Managing contractual risks

Berwin Leighton Paisner recently published a very interesting report on contractual risks in large corporate organisations with insight from in-house counsel, in collaboration with Contract Business Intelligence Nordic AB.

BLP Managing contractual risk report

The report is a follow-up report from last year's Legal Risk Benchmarking research, where contractual risk was identified as a top concern. In this new report, it has been found that contracting practice is still quite immature, which can mean that significant contractual risks are being understated, or overlooked. The following three issues were identified as the main obstacles, making it difficult to improve contract management:

1. The contracting landscape is increasingly complex

Factors such as multiple stakeholders, variety of contracts and terms, multi-jurisdictional influence and macro-regulatory requirements add to the complexity of the contract landscape.

2. Individuals find it difficult to focus on the right things in contract negotiations

There is a lack of consistency in application of core skills in the contracting process. Individuals tend to focus on specific terms, issues or objectives, at the expense of the bigger commercial picture. This goes for all professionals involved in the contracting process.

3. There is a general lack of investment in good contracting process and systems

Resource is scarce and contracting staff recruitment has lagged behind activity. Historically risk has been seen as low but increasing concern is beginning to see some organisations invest in improvement projects.

So if contractual risk is a growing concern, what can you do to improve the way your organisation manages its contracts, and improve your overall risk position?

The report provides a suggested approach to identify the key areas in the following five categories where variance in terms matters to your organisation, to measure the risk impact of each variance, and build meaningful and accurate management information about your individual and aggregate exposure to contractual risk.

1. Legal structure

Check that the legal and structural integrity of the agreement is intact. For example, ensure that each party has authority to sign and create a binding agreement.

2. Your liability and commitments

Check that you are prepared to assume the liability described in the contract. For example, do not commit any other company in your group, or third parties, without their prior approval, and ensure you are able to meet your direct commitments under the contract.

3. Your rights

Check that your rights are protected in the contract. For example, do not accept any transfer or assignment of rights (such as intellectual property) except for the right to use the product/service 'as intended'.

4. Commerciality

Review the value and strategic importance of the contractual arrangement to your business. For example, ensure the value of the contract to your business continuity is reflected in the terms, and that an adequate fall-back plan is in place.

5. Regulatory requirements

Check for provisions that require third parties to adhere to regulation that affects your business. For example, required regulatory provisions that relate to anti-bribery and corruption or data protection.

You can download the complete contractual risk report here »

The report is based on research carried out by Magnus Steen, CEO of CBI, and former Head of Legal, Nordics at Sony Ericsson. Magnus Steen has also written a lot of interesting posts on contractual risk, legal technology and innovation on his blog »


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