CLAUSES THAT MAY BE RISKY—OR OFFER PROTECTION AGAINST RISKS
Suppliers' contract terms typically contain limitations of liabilities that seek to protect the supplier against the consequences of contract breach, such as late delivery or delivery of defective goods or services. Buyers' contract terms typically lack such limitations. Instead, buyers may seek unlimited liability for the supplier. But the supplier might not be willing to accept (or able to insure against) unlimited liability. The two extremes are quite far apart, and the parties' bargaining position does not always lead to an optimal solution for both. What appears as a source of contract risk for one party may seem to be desirable contract risk management (or risk allocation) for the other party. Still the parties on both sides can and should use contracts proactively as planning and decision making tools to safeguard that risks are taken knowingly, balanced with reward, and managed. Here, the key word is knowingly.
The parties trying to allocate or transfer all risk to the other side need to remember that doing so does not make the risk disappear. The risk still exists and needs to be recognized and responded to, as its materialization usually has a negative impact on both parties and their relationship. It is better for both if the party in charge of the risk has taken the risk knowingly and is prepared to take the measures that are necessary to respond to it.
The following sections will list, with examples, a few of the most typical contract clauses, visible terms, that the parties should understand. In addition, we will continue the discussion of invisible terms (lack of clauses—gaps or silence) that might be filled in ways that are not what either party (or both) expected. in Chapter 6, we will cover possible ways to deal with risky clauses, whether visible or invisible.