Contractual Risks in General

Various contractual risks are part of a company’s day-to-day business. Contracts are always prone to various risks but use of common sense is usually sufficient to avoid most of them. Typical contractual risks include:

• there is no written contract;

• the parties do not know exactly what has been agreed, e.g. the buyer's strict purchase conditions will apply or the parties are not aware of the content of the law or commercial practice applicable to the contract concluded;

• the agreement will not be carried out at all;

• contractual obligations are not fulfilled on time;

• the subject matter of the contract is delivered as incomplete or defective;

• the subject matter of the contract causes damage to one of the parties or a third party;

• the contract will cost more to implement than intended;

• the other party is unable to meet their obligations or bear liability for damages;

• the company's purchase terms/contracts or product development contracts do not support the sales terms/contracts;

• the company's contract terms are not in line with the company's insurance terms.

When a contractual risk materialises, the contracting party may incur unexpected additional costs or compensation obligations and even significant financial losses. Such losses include, for example, lost revenues, penalties for late payment incurred by the company itself and compensation to third parties.

Common sense can help to avoid some of the contractual risks. However, the most significant contractual risks for your business should be carefully analysed. A well-drafted contract that takes account of the main risks is often an effective way of preventing contractual risks from materialising.