An in-house lawyer’s edict when negotiating a contract is simple: “make sure our risk exposure is as low as possible” and of course, “let’s sign this as soon as possible!”
How can a business translate its risk exposure into its contracts and how can the in-house lawyer facilitate the business with this? Practical Law Commercial’s new Practice Note, Allocating and controlling risks in commercial contracts, explains how contractual clauses can be used to allocate and control risks between the parties.
Drafted appropriately, any clause in a contract could be used to deal with risk. Obvious clauses include limitation of liability, indemnities, termination and insurance. Most lawyers, however, may not realise that boilerplate provisions, such as an entire agreement clause, and less operative clauses such as a warranties provision, could also be used to deal with risk.
This new note puts a risk angle to these clauses so that lawyers are able to spot how a clause can, if drafted properly, effectively reduce, or increase, a party’s risk exposure.
In any contract, each party will want to minimise its risk exposure, while maximising its reward. The parties’ competing interests means that a lawyer must be able to skillfully draft the contract so that it not only reflects the parties’ commercial intention and the mechanics of the transaction (which can be tricky in itself), but also ensure that a party’s risk exposure under the contract is one which the business is willing and able to accept.
Knowing which clauses and tactics to use, and applying them to the position of each party on the core issues, will help a business to control and manage its risks through its contracts.
To view this note, please see: Practice note, Allocating and controlling risks in commercial contracts.
