Managing Contractual Risks
It may be sensible to consider more efficient ways of dealing with contractual risks if several of the answers to the following statements are affirmative:
A majority of the company’s contracts are made orally.
Contractual negotiations must be conducted swiftly.
The name of the contracting parties, their address and signature may be filled in later.
The contracting parties cannot reach agreement about some contractual conditions.
A contracting party fails to comply with the payment conditions.
A contracting party fails to deliver on time.
There are no provisions in respect of delays.
The limitation of liability is ambiguous.
The parties have not prepared for a defective delivery.
A company is forced to accept the standard terms and conditions of a larger company in a better bargaining position.
One of the contractual parties is foreign – insufficient language skills on either side.
The parties are not entirely clear about the meaning of the contractual conditions.
The terms and conditions are not attached to the contract.
The contract does not have limitation of liability clauses.
Preparing contracts takes time and care. A well-drafted written agreement is a good basis and sets the ground rules for cooperation between the parties. The contract is the primary source for interpreting the legal relationship between the contracting parties. It is therefore important to clarify the roles and responsibilities of the parties at the negotiation stage and to record the outcome of the negotiations in the contract. The contract should define the roles, rights and responsibilities of the contracting parties as precisely as possible. If the rights, obligations and responsibilities of the parties are clearly defined, unpleasant and sometimes unexpected consequences and unnecessary disputes can be avoided. The contract should be conceived as a whole, with attention to detail and ensuring that the contract forms a clear, uncontradicted and sensible whole. It is also important to assess the consequences of a breach of contract and to agree in the contract on the penalties. It is a good idea for a company to have thought through the contractual models it will need for its contracting activities. At the same time, however, it should be borne in mind that each contract is individual and the suitability of the contractual model for the case in question must always be assessed individually.
The minimum requirement for establishing the reliability of the contracting parties is a check of credit, tax and trade registers. Credit records should also be checked from time to time during the contractual relationship, as should the counterparty's status in the tax authorities' registers. However, the conditions for cooperation will only become clear during the negotiations. Therefore, the importance of negotiation in successful agreements should not be underestimated.
Companies should also be aware of their capacity for liability and limit their liability accordingly. For example, the amount of any contractual penalty should be realistic, taking into account, among other things, the parties' ability to pay and the extent of any financial damage caused by the breach of contract. For a large company, €50,000 is a small amount, but it may exceed the SME's ability to pay.