As businesses grow, the number of contracts they need to create tends to increase — as does the potential for legal errors and other risks. A useful way to manage risk is to use a variety of contractual tools that specifically address the issues of a particular business.
Types of Contract Risks
Before considering the various options for tools, it is important to consider the types of contract risks businesses typically face.
Lack of Consistency
Consistency achieves much more than cohesion among contracts. When contracts are inconsistent, there is a greater likelihood they will fail to be compliant with local, state, federal, and international regulations.
Legal Issues
Some of the most serious contractual risks for businesses are legal. These include:
- Breach of contract
- Failure to fulfill regulatory requirements
- Personal injury
- Property damage
Financial Risks
Before entering into a contract, it is crucial to identify any potential for monetary losses, including lost time and wasted resources. Businesses should ensure they understand provisions like delivery dates and warranties to mitigate such risks.
Risk to Reputation
Risks related to reputation can lead to both monetary losses and other harm. Although it can be difficult to quantify (and therefore assess) such risks, one option is to include language that prevents counterparties from being allowed to make negative comments about the business.
Rogue Contracting
Whenever two or more businesses want to come to an agreement, they should involve the legal departments at their companies. Failing to notify the legal team is called rogue contracting. It is a problem because the legal department is unaware of any problems before the contract is finalized. Furthermore, if any issues arise, the legal team will need to resolve these without being familiar with the contract.
Lack of Visibility
Mistakes are more likely when it is difficult to check agreements and deadlines. Storing contracts on a device or USB drive that is only accessible to one person or, worse, not digitizing contracts at all limits visibility.
Tools for Contract Risk Management
To address all the above risks, it is necessary to employ certain contractual tools. However, businesses should bear in mind that using tools such as the ones listed below are just the start of managing risk. Consider visiting with a dedicated business attorney at Harrison Law, PLLC, for more advice about contract risk management in Arizona.
Contract Templates
Creating templates for contracts avoids the need to start each contract with a blank slate. The business’s legal team can approve templates in advance, meaning it will only be necessary to review the unique aspects of the contract. Templates should include common clauses and come with a library of terms, conditions, and language to ensure every new contract meets pre-approval standards.
Standard Indemnity Provisions
The standard indemnity provision in a contract is often called the “hold harmless” clause. It defines who is the indemnifying party — the party who is held liable for losses and is responsible for paying legal costs on behalf of the other party (the indemnified party). Businesses should use contracts to attempt to accept as little liability as possible. In some cases, this may involve using joint or several liability. The terms of joint obligation are explained in Arizona law § 44-141.
Liability Limits
Related to the above are liability limits — also called damages caps. These are important when a business does need to accept some liability in the case of a loss. A liability limit states the maximum amount the other party can claim, either as a percentage of value gained from the contract or a set amount.
Waivers
There may be certain circumstances where both parties should have the right to hold the other liable, such as if one party commits gross negligence or willful misconduct. Businesses can ensure this risk is covered by including waivers in their contracts.
Contract Reviews and Tracking
It is ideal to conduct both pre-award and post-award reviews involving internal and external stakeholders. Everyone involved in the review process should already have a good understanding of the purpose of the contract and its fine details. The group should consist of individuals from a variety of backgrounds to bring different perspectives and prevent overlooking a crucial risk.
Automated Data Mining
Businesses can lower the risk of errors involved in data entry by using automated data mining. One way to achieve this is to use contract lifestyle management (CLM) software that has the capability to search previous contracts for key information. CLM software may be able to search for data including monetary values, bank routing numbers, counterparties, and contact information. Quality software will use natural language processing to populate fields with the correct data.
Data Repository
Another way to use software as part of a risk management strategy is to incorporate a data repository. This allows businesses to quickly find information in contracts using relevant search terms. Some software will also alert users automatically about upcoming dates to ensure teams are aware of approaching deadlines.
Tracking Obligations
Even businesses receiving automated alerts about key dates need to track their contracts to ensure they are meeting all their obligations. Missed obligations tend to present the largest legal and financial risks.
Risk Assessment Map
It is helpful to have a framework in place to assess the likelihood and severity of all potential risks. For instance, businesses can use a risk assessment map to rate the impact of risks ranging from acceptable to intolerable and the likelihood ranging from unlikely to probable. It is then possible to determine what steps are necessary to make a risk less likely and less severe. Businesses should also use the framework to determine if any risks are too high to be worthwhile, in which case they may need to avoid creating a contract entirely.
Beyond Contractual Tools for Risk Management
Contract risk management can be challenging, even with a comprehensive set of tools. To minimize risk, it is useful to work with an attorney who specializes in business law and contracts. Arizona businesses can find support with Harrison Law, PLLC. Call us at (480) 320-2310 to schedule a consultation.