I was recently engaged in a discussion with various people about the difficulty in balancing the commercial versus risk focus in contracting. This is quite a topical subject, anyone who deals with contract negotiations will no doubt be constantly battling these sometimes opposing forces from within their business.
The discussion reminded me of a client I had been recently working with who had been grappling with these very issues when dealing with a request by a supplier to change a number of risk clauses in the contract. Whilst the supplier and our client had had a very long relationship spanning at least a decade, the supplier’s ownership and management had recently changed as the result of the company being purchased by a large US organization. The new parent company was obviously embarking on a process of aligning contract terms throughout the organization, and as a result wanted to align the liability and indemnity clauses in this existing contract with their standard position (a situation I’m sure is familiar to many of you).
The issue however was not so much in the detail of the actual changes requested (which were in part not entirely unreasonable, albeit they did change the risk profile of the contract for our client). The real issue was the way in which the discussion about risk was handled by the supplier.
In response to very reasonable questions posed by my client as to the practicalities of what the new risk allocation would look like, the supplier sent back standard wording obviously fed to them from their lawyer. The response was merely wording that captured the meaning of risk concepts in a legalistic way, but provided no flavour of what this meant for both of our clients in practice.
My personal view was that the supplier was taking this overly legalistic approach because they themselves didn’t understand what the effect of the words they were talking about meant in practice. Nor were they willing to try to understand. For them it was a tick-a-box exercise for aligning all of their Australian contracts, and they weren’t concerned with sitting down and discussing how this new approach would impact the way in which each party would manage the risks.
The result of a failure by this supplier to engage in reasonable discussions about risk allocation led to the position that our client, now re-tendering for the provision of those services, has immediately struck off this supplier from the list. The failure to properly engage in discussions about risk had undone more than 10 years of a strong relationship.
How does your organization handle risk discussions? Do you simply send off your liability, indemnity and insurance clauses to the legal team, or do you actively get involved in discussions about the risks involved in the contract, the commercial realities of which party is in the best position to manage that risk, what commercial approaches can be used by both parties to mitigate those risks, and what contractual provisions will be employed to organize the allocation of that risk?
I have found that organisations who are more actively involved in the discussion of risk, and educated in understanding the tools within a contract to help manage and allocate risk, are far more alert to an appropriate use of risk and liability clauses in balancing the risk versus commercial focus in each contract. And far more likely to develop approaches that manage risk appropriately.
I’d be interested in your thoughts!
If you would like to understand more about the tools within a contract to help manage and allocate risk, send an email enquiry through to us at [email protected] or phone us on 02 8006 0830, and we will contact you to organise a time for a confidential discussion.