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CONTRACTS & RISK MANAGEMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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© Petri Keskitalo 2006-2009

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Contact:

mcorim@mcorim.com

Last updated

22.06.2009

 

Despite the rapidly increasing appreciation of the perspectives of risk management in business management, literature dealing with the contract legal perspective of risk management is still rather limited.(1) The perspective of risk management is, however, nothing new to transaction lawyers, who will find it to be another label for their working method. The extent, consciousness, and depth of the contractual risk management-approach might nevertheless offer some insights even for the most experienced transaction lawyers, who in Erich Schanze’s terms have “ . . . large contract files . . . [and] anecdotal knowledge on the emergence and survival of numerous individual transactions, and they have developed a sense of whether a specific micro or macro structure of institutional design may be transferred into a different commercial context.”(2)

 

What then is the relationship between contracts and risk management? What kind of a role can contracts and contracting play in the organization’s risk management? Due to the different functions of risk management, even the answers to these two questions will vary from an organization to another, as well as from one person to another. Accordingly, even if we were to agree that good contracts are an essential asset to the organization, we would most likely have different expectations and different views of what good contracts are and what functions the contracting has for the organization.

 

Contracting can therefore have different functions to the different interest groups within an organization. From the business management perspective contracting might be associated with contract administration, whereas business governance perspective would see contracting as a tool for strategic management. A legal management perspective might lead us to associate contracting as a tool for compliance and a risk management perspective might see contracting as a tool for risk treatment.

 

In addition, contracts and contracting can have quite different roles as part of different risk management strategies of organizations. This is illustrated in the following table, which presents a characterized line of evolution in the role of contracts and lawyers as part of the risk management activities of an organization, which follows the evolution of the organizations risk management strategy as described by Suominen, except for the last strategy category: the ERM.

 

 

All these different functions need to addressed and integrated into the approach to the interplay between contracts and risk management. How this is actually done depends on the chosen conceptualization of the role of contract in this interplay and the focus point in the management of contracting.

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(1) The original breakthrough for risk management within legal reasoning took place in construction contracts, where the idea of risk management has been frequently discussed since mid-1980’s. See Abrahamson, Max W., Risk Management, International Construction Law Review 1984, pp. 241-264 as well as several other articles in the subsequent volumes of the International Construction Law Review.

 

In the past ten years the risk management approach to legal question has been gaining popularity even in the Nordic countries, particularly in Finland, where a number of books dealing with different aspects of legal risk management have been published during the past five years. Consider e.g. Keskitalo Petri, From Assumptions to Risk Management, Kauppakaari, Helsinki 2000; Pohjonen Soile (ed.), Ennakoiva sopiminen, WSOY Lakitieto, Helsinki 2002; Wahlgren Peter, Juridisk riskanalys, Jure, Stockholm 2003; Setälä Ilkka, et.al., Yrityksen ja yhteisön vastuuriskit, Tietosanoma Oy, Helsinki 2004; Iversen Jon, Legal Risk Management, Forlaget Thomson A/S, København 2004, which despite of its title is written in Danish; Haapio Helena, et.al., Yritysten sopimus- ja vastuuketjut, Tietosanoma, Helsinki 2005;  Haapio Helena, et.al., Yritysten sopimus- ja vastuuketjut, Tietosanoma, Helsinki 2005; Hemmo Mika, Sopimusoikeus III, Talentum, Jyväskylä 2005; and Trzaskowski Jan, Legal Risk Management in Electronic Commerce, Ex Tuto Publishing, Copenhagen 2005, available on-line at http://www.legalriskmanagement.net/. The latest addition to such literature is the volume 49 of the Scandinavian Studies in Law, dedicated to the subject of Proactive Approach.

 

A broader legal perspective to risk management is found in Baldwin, Robert (ed.), Law and Uncertainty: Risks and Legal Processes, 1997 and Steele, Jenny, Risks and legal theory, Hart, Oxford 2004.

 

(2) Schanze, Erich, Legalism, Economism, and Professional Attitudes Towards Institutional Design, Journal of Institutional and Theoretical Economics 1993, p. 130, describing the method of “better” consultants.