Liverpool Law Aug 2017

Management Matters
Should Contract Risk be higher up your
Law Firm’s agenda?
Like beauty, risk is in the eye of the beholder. A key business
decision can be seen through one person’s eyes as a clever
entrepreneurial market move and, through another’s, as a reckless
bet-the-house punt. It also depends on the point in time at which
you view a decision. As Evel Knievel put it: “Anybody can jump a
motorbike. The trouble starts when you try to land it.”
Most business decisions end up being codified in some form of
contract. This might be a simple letter with limited future
consequences, such as buying stationery or booking a conference
room. Or it might be a more complex document with long-term and
significant consequences for the future, such as a strategic
partnership with a key business introducer or the procurement of a
new practice management system. Whilst both have contract risks,
the failure of a stationery supply contract may result in nothing
more than an inconvenience whereas the failure of a strategic
partnership may completely disrupt the firm’s day to day operations
or even impact the firm’s future value.
any other parties and challenge them, as appropriate.
RISK 5 - BEST OR REASONABLE ENDEAVOURS If a contract
requires you to use your best or reasonable endeavours to perform
an obligation, this is better than an unconditional undertaking to do
something but it’s far from a slacker’s charter. Make sure you know
what’s involved.
RISK 6 - TIME OF THE ESSENCE If a contract makes time of
the essence for the performance of any obligation on your part by a
certain date or time, failure to meet the deadline will enable your
counter-party to terminate the contract and potentially claim
damages from you. Be alert to these deadlines and be sure you can
hit them.
RISK 6 - TERMINATION Understand the circumstances in which
the contract may be terminated and what the consequences are likely
to be.
The contract price is irrelevant as risk can lurk in unlikely places. A
back-of-a-fag-packet contract with a decorator which limits the
decorator’s liability to £200 (because that’s what you’ve agreed to
pay him) may seem innocuous enough. But if the decorator’s blowtorch
accidentally sets fire to your offices, and your insurers discover
that, by accepting the limitation of liability, you’ve waived their right
of subrogation against the decorator’s insurers, they will not be
happy bunnies. When you then discover your insurers are walking
away from your fire damage claim because you failed to disclose this
important contract limitation, you’re likely to be hopping too.
So, do we give our business contracts the attention they deserve?
With things like staff contracts and office leases, the answer is
almost certainly yes. But what about confidentiality agreements,
hosting agreements, introducer agreements and insurance broker
appointments? I dare say most of us would rather study Lord
Buckethead’s Election Manifesto.
What then are the main contract risks? Leaving aside the
commercial terms (the product or service description and the
delivery and payment arrangements), here are our TOP TEN
CONTRACT RISKS to look out for when someone pokes a
contract in front of you for signature:
RISK 7 - WARRANTIES & INDEMNITIES Make sure you know
what, if any, contractual warranties and indemnities you are being
asked to give and satisfy yourself that you can meet them. Flag them
up to your insurance advisers if they are likely to impact your
insurance arrangements as insurers don’t generally cover liabilities
assumed under contract.
RISK 8 - INSURANCE CLAUSES It is increasingly common to
see clauses imposing insuring obligation on one or other party,
particularly where services are being outsourced. Make sure you
spot them and seek advice on them from your insurance advisers.
RISK 9 - CONFIDENTIALITY & DATA PROTECTION Where
a contract involves you sharing data with a counter-party, be alert to
any confidentiality obligations you have and ensure that both you
and your counter-party can comply with data protection regulations.
RISK 10 - ENTIRE AGREEMENT And finally, most contracts
contain an entire agreement clause so if your counter-party has
agreed or assured you of something, stick it in the contract.
RISK 1 - PARTIES This may sound painfully obvious, but it is
fundamental that the contract is with the right counter-party, that the
signatories have capacity and authority to form the contract with
you and that you have carried out an adequate level of financial and
reputational due diligence on the entity with which you are about to
contract.
RISK 2 - REGULATION You don’t need reminding that the legal
sector is heavily regulated. It is critical that the form of any contract
you are about to enter into is not prohibited by your regulator and
that the contract does not oblige you to do or omit to do anything
which could cause you to be in breach of your regulatory obligations
going forward.
RISK 3 - LIMITATIONS AND EXCLUSIONS Keep your eyes
peeled for any unreasonable attempts by your counter-party to limit
or exclude their contractual or other liabilities to you. If you do spot
any, try to amend them or at least understand the implications. If
any are likely to impact your insurance arrangements, seek advice
from your insurance broker on securing your insurers’ approval.
Conversely, check your own obligations to the counter-party to see if
you need to limit or exclude your liability to them in any way.
RISK 4 - TRADING RESTRICTIONS Watch out for any
provisions seeking to restrict or limit your ability to trade freely with
© Nigel Wallis, O’Connors LLP. O’Connors is a Liverpool and
London-based law firm that advises all types of businesses
operating in and around the legal sector on start-ups, structures,
regulation, funding, mergers, acquisitions and disposals, contracts
and insurance. O’Connors offers a fixed-price half-day session
with its legal sector team for those law firm leaders wanting to
firm up their strategic options. The firm also offers a fixed-price
COLP support contract. For further information, please contact
Pamela Rafiq, Mark O’Connor or Nigel Wallis via
www.oconnorsllp.co.uk.