7 Ways To Avoid Commercial Contract Risks And Have A Worry-Free Business

One significant reason why commercial lawyers are expensive is that they protect businesses from financial risks. Commercial lawyers help in identifying common pitfalls in commercial contracts and look for ways how to minimize them.

Contracts are legally binding agreement. It’s there to delineate the intentions and limitations of the parties involved. One wrong word in the language of a contract can spell legal troubles for your business. It can cause revenue loss and fines.

That’s why it’s a must that you know the ways how to deal with common commercial contract risks so that you will have a worry-free business. You can gain insights from the tips below for that purpose.

Assess Contract Provisions

It’s needless to say that the lawyer you hire to handle such matters should have an assessment of the contract provisions to spot potential risks. There should be contract templates that will enable your lawyer to quickly assess a newly signed contract to check if there’s something that’s changed or overwritten by the other party.

As such, you’ll not be taken advantage of by other parties who only think about their own business interests. Failing to assess and control provisions in a contract is one of the primary causes of an unsuccessful business. So your legal team should put importance to this process.

Centralized Timeline Management

It’s essential that you have effective centralized timeline management in your contract management system. You should have contract management tools that will allow key persons in your business to know the important dates to meet in a contract.

This tool is vital to avoid problems such as failing to meet a condition precedent. Not only that this problem is a huge waste of time, but it will also put an enormous toll on your financial resources.

Checks and Balances in a Contract Management System

Checks and balances is a crucial part of a business operation, especially on the management of a commercial contract. Thus, you should have a reliable contract management system for that purpose.

A contract management system will put approval requirements on a particular contract before it can pass through the system. It will check if an organization has securities, escrow, guarantees, and insurance management function.

This system can give you information about the background and credentials of a supplier, for instance. It can also determine hazardous activities, potential consequences, and identify solutions to problems.

Review Contract Provisions

Lawyers don’t necessarily take the role of negotiators in the dealing of a business contract, but if changes to the contract provisions occur, the lawyer’s knowledge and expertise of the law should be brought on the table. It’s a must, for instance, that you pass the critical information during this process to your lawyers.

In this way, they can review the language of the agreement – especially the warranty and risk allocation clauses – to identify potential problems and take action on them right away to avoid a disadvantageous transaction.

Lawyers are mindful of the need to scope the risks and determine if such risks go beyond the organization’s risk tolerance. You can reach out to law services like Commercial Law Boss to deal with such matters.

Transferring of Risk

Risk transfers is an essential strategy for dealing with potential contract risks. It’s intended to allocate the responsibility to the other party that creates the risk exposure. In a contract, you can accomplish an effective risk transfer through a combination of limitation of liability, indemnification, and waiver of subrogation clauses.

A limitation of liability clause refers to the limitation of the amount that an organization needs to pay for damages that results from a breach of contract. It also puts a restriction on the remedies available and the types of loss recoverable.

On the other hand, an indemnification clause seeks to obligate one party to pay compensation to another for damages or losses. This clause relieves an organization involved in a contract from the legal consequences for damages and defense costs and puts that responsibility for compensation to the one who created the damages.

An indemnification clause is closely attached to warranties or representations, which are assurances that the provisions are to be met.

Lastly, a waiver of subrogation clause is an agreement between the parties involved that one agrees to waive subrogation rights against the other party when there’s a loss. The purpose of this waiver is to prevent the insurer of one party from pursuing subrogation against another.

Consistent Business Processes

Businesses should create a standardized workflow for their business processes. As such, they’ll get rid of the potential problems that result from ad hoc processes. If an organization has a consistency of business processes, contract managers can put more efficient visibility across the lifecycle of a certain contract and the parties involved.

It’s also crucial to have a contract management system which has a single data-entry input. This tool will be a huge help in enhancing the efficiency and consistency of business processes .

Then, this input will streamline process compliance, integrity, and risk management. You should see to it that you have a post-contract document that can be searched by keyword.

Enhanced Collaboration

As you and other party are considering the risk transfer clauses, it’s essential that you determine what’s the primary cause of contract risk. Well, for sure, it’s the result of a lack of transparency and poor collaboration. You should keep in mind that the main purpose of a contract is relationships, and enhanced collaboration is the means to that end.

A contract is not just a piece of paper to be kept on your drawer or computer and forgotten. It’s an essential document reflecting the agreement between entities and persons. Putting importance on business contracts will encourage the stakeholders to increase transparency and avoid risks in their relationships.

Takeaway

Commercial contract pitfalls are indeed a pain in the neck for many businesses. Not only that it’s time-consuming to deal with, but it’s also a waste of money. The good thing is that there are ways that a business organization can avoid such problem from happening. The solutions mentioned in this article will be a huge help for that purpose.