Most business transactions, including the execution of a contract with another firm, subject a company to risk. With contracts in particular, there is always the risk that one side to the agreement will not perform as stipulated, causing a great deal of harm or loss to the other side. Although there is no way to completely eliminate the risk associated with contracting, there are certainly a number of steps that companies can take to mitigate the likelihood, as well as the impact, of a breach or other misfortune. Here are the top tips for successful contract risk management:
Incorporate Appropriate Contract Clauses
One of the strongest ways to deter a party to a contract from acting in a way that is contrary to the spirit of the agreement is by incorporating the appropriate contract clauses. With respect to risk mitigation and allocation, this includes clauses relating to indemnification, limitations of liability, and relevant disclaimers. Indemnification ensures that the party who causes harm will be the party who takes responsibility and pays for the consequences incurred as a result of their actions.
On the other hand, rather than clearly assign responsibility and agree to indemnify the other party, parties may wish to include limitations of liability, thereby avoiding responsibility in the event that certain things occur. This is similar to the disclaimer, which is essentially a repudiation or rejection of responsibility or a narrowing of one’s obligations. Regardless of how two parties to a contract decide to allocate risk, the language of the contract must make clear each side’s intentions, and it is most helpful if this is explained in the context of specific circumstances.
Mandate Rigorous Reviews
These days, attorneys are not always the ones negotiating and drafting contracts. Although automation and online tools have made it easier for laypersons to participate in the contracting process, it is generally wise to retain the services of legal counsel to ensure there is a sound agreement in place. The more rigorous the contract review process is during the drafting of the agreement, the less likely it is that there will be costly breaches or disputes down the line.
Obtain Pertinent Insurance
There is obviously no way to altogether avoid the risks associated with contracts. It is best to endeavor to reduce their likelihood by negotiating and drafting a solid agreement that is attorney approved, and then decreasing the potential impact by taking proactive steps to protect the company from the fallout. The most common way to achieve this is by purchasing relevant insurance policies. Nowadays, there are companies selling insurance policies for just about anything imaginable, and companies should be willing to fit this within their budget to avoid catastrophic losses in the event of a contract dispute.
Utilize the Right Technology
Implementing a coherent contract management process is another effective yet affordable method of mitigating risk. There are practical solutions available that can meet virtually any company’s contracting needs, irrespective of industry, size, or budget. The key is to find a contract management solution that aligns with your company’s contracting goals and objectives and taking full advantage of all that the particular solution has to offer. And, the contract management process should be automated as much as possible to reduce the chances of simple but highly detrimental human errors.