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Contract Review and Risk Management

08 September 2021, by Donovan Lee Shyun Hyn
What is the correlation between contract review and risk management? 
 
Contract review including drafting, is one of the main and inevitable job scopes of a corporate legal practitioner or an in-house legal counsel (“Legal Counsel”).  As much as the Legal Counsel ought to be prudent in contract review to minimise the risk in a contract, a balance has to be struck between stringent review and the consideration or value of the contract, so that we do not miss out on great opportunities for the fear of taking risk.   
 
There are essentially two broad categories of risk in a contract:
 
Category Business Risk Liability Risk
Example Poor relationships, instability, weakening of brand integrity, loss of goodwill, failure to obtain objectives, bad public relations, declining morale, and reduced revenue or profits. Breach of contract issues, alleged confidentiality disclosures, claims, warranty problems, terminations, intellectual property infringement charges, indemnities, disputes, and litigation.
 
In any established commercial organisation, the Legal Counsel would typically work hand-in-hand with the business or engagement team in performing contract review.  The former will firstly gather input from the latter on the background information of the potential engagement, including but not limited to the scope of work, deliverables to be produced, the types of confidential information that the engagement team will be receiving, and whether personal data will be involved in the transaction, among others, so that the Legal Counsel is able to appreciate the terms in the contract from the engagement team’s perspective.  Whilst the predominant duty of the Legal Counsel in performing contract review is to manage the liability risk of the commercial organisation, the Legal Counsel should also work with the engagement team in managing or addressing the business risk, especially in the event where members of the engagement team may not be too familiar with the notion of risk management. 
 
Speaking of contracting templates to be used in a potential engagement, most commercial organisations may have their own templates and would usually prefer to use theirs in contract negotiations.  Such templates would usually be crafted to the advantage of the commercial organisation and would already contain the appropriate components to form a complete contract.  However, in the event where the other party’s template is used in the contract negotiation, the Legal Counsel in reviewing the template should strive to ensure that the following minimum components, except to the extent that the item is prohibited under the relevant governing law, regulation or professional standards applicable, are included:
  • the identity of the parties in the contract;
  • the scope of the engagement including a description of any deliverables and restrictions on the approved use of the deliverables;
  • the timetable for undertaking and completing the work, where appropriate;
  • the key responsibilities of the other party including taking responsibility for deliverables;
  • the ability to use the other party’s confidential information in order to identify and mitigate any quality, conduct or risk management issue, including conflict checks;
  • the fees or a description of fee arrangements, including recovery of certain costs in relation to regulatory investigations into the other party;
  • limitation of liability provisions where permissible;
  • termination provisions;
  • the governing law and jurisdiction;
  • statement of entire agreement, severability and provision for modifications to the contract;
  • evidence of formal acceptance eg signatures of the parties to the contract; and
  • any other component required for compliance with applicable laws, regulations, and professional standards relevant to the commercial organisation concerned.
It is important to note that the above components are must-haves in order to form a comprehensive contract, failing which the commercial organisation may carry the risk of facing numerous undesired issues to be resolved later, including executing a contract which may be held to be invalid by the courts.
 
In the process of managing risk in contract review, the Legal Counsel with the relevant assistance rendered by the engagement team should also pay close attention to the following non-exhaustive clauses and component:
  • Requirement to indemnify the other party for any losses or damage that the other party may suffer as a result of the commercial organisation’s breach of its contractual obligations.  Ideally, the Legal Counsel should disagree with such indemnity requirement by proposing deletion which will most likely be faced with objection by other party.  What the Legal Counsel may do in such instance is to then propose that the commercial organisation’s indemnity be capped, typically to the engagement fee amount of the contract, so that the commercial organisation’s financial risk is limited;   
  • The feasibility of having indefinite confidentiality period to be observed by the commercial organisation in safeguarding the confidential information received from the other party; 
  • Audit access rights of the other party to the commercial organisation’s system, records, documentations, etc to ensure the commercial organisation’s compliance with its contractual obligations.  Such rights should ideally be objected to by the Legal Counsel as it may jeopardise the confidentiality of the commercial organisation’s proprietary information, working papers (if any) and of its other clients; 
  • Requirement to purchase certain insurance policies including professional indemnity insurance, public liability, product liability and/or workers’ compensation, and provide a copy of such policies to the other party for its inspection or audit which are usually confidential in nature.  The Legal Counsel and engagement team should negotiate on the subscription of applicable insurance policies that are only relevant to the goods or services provided without causing significant, unnecessary dent to the commercial organisation’s finances, and instead of providing a copy of the insurance policy, to propose providing evidence that such insurance policy has been subscribed to eg, a confirmation letter from the relevant insurer; and 
  • Ensure that only authorised signatories are permitted to sign the contract on the commercial organisation’s behalf as it binds the commercial organisation and imposes obligations.  Similarly, due care is taken to ensure that the other party’s signatory is also duly authorised to sign the contract so as to avoid claims that such contract is not binding on the other party.
Risk is inherent in any contracts.  It is the duty of the Legal Counsel with the help of the engagement team to manage or minimise such risk when performing contract review, by always having the commercial organisation’s best interest in mind. 
 

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