There are five (5) common areas of commercial risk for a business. As technology lawyers, we’ve seen exactly how it arises, and it’s our job to spot it right away. We share the common areas they commonly crop up in and the strategies you can do to manage them.
Transaction Risk refers to the adverse effect that is associated between entering into a contract and settling it. The more complex the transaction, the greater the risk. For example, construction projects, complex financial transactions and major acquisitions.
There are a few known effective strategies for managing this risk. They are:
- Ensuring clear pre-contract procedures are air tight and in place. You have to set strict limits on authority when delegating tasks. They should be skilled in principles of contracting and due diligence. Make sure that you incorporate a litigation risk review at the pre-contact stage and establish a set of in-house transaction documents wherever possible, reassessing it from time to time.
- Documenting the Contract or agreement with utmost care and clarity. You have to meticulously understand and examine specific substantive provisions and boilerplate clauses integrated within your contract.
- While transactions and contacts are regularly reviewed and properly documented, you have to ensure that compliance is established. Train key management and staff as problems often stem from a lack of understanding about basic legal principles or applicable policies and procedures.
- Obtain appropriate insurance cover, and ensure contracts and insurance arrangements do not contradict each other so there are no gaps in the coverage.
Counterparty risk is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation. This can exist in credit, investment, and trading transactions.
Probity enquiries should be a part of a thorough background check in relation to the proposed counterparty before embarking on a contract to determine whether it has (a) a well-established reputation in the relevant industry, (b) has a litigious reputation, (c) is a creditworthy and has sufficient financial resources to support and meet its contractual obligations, and (d) has valuable assets against which any loss or damage could potentially be recovered.
In order to have a thorough background check, you can extract information from:
• Company searches of the Australian Securities and Investments Commission database;
• Industry references;
• Bank or credit provider references;
• Credit ratings searches;
• Inspection of financial accounts;
• Internet searches;
• Searches of court records; and
• Land title register searches.
Jurisdiction risk (geo-policitical) refers to the risk that arises when operating in a foreign jurisdiction. You have to negotiate the choice of governing law and jurisdiction at the outset. This risk includes instances when laws unexpectedly change in an area where a party has exposure. This type of jurisdiction risk can often lead to volatility.
Certain countries have a poor reputation for litigation due to factors such as:
• Biased or corrupt judiciaries;
• Litigious culture;
• Inadequate procedural systems;
• Frequency of large damages awards; or
• Difficulties in enforcing judgments given or awards granted.
Whatever the choice of law or jurisdiction, parties should be aware of any relevant limitation periods keeping in mind any relevant limitation periods, the types of loss that are recoverable, and the treatment of exclusion and limitation clauses.
Parties will generally not be able to choose the law to govern a non-contractual dispute (for example, tort and product liability). One strategy to avoid such claims is to ensure that operations are conducted in the relevant country by a third party, such as an agent or a subsidiary of the contracting parent. Remember to Check that the parent is not liable for the subsidiary in the relevant jurisdiction.
The complexity of multiple jurisdictions means that you benefit the most with a legal partner capable of advising across borders so you’re secured on both ends.
Product risk is the risk that you may not actually be able to deliver the product to market within the resources, like time and money that is available to you. And if you are able to deliver the product, the risk is also in that the product may not function or operate exactly as you envisioned. Every business has a degree of product risk and it can be mitigated and kept low by:
• Quality management systems;
• Crisis management (for example, product recall) plans;
• Clear product instructions and warnings displayed on products;
• Contractual protections;
• Insurance; and
• Marketing communications input.
These strategies should be inspected and frequently reviewed by a committee comprised of a cross-section of personnel like, for example, in-house lawyers, product managers, designers and marketing personnel.
Process risk exists when the process that supports a business activity lacks both efficiency and effectiveness, which may then lead to financial, customer, and reputational loss. This form of risk may be present within any stage of business transactions.
Day-to-day business operations can give risk to a number of commonly occurring issues, including environmental, health and safety issues; employee disputes; intellectual property disputes; and regulatory investigations.
The risk of such issues arising can be managed by appointing multi-disciplinary teams with specialist personnel to regularly review business processes; identify particular risk areas; revise procedures where necessary; develop new procedures to manage emerging risks; and implement compliance programs that strictly adhere to rules and regulations.
Risk is ultimately unavoidable in business. The only thing you can do is learn how to manage and mitigate it. We wrote a different article on managing litigation risk that you can check out, but this is really where a trusted partner can come in – someone who you can trust to advise you on and strategize against risk with! Consult with our cross-border lawyers today!
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