There’s a reason why lawyers are so expensive: they protect clients from risks, especially financial dangers. Corporate lawyers are no different to their companies. Legal teams within any industry, large or small, are in charge of identifying risks and finding ways to reduce them.
Risks can lead to lost revenue and fines
When it comes to contracts, risks are found in the language of the agreement. A contract, by definition, is a binding agreement between two or more parties. A legal team makes sure that the written content in that contract reflects the intention and abilities of both parties. One wrong word can throw off the entire meaning of the contract and could lead to financial disadvantages for your company:
- Pay more than what was originally agreed to
- Incur fines
- Customer can exit a the agreement without paying
In a recent survey, 85% of respondents said human error had affected their contract management process. 1 in 10 said their company had been penalized for compliance errors within a sales contract.
Identifying the Risk Points
Risks can come in many forms during the contract lifecycle. Lawyers need to consider all variables in order to mitigate financial and compliance risks for their companies. Here are seven of the most common legal risks in the contract process we’ve heard from customers (From the Editor – see also this guide to Nath Solicitors’ fixed fee commercial contract reviews):
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Control Contract Provisions
Lawyers must assess each individual provision in a contract for potential risk. Creating contract templates will allow a legal department to quickly assess a new contract to see in anything has been overwritten or changed by any other party involved.
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The Review Process
It’s not necessarily the lawyers job to negotiate a contract, but when changes are being made to provisions within a contract, a lawyer should be brought into the loop. Keep your lawyers over-informed during this process, to make sure the company is not at a disadvantage.
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Managing Existing Risks
Sometimes the best road for a company might also come with the most risk. It’s up to the legal team to track and account for any potential risks that were accepted in the negotiation process. Think of it this way: you closed fifty deals this year, but you really had to put yourself out there for two of them – your legal team should watch those two agreements for warning signs.
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Contract Obligations
Most contracts contain obligations, provisions and stipulations that must be met. Failing to do so could prevent customers from paying you, and the contract falling through come renewal time.
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Contract Amendments
When it comes to renewals, an agreement may not be the same as it was previously. Each change made to an existing contract is considered an amendment. In this case, your legal team must again review these terms and identify any risks that could impact your business.
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Acquisitions
When a company acquires another business, they are bringing in a new revenue streams with a new customer base. Now the legal team sees a whole new slew of contracts which they had no control or visibility during the negotiation process. Again, it’s up to them to vet these existing contracts for potential risks to the company.
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Contract Storage
This is a major hang up for the legal team’s workflow. As you’ve seen already, businesses are changing constantly with new hires, rules and products. There needs to be a central repository for contracts that is both secure and accessible. File cabinets just don’t cut it anymore. Many companies are looking for a cloud platform to manage and store contracts. A lawyer’s time is expensive and it shouldn’t be spent shuffling through file cabinets for the right contract.
Think of your legal team as a smart filter, picking the contract apart detail by detail, looking for possible risks throughout the entire contract lifecycle. Multiply this process by the number contracts your company is handling at a given time, and you get an accurate view of how busy your legal team is in the contract management process.
Image via Flickr (Derek Gavey)
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