Businesses are constantly engaged in several commercial transactions and dealings, which require contracts. There are several types of contract risks that can affect the parties to the contract, including poor incentives, bad planning, and contract manipulation.

Loss of bargaining power, damage to business, and cost overruns are also commercial contract risks to consider. It can all boil down to miscommunication between the parties as well, which is why businesses typically work with a law firm UK when drawing up commercial contracts and carrying out negotiations.

While these risks could always exist with commercial contracts, there are ways to manage contract risks and these are ten tips to managing risk in commercial contracts.

Transparency is one of the most important requirements from all parties of a commercial contract as a lack of transparency can result in errors and misunderstandings. It is thus better to use clear and concise language, ensure there are no misunderstandings between the parties, and identify every possible risk scenario.

When two businesses develop ideas and products together, there could be disagreements over intellectual property. In order to stop these disagreements from escalating, contract law services would include clear provisions regarding intellectual property so that there is no confusion or misunderstanding over who has full ownership and rights to these products.

Commercial contracts typically include a lot of provisions and terms, which the legal teams of the parties will study carefully. This is what makes negotiation a lengthy but important process. One of the best ways to manage risk is to go over the contract multiple times before it becomes legally binding and ensure all parties are in agreement with the contract.

A company will be required to share some amount of data with other businesses they have dealings with and this is one of the risk areas of a commercial contract. While privacy may not be given a prominent position in the agreement itself, understanding the consequences of a data breach, knowing what data protection laws apply, and ensuring that responsibilities and expectations are included in the clauses will help manage risk in commercial contracts.

There could also be room for security breaches, especially when obtaining software-as-a-service (SaaS) and similar products. In such situations, it is best to consider all measures taken by the parties to secure relevant systems and IT infrastructure as well as company data. This could include certifications and compliance with security programmes as well as any organisational measures taken to prevent security breaches.

Software and related products require a license and warranty, but issues could arise between the parties to a contract over them. For instance, a company approaching a vendor for SaaS may want to ensure the relevant and appropriate warranties are offered for the specific service they are obtaining. A tip to manage risk in commercial contracts over licensing and warranties is to ensure the expectations of both the customer and the vendor are clearly stated and agreed upon.

Indemnification and risk transfer are two key areas of a contract that are important when managing risk. A tip with indemnification is to include provisions that consider strategies from the perspective of all parties to the contract and using indemnity and liability terms as well as subrogation waivers when transferring risk.

There could be instances where a contract is ended before both parties have fulfilled their obligations. Since termination could come at a cost to all involved parties, the relevant provisions and terms must be discussed during the negotiation phase. Exploring all options as well as likely scenarios that could lead to the termination of the contract is important when managing risk.

Depending on the type of commercial contract, insurance may be a provision that is added to the contract. Coverage and compensation depend on the purpose of the contract, but a few common areas covered in a contract are general liability, workers’ compensation, and crime coverage.

Software has come to play a key role in managing risk in commercial contracts and contract lifestyle management (CLM) software can be used to manage the entire process involved in a contract, starting from initiation and negotiations to compliance and renewal.

Published date - October 15, 2021