business, litigating offshore is also prohibitively expensive, impractical and may have the effect of stripping them of their right to enforce the contract.
8. Unilateral Variation Clauses
Occasionally, agreements contain terms allowing the supplier to change prices, specifications or delivery timelines without the need for your prior consent. This creates uncertainty and makes financial planning impossible for startups operating on tight budgets.
9. Excessive Termination Fees or Penalties
Some contracts make it extremely difficult for you to terminate the contract early, even if supplier performance is poor. Ensure that you are able to exit the contract before the termination date without unreasonable clauses that require lump sum payments or payments of all “future expected profits.”
Key Takeaways
These red flag clauses hand all the power to the supplier while leaving you in a vulnerable position. Rushing to accept agreements without adequate review may expose your business to unnecessary risk and result in costs greater than the savings you would have otherwise obtained from entering into the agreement earlier.
In industries like construction, where 43.6% of procurement value comes from small business suppliers, you are more vulnerable to unfair terms. By identifying red flags in advance, you can negotiate more favourable terms or walk away from contracts that create unnecessary exposure.
Many small businesses skip legal review altogether for cost concerns. However, it’s important to note that seeking legal advice early is often cheaper than pursuing litigation or dispute resolution later on.
Having a lawyer review your contract before signing can identify and address any issues early on and put you in a stronger negotiating position.
Empirical Legal is a corporate advisory and technology law firm for startups, scaleups and SMEs.
We combine legal, technology, and business experience and expertise to deliver practical, actionable advice and solutions.
If you’re negotiating supplier or commercial agreements, Empirical Legal can help you review the contract or help you negotiate to align with your business interests and protect your business.
Reach out to Empirical Legal today.