RISK MANAGEMENTin Commercial Contracts

Overview

APPRECIATING RISK

Areas

• Operational• Process• IT • Security

• International• Political• Environmental

• Market • Business• Financial• Credit• Liquidity

• Legal• Ethical• Tax• Regulatory

• Human • Fraud

Types

• Poor contract management • Non-performance• Defective performance• Insolvency• Lack of financing/liquidity• Ownership disputes • Third party interference• Breaches of confidence• Fraud / misrepresentation

• Global downturn• Force majeure events• Supply chain interruption• Increased cost of goods• Forex losses• Tax liability• Security breaches• Promulgation of new

laws

• Wrong counterparty• Unauthorised execution• Poor drafting• Onerous terms• Excessive disclaimers• Inadequate remedies• Unenforceable security• Unenforceable judgements• Poor contract visibility

Potential Impact

• Loss of assets• Damages claims• Indemnity claims• Third party claims• Rectification costs

• Increased costs• Loss of revenue• Cash flow issues• Enforcement costs• Insolvency

• Criminal liability• Reputational

damage

• Loss of approvals, licences & permits

OBJECTIVES

• ESTABLISH a framework to identify, assess and mitigate key risks throughout the contract lifecycle

To

• ADOPT a proactive and preventative approach toward risk, versus a reactive and reparative one

Contract Lifecycle

CREATION(drafting &

negotiation)

EXECUTION (approvals &

authorisations)

PERFORMANCE(compliance, milestones &

time bars)

ADMINISTRATION (repository &

retrieval)

TERMINATION / RENEWAL(evaluation & optimisation)

• Loss from risk can impact not just profitability and growth but financial and operational stability

• Risk management helps to alleviate exposure and provide a mechanism for conflict resolution

• If you haven’t assessed the risk, …

Why?

you are bearing it!

Contracting process often relegated to mere ‘administrative’ function, with:

Problem

• inadequate verification • insufficient cost-benefit analysis• non-existent, fragmented or inconsistent policies • low or no visibility of terms• poor document management• ineffective monitoring and compliance • no review and performance analysis

Dilbert on Risk Management

FUNDAMENTALS

The 5 Cs

Culture.

collaboration

clarity

compliance

continuity

RISK ASSESSMENT PROCESS

Process

• Assessment

• Evaluation

• Mitigation

• Stakeholder discussions

• Surveys & audits

• Risk wheel & risk matrix

• Customisation

Assessment

Dilbert on Risk Management

Risk Wheel

Catastrophic 5 10 15 20 25

Major 4 8 12 16 20

Moderate 3 6 9 12 15

Minor 2 4 6 8 10

Insignificant 1 2 3 4 5

Very

UnlikelyUnlikely Possible Likely

Very

Likely

CO

NS

EQ

UE

NE

PROBABILITY

Risk Matrix

Evaluation

Weightage

WCGW

ALARP

Key Assumption

• What can go wrong?

• How likely is it to go wrong?

• What’s the impact if it goes wrong?

• Can the risk be removed, moderated or tolerated?

WCGW

ALARP

• As low as reasonably possible

• Point at which cost to reduce risk becomes disproportionate to benefit to be gained

• Aim is to reduce risk value down to ALARP level

• Steps taken must be lawful and reasonable

• Developing & implementing appropriate safeguards to eradicate, control & monitor risk

Mitigation

SAFEGUARDS

• Policies

• Process alignment

• Extra-contractual measures

• Contractual measures

Safeguards

• Contract creation, approval & renewal• Document retention & management• Privacy & data protection• Email & social media• IT security & BYOD• Procurement• Gifts & disclosure• AML / KYC• Crisis / dispute management• Whistleblowing• Business continuity

Policies

• Due diligence • Credit searches• Public register & court searches• Inspections• Interviews• References• Contingency plans• Insurance

Extra-Contractual Measures

• Standard forms• Approved clauses library• Contractual terms (including security arrangements)• Internal stakeholder review• Legal review• Contract repository• Checklists• CLM systems• Contract ownership

Contractual Measures

• Counterparty• Authorisation• Scope of obligations / rights• Performance standards• Payment terms & deduction rights• Adjustment & variation rights• Continuing disclosure obligations• Extent of liability imposition• Scope of limitations & exclusions

Contract-Specific Risks

• Third party interference• Ownership disputes• Force majeure events• Third party claims• Forex loss & tax exposure• Compliance issues• Unlawfulness• Enforceability of security• Status post-breach

Contract-Specific Risks

• Expiry & renewal• Termination rights• Adequacy of remedies• Impediments to enforcement • Breach of confidence• Data leakage • Governing law & dispute resolution• Post-termination dependency• Post-termination obligations

Contract-Specific Risks

USE OF CONTRACTUAL TERMS

Contracts…

• Performance• Status• Asset protection• Security• Exposure• Renewal• Termination• Remedies• Enforcement• Post-termination

Using Terms to Manage Risk

• subject to contract• conditions precedent & subsequent• representations & warranties• positive / negative covenants & undertakings • variation & adjustment provisions• assignment & change of control provisions• control of third party involvement• consequence of breach• impact of force majeure events

Performance

• conditions precedent / completion deliverables • purpose / objects clauses• representations & warranties• reporting & continuing disclosure obligations• restrictions & disclaimers• subject to consent, deeming & discretionary provisions• precedence clauses• conclusiveness clauses• further assurance provisions• entire agreement provisions

Status

• assertions / acknowledgements of ownership• assignment of interests• segregation requirement• retention of title • passing of title & risk• restrictions on use• insurance obligation• return / destruction of assets • confidentiality / data protection

Asset-Protection

• deposit, escrow & trust arrangements• guarantees• charges, pledges & liens• audit & inspection rights• rights of entry

Security

• exclusions • limitations • indemnities• liquidated damages• fee credits & debits• non-recourse• third party claims• tax, forex losses & costs

Exposure

• fixed term• indefinite• with consent• automatic

Renewal

• by expiry• by notice• upon breach • upon insolvency, etc.• upon cross-default• upon intervening events

Termination

• suspension, withholding & set-off rights• return of deposit/goods • action for account• appointment of receiver / manager• power of sale• equitable relief• liquidated damages• power of attorney• default interest• recovery of enforcement costs

Remedies

• governing law • submission to jurisdiction• dispute resolution mechanism

Enforcement

• hand-over• transitional support• survival clauses

Post-Termination

Specific Concerns

• Battle of the forms• Addendums & variations• Conditional language • Qualifying language• Cross-referencing• Contract management

CONCLUSION

• Risk management is not about bureaucratic back-covering

• It’s about taking sensible, practical steps to protect against potential loss

• Organisations should strive to formulate a robust risk management framework that is tailored to their specific needs

• All relevant stakeholders should be trained and motivated to implement the framework and made aware that a failure to manage key risks can lead to significant loss

Conclusion