Contracts form the cornerstone of many businesses. These legally binding documents communicate agreements that you have with customers, vendors, employees, and others. Fortunately, there are a number of contractual tools to manage risk.
The first step to managing risk is to identify it. Businesses may encounter legal risks, such as being subject to liability for personal injuries, winding up with penalties if they fail to follow regulatory requirements, or being on the receiving end of a breach of contract claim. They can also face financial risks, such as entering an agreement that is too expensive to maintain or entering into an agreement with another party who does not uphold their end of the bargain.
Businesses also risk their brand and reputation if they are associated with certain legal actions or accusations. Ferlito Law Group can analyze your specific situation, determine appropriate ways to minimize risk, and implement methods to help you protect your business both legally and financially. If you are looking for a tailored solution, consider contacting the experienced business attorneys at Ferlito Law Group to schedule a confidential consultation.
Acceptance Criteria
One of the most important ways that a business can manage risk is to provide very specific information in its contract regarding what constitutes acceptable performance. This allows the business to avoid ambiguity regarding one of the most important provisions in the contract. For example, if the business hires a contractor to perform work on its building, the contract should specify what indicates performance and that the business is responsible for making final payment after completion of the required activity.
Indemnification Clauses
A common way to manage risk via a contractual provision is to include an indemnity clause in the contract. This clause determines who will bear certain risks under the contract. Harvard University’s Risk Management & Audit Services explains that an indemnification clause obligates one party to compensate another party for losses or damages the other party causes. This contractual tool saves a party from legal consequences related to doing business with the other party.
Generally, this type of clause will state that one party “holds harmless” the other party. It may also state that the party will defend and pay costs for the party who is indemnified. This type of clause also shifts responsibility to the party who was responsible for the damages. In this way, it allows one party to take on specific risks and liabilities on the other’s behalf, which minimizes the other party’s risk of entering into the contract.
Waiver of Damages
A waiver of damages states that the parties will not be responsible for losses that arise under the contract, such as property damage, personal injury, or lost profits. The contract may state when these types of damages are waived, such as in all cases except for intentional conduct or gross negligence.
One of the most pivotal aspects of this type of waiver is waiving rights to seek consequential damages, which tend to be much more expensive than actual damages. Actual or direct damages are those that flow directly from the contract, such as the cost of having to hire another party to perform the work agreed to under the contract when the other party failed to perform. In contrast, consequential damages are the damages a party suffers due to their particular circumstances. For example, a business may have lost profits because the work was not performed.
Limited Liability
A limited liability clause is similar to a waiver of damages. However, the key difference is that a limited liability clause sets out ahead of time the amount that one party will be responsible for paying the other party in case of a breach of the contract, rather than waiving the entire amount of damages. Some limited liability clauses may include additional terms, such as:
- Whether the amount one party pays is a fixed amount or percentage of the contract’s value
- Restrictions for the types of losses that can be recovered
- Restrictions on the remedies available
- Shorter timeframes for seeking damages than the law generally provides
Access Controls
Parties may want to restrict who will have access to their contracts, especially if they are required to maintain confidentiality under state, federal, or international laws. They can have greater control over their contracts by limiting access by having an administrator assign access to specific individuals as necessary. This can help prevent people from accessing sensitive information they should not have access to.
Security Controls
Another way to minimize risk with contracts is to have secure controls in place. You can encrypt your contract information and use a secure cloud storage option for your contract. It is also important that your contracts stay secured while they are being prepared. Ferlito Law Group can discuss measures that you, as a business owner, can take to keep your contracts secure.
Insurance
One of the most important ways that you can manage risk is to use insurance. Commercial insurance can provide financial resources a business may need to cover financial losses. You can require parties you contract with to maintain insurance policies in case they do not have sufficient assets to cover a loss.
Contact an Experienced Business Lawyer To Ensure Your Legal Rights Are Protected
The foundation of a business rests upon the strength of its contracts. If you would like more information about contractual tools to manage risk, or need drafting or review of a contract for your business, consider contacting our experienced and dedicated business attorneys at Ferlito Law Group. We can discuss proactive measures we can take to protect your business via contracts. We look forward to partnering with you to help you grow your business.
If you need business contracts to help reduce risk in your business and have pease of mind that your business interests are protected, check out the contract templates in our Legal for Founders Library.