Managing risks in contracts

09 March 2015
If News 2/2015 Liability. Companies that don't focus on contract management often fail to meet expectations with regard to quality of product or service and handling risks.​​​​

Not only does a good contract ensure delivery of agreed quality to the agreed price at the agreed time. It also favours the company’s legal position, in relation to a liability claim, if they have drafted and managed their contracts well. But even highly professional companies cannot fully avoid the risk of getting involved in disputes with their contract partners. The relationship can often turn sour and the losses can be significant.

Contract management policy

We at If encourage the use of check lists, which should include items of contract drafting and reviewing, how to handle the negotiating phase, as well as documentation and storing. Make sure that all levels of the organization have a commitment towards improving contract management.​

Contract drafting

  • Read the terms of delivery/contract wording thoroughly, even though they may be standard wording. Keep an active approach and seek to clarify such differences, don’t solely rely on your own standard terms of delivery to “outdo” your counterpart’s.
  • Choice of law and venue is important. One must know how it impacts the interpretation of the contract, and in some venues certain contract clauses may be unenforceable. Before accepting a certain jurisdiction or choice of law, you should consider if there are practicalities which need to be sorted out, or what cost you would incur if you had to establish a legal defence in a foreign jurisdiction.
  • Review your contracts from time to time. Your terms of delivery or other contracts may not always be up to date with your current needs.
  • Before contract reviews, involve stakeholders that are or may be responsible for contracts within their department. Get them involved to understand the key legal and business risk factors associated with each party and contract type and identify the areas of focus.
  • When changes are made to a contract, the contract obligations should be aligned with the terms and conditions of the company's insurance policies. If the insurance company has accepted a risk provided that a certain condition is in place, one should ensure that the new agreement does not create problems in relation to insurance coverage.

Negotiations

  • Are your negotiations handled in the best way possible? In one case, our client was represented by a bargaining team consisting of technical people who were very skilful at what they did, but who had little experience or interest in negotiating. Their contract partner managed to persuade them into accepting what turned out to be highly unfavourable terms and conditions.

Documentation and contract storing:

  • Many cases are lost due to lack of documentation. Make sure the contract itself is stored safely, but don’t forget to also keep any e-mails or other written communication that could help clarify the parties’ intentions. ​

Use clear wording

Being crystal clear allocates responsibility for fulfilment of contractual duties. Several cases we have dealt with have involved previous business partners who had not been clear enough of what they expected from each other in the project, causing disagreement and lack of trust. Even though the liability claim was a heavy burden for our insureds, for some of them the loss of reputation and the sense of personal loss caused by the business break up were almost as troubling as the litigation itself.

If a contract is drafted with a clear wording on the scope of work or delivery and the parties duties within the contract, while at the same time implementing a limitation of liability suitable to the line of business one operates within, the chances of misunderstandings and receiving a claim is less likely. However, if a claim is filed, clear expectations in a contract could facilitate managing the claim and assessing litigation risk, which again could ease potential settlement discussions.

Resolving the dispute through settlement is often a good solution for the parties, as this could minimize friction and help the parties resume a business relationship afterwards. ​

Nina Torgrimsby and Janne Karinen Sandborg