CONTRACTUAL RISK MANAGEMENT IN TRANSNATIONAL SALES CONTRACTS Version

RISK MANAGEMENT: ”Risk management is a comprehensive view of the risk factors threatening the business operations and at the same time a systematic course of action, which aims at minimising the likelihood of risk materialising and the economic losses caused by the risk” Eero Luotonen

CONTRACTUAL RISK MANAGEMENT: - A systematic method for use of proactive contracting i. e. contract design and contract governance for the purpose of holistic management of risks to the firm - Alternative methods are for example: production-technical solutions finance-technical solutions insurances - Forms a part of the firm’s total risk management but adopts a view internal to the contracting activities for the management of the risks to the firm - Offers a common language for the various groups of professionals in charge of the firms contracting and risk management

CONTRACTUAL RISK MANAGEMENT: - Is based on an integration of the legal, economics and risk management perspectives to the management of the risks to the firm with help of contrating activities - Can be tailored for the purposes of the firms strategic and operative risk management: - Strategic contractual risk management will enable the firm to systematically develope and manage it’s contracting activities - Operative contractual risk management will enable the firm to systematically manage it’s single business transactions - Will enable the firms contracting activities also to fullfill the demands set by the ISO 9001 -standard

RISK MANAGEMENT PROCESS: 1) Risk identification 2) Risk evaluation 3) Risk mitigation - risk bearing - risk elimination - risk reduction - risk transfer 4) Risk management monitoring and control

C RM THEORY OF CONTRACTUAL RISK MANAGEMENT: 1) Identification of strategies 2) Risk identification Go to Strategic C-RM 3) Risk evaluation 4) Contractual risk mitigation Go to 5) Monitoring and control of contractual risk management 6) Development of strategies and procedures Operative C-RM

Strategic C-RM STRATEGIC CONTRACTUAL RISK MANAGEMENT: 1) Identification of business and risk management strategies 2) Risk identification 3) The abbreviation functions as a link to the beginning of the presentation The numbers also function as navigation links Risk evaluation to the beginning of the section and as Contractual risk mitigation memory notes to the content of the section (point them by your mouse) 4) 5) Monitoring and control of contractual risk management 6) Development of business and risk management strategies and procedures

Strategic C-RM 1) 2) 3) 4) 5) 6) STRATEGIC CONTRACTUAL RISK MANAGEMENT: Identification of business and risk management strategies

Strategic C-RM Identification of business and risk management strategies 1) 2) What is the company’s operational environment like? What are company’s business strategies? 3) What about risk management strategies? 4) If such strategies do not exist, how should they be formed? 5) 6) What goals do these strategies set for the contractual risk management?

Strategic C-RM STRATEGIC CONTRACTUAL RISK MANAGEMENT: 1) Identification of business and risk management strategies 2) Risk identification a) Identification of general risks connected to the business and business transaction b) Identification of legal norms regulating the transaction c) Identification of risks and risk distribution created by legal norms 3) 4) 5) 6)

Strategic Risk identification: C-RM Identification of general risks connected to the business and business transaction 1) 2) a) b) c) General risks connected to the business: 1) Financial risks (currency risk and risk of buyer’s insolvency, etc. ) 3) 4) 2) Political risks (risk of change in legislation, etc. ) 3) Risk of interruption 4) Risk of dependency 5) 6) 5) Product risk

Strategic Risk identification: C-RM Identification of general risks connected to the business and business transaction 1) 2) a) b) c) Risks connected to the coordination of the different parts of a transnational business transaction: Finance C Sales C 3) 4) TBT 5) Insurance C 6) Transport C

Strategic Risk identification: C-RM Identification of general risks connected to the business and business transaction 1) 2) a) b) c) Risks connected to the coordination of the different parts of a transnational business transaction: Payment modalities Sales C Finance C 3) 4) INCO TERMS, The 1982 Institute Cargo Clauses IN CO CO TE RM M BI S, TE RM S 5) Insurance C 6) Transport C

Strategic Risk identification: C-RM Identification of general risks connected to the business and business transaction 1) Risks connected to the coordination of the central parts of a sales transaction: 2) a) b) c) Spesifications for the goods Delivery terms 3) 4) Sales C 5) 6) Mechanism for the adaption of the contract Payment terms

Strategic Risk identification: C-RM Identification of general risks connected to the business and business transaction 1) Risks connected to a single business transaction: 2) a) b) c) 3) 4) Information risk Risk for product liability Risk for changing circumstances 5) 6) Negotiation risk Risk for contractual disputes Risk for damage to or loss of the goods Risk for nonperformance Sales C Risk for delayed performance Risk for nonconforming performance

Strategic Risk identification: C-RM Identification of general risks connected to the business and business transaction 1) Need for contractual allocation of risks? 2) a) b) c) 3) 4) Negotiation risk Risk for contractual disputes ISC Risk for product liability § 1 § 2 Information risk Risk for nonperformance § 3 Risk for changing circumstances Sales C § 4 § 5 Risk for delayed performance § 6 5) 6) Risk for damage to or loss of the goods Risk for nonconforming performance

Strategic Risk identification: C-RM Identification of legal norms regulating the transaction: traditional approach 1) 2) a) b) c) BUILDING BLOCKS OF TRANSNATIONAL SALES CONTRACTS, MATERIAL FOR INTREPETATION and MATERIAL FOR GAP-FILLING: Interpretation Tailored guidelines of the contract terms contract standards ORDRE PUBLIC 3) 4) Standard contract clauses Standard contract terms International trade usage Established usages and/or practices between the parties ? Law of the contract 5) CISG 6) Contracting standards PECL, UPICC & CENTRAL TLDB LEX MERCATORIA

