Contract Risk Management and Mitigation — without lawyers
I go into businesses and talk to them about contract law. I manage to get their attention by pointing out that their sales personnel and others are leaving the business wide open to unlimited liability. Or I show them that they are manufacturing products potentially without any contract in place. Or that their written and negotiated contracts are being varied by people within their organisations without anyone realising that this is going on.
Managing risk and obtaining “insurance” at the same time
One of the best ways to manage contract risk is to employ outside lawyers. They may get the law right. There is no guarantee that they will, no matter how expensive they are. There are many cases that come before the courts, including the Court of Appeal and the Supreme Court, where the contracts were drafted and entered into with the help of very expensive law firms. However if you lose at court, you will at least have someone else to sue — your lawyers!
Much better, surely, to ensure that you identify contract risk and put in place some simple steps to mitigate and manage risk.
As for using a lawyer at all times, you may well not have a spare one sitting at your side when you are considering how to respond to a purchase order. And even if you have, then it is going to cost!
But what is the risk?
But, hold on, do you need to worry? On the face of it, the contract is only worth a few thousand pounds to you.
However, when you think of it, if you think of it, your liability could be huge.
For example, you are manufacturing electrical sensors for a customer. The customer will be incorporating your components into an electronic throttle pedal for use in Ford motor vehicles. Consider your potential liability if a batch of your sensors are defective. The customer will deliver its completed product to Ford. If defective, Ford will be seeking compensation from the customer. This compensation, or ‘damages’, is likely to be significant, or huge. The customer will be looking to claim these damages from you. It is, after all, your fault. But do you need to worry? After all, your terms and conditions have an effective limitation clause. Phew!
These are the facts of a case that reached the High Court in 2010. The customer claimed that the contract was made on its standard terms and conditions which, disastrously for you, would mean that you have incurred unlimited liability.
The judge did not agree with the customer. That is the good news. There is, however, some bad news.
The judge also concluded that your terms and conditions did not apply to the contract. In his opinion, which is the one that counts, neither party’s written terms applied.
However, there was clearly a contract. The judge found that terms were implied by the Sales of Goods Act (SOGA). Unfortunately (disastrously?) for you, the SOGA does not imply any limitation of liability.
“Battle of the Forms”
So it is vitally important, if you have standard contact terms, to ensure that the contract is made on your terms and conditions, if you can. And if you cannot, then it is necessary to have an important discussion with the other side to agree a commercially-acceptable limitation of liability clause.
There is no point in having well-drafted standard terms and conditions produced by expensive lawyers if your processes mean that you are contracting on the other side’s terms and conditions.
And there are many other issues that might come back to haunt you if you do not win what lawyers may call the “battle of the forms”.
Can you get your goods back?
For example, the customer has just taken delivery of thousands of pounds of your goods and has now gone into liquidation! Can you send a van or two around to get your goods back? After all, your standard terms and conditions have a “retention of title” clause.
The first thing the liquidator will ask you is to prove that the contract was made on your standard terms. (This takes me back to a brief article that I wrote in 2009! I have set out the link for this memory trip at the bottom of this Post.)
So it seems essential that anyone negotiating, drafting and entering contracts, including sales personnel and people who process purchase orders, need to be able to identify and mitigate risk. And this is not difficult once the risk has been identified.
There are risks relating to all stages of contract that can be easily understood and for which procedures could be put in place to deal with those risks.
For example, there are risks with pre-contractual statements (basically, don’t mislead the other side intentionally. If you do, then nothing in the contract can help you! If you are mistaken, however, then the contract needs a very important clause or you may be liable or a misrepresentation.)
There are risks when managing a contract. If you fail to comply with a procedure set out in the contract, then you could lose valuable rights.
And there are risks with terminating an agreement.
£200 million claim kicked into touch
In one very recent case, a company terminated an agreement under an express right in the contract for it to do so if the other side experienced and insolvency event. Okay so far? Not really! The company claimed £200 million claiming that the other side had been in breach of contract. However, the company had terminated for insolvency and not for breach. Therefore, it could not claim damages. So a £200 million claim kicked into touch because someone did not read the contract or understand the risks associated with termination for cause.
All of this is not difficult. Once you understand the risks, you can follow some simple steps and procedures to mitigate the risk.
So, what can you do?
So what can you do? One option is, nothing. You have spent a lot of money using lawyers to draft standard terms and conditions. You can trust your systems to mitigate risk and your staff are able to recognise and deal with contract risk. The other side, by the way, have also spent a lot of money on their terms and conditions.
Another option, and one that a lawyer may advise, would be to “consult a lawyer at all times or as early as possible”. Well, he would say that, wouldn’t he?
I would say “make sure you are trained to identify risk so that you can incorporate risk management processes.” Well, I would say that, wouldn’t I? (I am both a lawyer and a trainer).
Michael Twomey is a practising solicitor and has nearly 25 years’ experience in designing and delivering training to law firms and businesses, in the UK and internationally.
