A failure to address legal risks before they turn into actual problems can be devastating in the business world. From breaches of contract to compliance failures, companies that do not take steps to recognize and address their legal exposure can end up on the hook for damages, fines and penalties, and reputational damage.
But though some element of risk is generally inherent to conducting any type of business, not all exposure should be seen as inevitable. By applying some of the key principles of risk management to contractual and legal dealings, enterprises can proactively take steps to limit their risk of losses, as well as mitigate the level of damage they experience should a breach of contract or other problems occur. This is called legal risk management, and here are four key habits the best teams typically possess to inform their approach.
Habit #1: Successful Legal Risk Management Teams Have a Plan
The most important thing to know about reducing legal risk is that it requires a plan. Though you may get lucky and any inherent risks within your contracts may never come to fruition, there are better ways to reduce your business’s exposure than wishing and hoping (also, everyone's luck runs out eventually). Instead, think of legal risk management as something businesses must plan and strategize for. This should occur at both the macro-level – employing a process for considering and onboarding all new contracts – as well as at the micro-level, which is how you approach each specific contract. Your general legal risk management plan is essentially a step-by-step framework that provides the tools and considerations for addressing specific risks within any new contract.
As you develop your legal risk management plan, it’s important to consider and address the following:
● Who is responsible for creating contracts?
● Who is responsible for managing contracts?
● Where will contracts be located?
● What legal jurisdiction(s) and other rules apply to agreements?
● How will risk level of a contract will be assessed (and will higher-risk contracts have special controls or procedures)?
● Who is responsible for monitoring contract performance, including keeping tabs on risk factors?
● How can the process be evolved to ensure the process meets our needs and new risks are addressed?
Habit #2: Successful Legal Risk Management Teams Identify and Assess Legal Risk at the Contract Development Phase
The best way to reduce legal risks is to proactively include language and terms that can mitigate losses should they occur or even eliminate some risks altogether. The most effective way to do this is to negotiate the most favorable contract terms upfront, at the time that you are drafting your agreement. But this requires familiarity with the potential risks that may apply to the agreement in question.
Identifying such risks at the outset doesn’t require a crystal ball – you likely already have important clues and information at your disposal. Seeking stakeholder input at the earliest opportunity is one useful tactic as those who will be involved in delivering on a contract will likely have the experience to identify potential problem areas. Your existing and archived agreements can also yield some important clues as to what has worked well - and what hasn't - in the past.
One way you can get extra mileage out of these up-front risk assessments is by using them to inform the creation of boilerplate contract templates that can be readily employed under standard scenarios. This means that certain sections of your contracts will be prewritten with the strongest and most up-to-date language. Employing templates also reduces the risk of protective clauses accidentally being omitted. Even when a contracting scenario is too complex for a standard agreement, these templates can provide a good starting point.
Habit #3: Successful Legal Risk Management Teams Have Response Plans in Place
While your risk management plan is a high-level strategy for dealing with all legal risk, each contract requires its own response plan for recognizing and addressing any issues that might arise during a contract’s term. While your contract administration plan is part of this, a risk response plan specifically considers what might go wrong and what should happen next if it does.
Establishing a contract scorecard can help you to spot emerging risks because it gives you a tangible measuring stick against which you can measure performance. As you establish the performance criteria and metrics for a contract, it’s important to define not only what success looks like, but also the indicators of a potential problem. Your response plan should also consider the following:
● Who needs to be alerted in the case of a potential problem, and when?
● What steps need to be taken if a problem occurs?
● What will we need to enable a solution (budget, resources, etc.)? How will we obtain these requirements if needed?
Habit #4: Successful Legal Risk Management Teams Monitor Threats Proactively
It’s not enough to have a plan for addressing risks that have already occurred – successful legal risk management teams know that proactively staying on top of contract performance is key to averting problems or to spotting contract breaches early when they can still be mitigated or contained. As such, defining what to look for is only half of the equation – it’s equally crucial to ensure that contacts are closely and regularly monitored in order to reduce legal risks. While the monitoring requirements will vary depending on the agreement, the key is ensuring that this measurement and analysis is an ongoing, consistent activity and not just a reaction to already-visible red flags
For more information about improving the way your legal team operates, download Contract Management Software for the Small Legal Team.
Some of this content was previously published on the ContractWorks blog.