Not uncovering hidden risks is a risky strategy

Failing to discover hidden risks in a contract can be a dangerous strategy

When faced with a business risk, there are 3 courses of action:

1. Manage or reduce the risk (through negotiations, operational activities, change, etc.)
2. Transfer it - either to another party through a contract or to an Insurer
3. Lump it under 'affordable losses' or hope that the adverse situation never happens

To decide which one to take, you'll need to understand the risk well. Unfortunately, in many companies, details of risks are buried and littered under a mountain of contract paperwork.

Uncovering and understanding the true breadth of risk present in the agreement is the real challenge here. Mere moving all your documents to a centralized repository (a.k.a. CLMs) will hardly serve the purpose here. You need a specialized analysis of contracts from a risk management perspective.

Lets look at a few examples

At the simpler end of the spectrum, which many of us encounter regularly:

• Uncapped liability is something which most businesses are not willing to agree upon. Language around such a clause can be presented differently, at multiple locations, within a large contract document. Plain 'searching' for liability keyword or clauses may lead to something falling through the cracks.
• Conditions (buried in a schedule) which affect your costs (e.g. Inflation linked increments which trigger automatically) and hence may make the deal completely unviable under those conditions.
• Condition which mandates sharing of all states privacy compliance report monthly, failing which the contract can get cancelled.

A very specific example that we came across:

• A vendor agreement (between a manufacturer and a supplier of raw materials) mandated that the material will reach the destination within a specified time (by the end of summer in Europe in this case). The supplier had traditionally used inland shipping as a transportation for such deals. However, no one anticipated the risk of water level in rivers going down (during summers) to the extent that shipping stops or becomes very slow, and hence the deadline may be missed. Seemingly innocuous clause relating to the time of delivery could be impacted by unique extraneous circumstances.

We can find many such examples but the real point is:

Knowledge is power when it comes to contract risk management

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Do not risk leaving out proper risk analysis of your vendor and customer agreements. Check out our capabilities in contract risk analytics and contact us for a discussion.

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