Risky Terms and Issues in Contracts
As seen in earlier chapters, contract risks can take many forms and arise from many different sources. This chapter covers the risks inherent in a contract itself. Many "risky” terms and issues, such as the dynamics of price and payment on one hand and work, key performance indicators, and acceptance criteria on the other hand are deal-, industry- and situation- specific. In the following sections, we will focus on terms and issues that are more universal.
We first examine contract terms that deal with risk and the most frequent sources of claims and disputes. We then divide contract clauses into two groups, active clauses and passive clauses, and explore their interrelationship, along with related performance and legal concerns. We then introduce, with examples, typical high-risk issues and risky clauses in contracts. These clauses are frequently used by parties as risk allocation or risk transfer mechanisms in contracts. To succeed in contract risk management, both parties need to be aware of the existence of these mechanisms so they can make better risk-related decisions and share and manage risk together.