The ideal contract protects you from as much legal and financial risk as possible. While you cannot foresee or protect yourself from every risk in business, an attorney who specializes in contract risk management may help you mitigate your contact risk exposure to a significant degree. Contact an experienced business attorney from Polymath Legal PC today at (833) 931-6418 to learn how we may help you with contract risk management.
What Does Contract Risk Management Mean?
Contract risk management, or contract risk mitigation, means minimizing the exposure to risk that you face because of the wording (or lack of wording) in a contract. Contract risk management is as much a process as it is a concept or idea, and it is a process that many businesses have one or more attorneys manage.
What Is the Goal of Contract Risk Management?
The type of risk that exists within a contract depends on the contract type. More often than not, “managing risks” means protecting oneself from financial losses. This is not always the case, though. For example, an organization or its leaders may face criminal sanctions if it violates certain laws or regulations, and contracts may mitigate the risk of criminal liability for an individual or organization.
In a broader, sense, contract risk management is about protection. Effective risk management can prevent or minimize:
- Financial losses
- Criminal or civil sanctions
- Embarrassment to an individual, organization, or both
- Harm to a business or organization’s reputation
With each contract comes risk. The nature of your business, and the specific contract in question, may dictate which types of risk your contracts expose you to.
Which Contracts Require Contract Risk Management?
Any legally enforceable contract requires risk management. The cost of compliance and risk mitigation has ballooned by over 60% for financial service institutions, and most professional sectors face increasing compliance costs. With regulatory and legal pressures consistently rising, it is in business’ interests to ensure that contracts are risk minimal. This way, organizations may reduce the additional costs that come from loophole-ridden contracts, as well as the potential cost of non-compliance with regulations.
Some contracts that may qualify for risk mitigation practices include:
- Employment contracts
- Termination contracts
- Vendor contracts
- Merger and acquisition-related contracts
- Non-compete agreements
- Intellectual property agreements
Any contract that an individual or organization engages in should be vetted and edited to mitigate risk to the greatest possible extent.
Types of Contract Risks
The nature and details of contracts vary greatly. From industry to industry and company to company, no two contracts look exactly alike. Nonetheless, there are specific types of risk that apply to most professional sectors and organizations’ contracts, including:
Liability Risk
When an organization or individual agrees to the terms of a contract, they face liability should they breach some aspect of that contract. Liability risks associated with contracts include:
- Wrongful termination claims
- Lawsuits alleging infringement of intellectual property or trademarks
- Alleged violations of confidentiality agreements
- Alleged breach of contract
Litigation and financial penalties are the (costly) manifestations of liability risk. By mitigating the liability risk in each contract, one may reduce the likelihood of facing credible breach of contract claims, resulting litigation, and associated financial costs.
Risk to Your Business Operations
Contracts can govern the terms and conditions of inter- and intra-business operations and objectives. When an organization enters a contract with a vendor to deliver a certain number of goods of a certain quality by a specific date, it is a contract that binds the vendor to those terms. This is just one example of the many contracts in which businesses routinely engage.
Failure to comprehensively mitigate risk within contracts can expose an organization to myriad risks. A risk-heavy contract might prevent an organization from recouping money it has paid a vendor that did not fulfill its obligations. Worse yet, a poorly drafted contract may tie an organization to a vendor, employee, or other party that impedes healthy business operations —perhaps until the contract’s expiration.
Legal and Regulatory Risks
Organizations today have more legal and regulatory obligations than ever before. Some sectors, such as financial services, face greater legal and regulatory pressure than most. Regardless of the field within which an organization operates, it may need to comply with:
- Local, state, and federal law
- Federal regulatory agencies, including but not limited to the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA), and the Federal Trade Commission (FTC)
- Industry-specific regulatory bodies
Each of these legislative and regulatory institutions place demands on organizations and their leaders. Contracts must reflect these legal and regulatory imperatives, or organizations may pay a steep financial and reputational cost.
Security Risk
Contracts with insufficient risk mitigation may expose an organization to:
- Loss of intellectual property
- Employees and former employees sharing details about the organization’s proprietary operations
- Destruction of organizational information
- The sharing of the contract itself, which may contain sensitive information about the organization
In an increasingly digital business landscape, security threats are complex and abundant. Contracts must be air-tight in order to protect an organization from these threats.
Does Contract Management Include Risk Management?
Contract risk management is a subset of contract management. Because risk management is such an important element of contract management, many organizations choose to hire professionals dedicated specifically to contract risk management.
How an Attorney May Manage and Reduce Risk Within Contracts
The attorneys at Polymath Legal PC help organizations detect and mitigate risks in a wide array of contracts. In doing so, the firm helps reduce clients’ exposure to litigation, business-related financial losses, financial sanctions, and other risks.
An attorney may address contract risk management in your contracts by:
- Helping determine how much risk you are willing to accept for each contract you engage in
- Spotting specific language in contracts that expose you to risk
- Balancing unavoidable compliance demands with risk mitigation (i.e. making contracts as favorable as possible without crossing legal or regulatory lines)
- Relying on various contractual tools to manage risk
- Helping you develop a repeatable, digitized process for contract risk mitigation
Each contract presents unique challenges and risks. Having an attorney on hand to help mitigate risk is important to consider.
Consider Contacting an Attorney from Polymath Legal PC Today
If you would like to review your contract risk mitigation practices, consider visiting with an attorney from Polymath Legal PC today. You can call our legal team today at (833) 931-6418 for a free consultation.