The best practices for reducing contract risk

Unfortunately, whenever businesses engage in any transaction, they run the risk of the other party acting against the spirit of the agreement. While disputes may be a fact of business life, there are ways in which you can minimise the risk associated with entering into a contract. By and large, the very purpose of contracts in business are to enforce accountabilities and ameliorate the risks that come with making agreements. If drafted well and regularly reviewed, contracts can offer a protective legal layer in the face of risk and help to minimise liability.

 

From the initial negotiations throughout the duration of the transaction, these are the steps you should be taking to help mitigate the likelihood and lessen the impact from a breach of contract.

Transferring risk

Perhaps the most common cause for contract disputes is a lack of transparency and clear intention in the clauses that allocate risk and responsibility. This includes clauses relating to indemnification and limitations of liability.

 

A robust indemnification clause can ensure the party who causes loss will be accountable for the consequences incurred. This is an example of what’s known as risk transfer, defined by the Harvard Risk Management and Audit Services department as the intention to assign the responsibility, either financial or otherwise, to one of the parties involved.

 

To that end, parties might also choose to include limitations of liability, which effectively does as the name suggests and minimises the amount of damages due in the event a claim should be brought against them. This isn’t dissimilar to a disclaimer, which can be inserted to specify the exact scope of rights that can be exercised by parties and narrow your obligations.

Taking precautions

As solid as your agreement may be, contractual disputes are still the main cause of legal action. Disputes can and do arise when the quality or delivery of goods or services does not meet the standard or timeframe specified and the party on the receiving end pursues a claim. Decreasing the potential impact of the fallout by taking out the relevant insurance policy is recommended to any business who wishes to avoid losses in the event of a contract dispute.

Ensuring clarity in every clause

From loopholes that don’t serve to your interests to unclear consequences for breach of contract, it’s easy for the untrained eye to miss a red flag when reviewing an agreement. The result of this lack of clarity can be a costly legal battle that takes valuable time to resolve. Whichever approach you choose in allocating risk, the clauses you include should leave no room for misinterpretation.

 

As much progress as automation has made in the last decade and as many tools as there are to assist in the process, it’s wise to instruct a specialist in business law and commercial contracts to ensure your agreement is as watertight as it can get.

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