The Contract Review Process
A contract review is a thorough analysis of the terms, conditions, and clauses within a legal contract. The process involves identifying potential risks that could have financial or legal consequences, including the rights and responsibilities of the parties, assessing the impact of each risk, and examining options available to mitigate and transfer as much risk as possible.
A knowledgeable insurance broker armed with a deep understanding of the business operations, can scrutinize all aspects of the contract to identify the risks presented, propose amendments to lessen the severity of the risks, recommend mitigation measures to reduce the likelihood of risks manifesting into legal liabilities and direct financial losses and identify potential gaps in the insurance program to ensure alignment with risk transfer strategies and placement of adequate insurance protection.
Risk Identification
Risks established in contracts can be found in common clauses contained in commercial contracts and include performance obligations, terms of payment, rights and duties surrounding intellectual property, representations and warranties, confidentiality provisions, use of subcontractors, compliance with applicable laws and regulations, indemnification and duty to defend agreements, hold harmless agreements, limitations of liability, insurance requirements, governing law and dispute resolution procedures, among others.
Disputes can arise if a breach of contract occurs in which one party fails to perform, violates, or does not fulfill their contractual obligations as specified in the agreement.
Contractual liabilities are relatively easy types of risk to identify as they are specifically listed in the contract; though ironically, they are often overlooked, and in many cases, the contracting parties only first become aware after a problem manifests.
Risk Assessment
Risk assessment involves a comprehensive analysis of the potential threats and liabilities associated with the agreement. It should identify areas of vulnerability that could adversely affect the contracted parties.
Contractual clauses that may impose financial, operational, or legal risks are evaluated against factors such as the nature of the industry, regulatory compliance, and the specific needs of the business. By scrutinizing these elements, the risk assessment facilitates the development of strategies for risk mitigation, ensuring the contract aligns with the overall risk tolerance and objectives of the business.
This proactive approach enhances decision-making and enables agreements that meet the
objectives of the business while minimizing potential adverse consequences.
