Contractual Risks

From Blog Derecho e Inversión

This entry is based on an entry I wrote a couple of years ago. If you want to read it in full, click here

What are risk scenarios in contractual matters? Do we have to work on scenarios in all contracts?

It is necessary to understand that risk scenarios are evaluations that seek to reduce the impact of an event, in this specific case, on contracts. The Royal Academy of the Spanish Language (RAE) defines the word scenarios as: Set of circumstances that surround a person or an event. Possibilities or perspectives of a fact or a situation.

This is how the scenarios of risks in contractual matters will refer to the possible circumstances that can surround the life of a contract; some good, when it is fully complied with; and others bad, when there are breaches or the wording lends itself to ambiguities.

When talking about risks, it is important to understand that there are several types:

• Strategic and reputational risks;

• Legal and financial risks;

• Operational risks; and

• Compliance risks.

My particular interest is the legal one. The management of legal risks does not constitute an inflexible process but neither should the management be done lightly because there are too many components that relate to each other derived from the way in which the investment, the company or the business is conducted.

WHAT TO DO?

1. It is essential to identify the sources of risk for non-compliance with each part of the contract. Although not all risks materialize, it is important to identify, analyze and evaluate them.

2. The source of the risks is varied in a contract:

   1. The applicable regulations;

   2. Activity in terms of permits, licenses, authorizations;

   3. The contractual object;

   4. The nature of the contract;

   5. The obligations;

   6. The regulatory authorities;

   7. Information management and data protection;

   8. Special clauses;

   9. Tax treatment;

   10. Technical variables; etc.

We must not ignore the fact that there is NO ZERO RISK in a business. Legal work in any case must be aimed at creating mechanisms that reduce the risk and that the company can TOLERATE IT.

My experience has led me to evaluate in advance scenarios of possible risks in the face of early terminations or contractual resolutions through potential lawsuits. Those that can be by interpretation of clauses, application of clauses, non-compliance with execution by one of the parties or by monetary obligations, to do, to give, conditional, among others.

Ah! It is also important to evaluate the execution of contracts.

The work of seeing potential risk scenarios must be carried out in those - contracts - where the execution of the same occurs in more or less the following circumstances:

1. The life of the contract is valid for more than 3 months.

2. Its complexity involves a possible risk situation.

3. There are more than two parties involved directly and indirectly.

4. The contract is linked to a series of special conditionalities.

5. Atypicality of the contract with respect to local legislation.

6. Technical variables that need to be reviewed or supervised.

7. Some leases for movable and immovable property.

8. The solution mechanisms are confusing.

9. The exit clauses of the contract are only beneficial for one of the parties.

As I mentioned in a blog post Derecho e Inversión: ¨Let's not look for the perfect strategy but the one that is good for every company and every case.”.

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