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© Petri Keskitalo 2006-2009

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Last updated

11.06.2009

 

The fact that contracts and risks are intertwined is hard to escape. The inescapable truth of decision making in today’s world is that it is all about risks and risk management. This perspective of the human decisionmaking has been subject to a lot of literature within the social sciences but has only to a small degree been reflected in the legal literature. This cultural difference is mainly due to differences in language, law and lawyers have not been familiar with the risk terminology and have often communicated the same type of reasoning through the concepts of prevention: prevention of accidents, conflicts, litigation etc. The essential point therefore is to realize that risk management as a particular type of reasoning is hardly totally new to law although lawyers are less familiar with the terminology and methodology that lies behind the risk management discipline.

 

Nevertheless, the relationship between contracts and risks can be approached from quite different directions. Depending on the chosen approach to contracts and risks, the relationship between them will be viewed quite differently. If one chooses to approach contracts and the contracting activity of businesses and other organizations from the perspective of legal risks, contracts will most likely be viewed as sources of risks since contracts in such an approach are easily understood as primarily legal instruments. This perception of contracts as sources of risks is shared by the more analytic perspective of liability risks since contracts create contractual relationships loaded with rights and liabilities. On the other hand, if one chooses to approach contracts from the concept of contract risks, the focus shifts towards the details of contracts in order to deal with the risks that these contracts are embedded with. Finally, if one approaches contracts from the perspective of business risks and sees the contracting activity as yet another branch of the organizations activities, contracts are no longer conceptualized merely as sources of risks but also as tools for the management of not only contract, liability of legal risks but also business risks.

 

Contracts can be tools for risk management and that applies to all types of contracts: business-to-business contract (B2B), business-to-government contracts (B2G), business-to-consumer contracts (B2C), consumer-to-consumer contracts (C2C), as well as government to government contract (G2G). However, this risk management aspect of contracting is most appealing to the first two groups of contracts due to the importance of contractual regulation of the relationships between the parties in these two types of contracts. It is almost needless to say that not all contracts are tools for risk management; only good contracts fulfil that role while bad contracts are in fact risks as such. The interplay between contracts and risks has in other words to do with the art and discipline of good contracting. But what is good contracting and good contracts? In order to answer that question one should take a detour and discuss the role of contracts in different forms of business management, click here to go there.