Strategic Risk identification: C-RM Identification of legal norms regulating the transaction: RM-approach 1) 2) a) TYPES OF LEGAL NORMS REGULATING THE CONTRACT b) c) 3) 4) INDIVIDUAL CONTRACTUAL NORMS STANDARD CONTRACTUAL NORMS (optional default norms) 5) 6) MANDATORY LEGAL NORMS DEFAULT LEGAL NORMS

Strategic Risk identification: C-RM Identification of legal norms regulating the transaction: RM-approach 1) 2) a) TYPES OF LEGAL NORMS REGULATING THE CONTRACT b) c) 3) 4) INDIVIDUAL CONTRACTUAL NORMS STANDARD CONTRACTUAL NORMS (optional default norms) 5) 6) MANDATORY LEGAL NORMS DEFAULT LEGAL NORMS Unavoidable default legal norms Alternative sets of default legal norms (legal orders)

Strategic Risk identification: C-RM Identification of legal norms regulating the transaction: RM-approach 1) MANDATORY LEGAL NORMS, DEFAULT LEGAL NORMS, STANDARD CONTRACTUAL NORMS 2) a) b) c) and INDIVIDUAL CONTRACTUAL NORMS: Interpretation Tailored guidelines of the contract terms contract standards ORDRE PUBLIC 3) 4) Standard contract clauses Standard contract terms International trade usage Established usages and/or practices between the parties ? Law of the contract 5) CISG 6) Contracting standards PECL, UPICC & CENTRAL TLDB LEX MERCATORIA

Strategic Risk identification: C-RM Identification of risks and risk distribution created by legal norms 1) 2) a) b) c) 3) What is the default legal distribution of the risks to the business and business transaction? Are contract-specific investments adequately protected? 4) Do legal norms give adequate protection against the opportunistic behaviour of the contracting party? 5) Do legal norms create risks of their own? 6)

Strategic C-RM STRATEGIC CONTRACTUAL RISK MANAGEMENT: 1) Identification of business and risk management strategies 2) a) Risk identification a) Identification of general risks connected to the business and business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms b) c) 3) 4) 5) 6) Risk evaluation

Strategic Risk evaluation C-RM 1) 2) The goal is to allocate risk management resources with help of determination of the risk exposure Risk exposure is determined as a multiple of the likelihood of the risk and its extent: 3) 4) Extent of the risk Insignificant 5) 6) L i k e l y h. Great Catastrofical Unlikely 1 2 3 Likely 2 4 6 Very likely 3 6 9

Strategic Risk evaluation C-RM 1) 2) Determination of the likelihood and extent of risks connected to contracts is often difficult and a three-way classification might be sufficient: 3) 4) Extent of the risk Insignificant 5) 6) L i k e l i h. Great Catastrofical Unlikely III 1 II 2 3 I Likely III 2 II 4 6 I Very likely II 3 6 I 9 I

Strategic Risk evaluation C-RM 1) Allocation of resources of the company’s legal department based on a similar classification could be highly cost-efficient 2) The resources would then be allocated according to and in relation to the risk exposure: I Preventive law II Preventive law & remedial law III Remedial law 3) 4) Extent of the risk Insignificant 5) 6) L i k e l i h. Great Catastrofical Unlikely III 1 II 2 3 I Likely III 2 II 4 6 I Very likely II 3 6 I 9 I

Strategic C-RM STRATEGIC CONTRACTUAL RISK MANAGEMENT: 1) Identification of business and risk management strategies 2) a) Risk identification a) Identification of general risks connected to the business and business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms b) c) 3) Risk evaluation 4) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation 5) 6)

Strategic Contractual risk mitigation: C-RM Golden advices: 1) 2) - predict eventual contractual problems and agree on meaningful governance mechanisms for the contract and the contractual relationship 3) 4) a) b) c) - remember cost effectiveness considering negotiating, designing, monitoring and enforcement of contracts - protect contract-specific investments - remember to build exits 5) - prepare for contractual disputes 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) - Alternative governance mechanisms for business transactions? 3) 4) a) b) c) 5) 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) 3) GIES RATE ST S Firm FOR BUSINES A ONAL NATI RANS 4) a) b) c) 5) 6) T

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) Direct export sales DIRECT SALES 3) 4) a) b) c) 5) 6) Firm A

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) Direct export sales DIRECT SALES 3) 4) a) b) c) 5) 6) Firm A Reseller INDIRECT SALES Sales Agent

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) Direct export sales DIRECT SALES 3) Firm A 4) a) b) INDIRECT SALES c) 5) Reseller LICENSING Franchise Sales Agent License agreement 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) Sales office 2) Direct export sales Subsidiary DIRECT SALES ESTABLIHMENT ABROAD 3) 4) a) b) Joint Venture Reseller INDIRECT SALES c) 5) Firm A LICENSING Franchise Sales Agent License agreement 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) Sales office 2) Direct export sales Subsidiary GO VE 3) 4) a) b) c) 5) RN AN CE BU ME SIN FO ESS Firm. R CHA Joint Venture NIS Reseller TRA MS AN SAC TIO NS Franchise Sales Agent License agreement 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) Sales office 2) Direct export sales Subsidiary MARKET GOVERNANCE 3) 4) a) b) Joint Venture Firm A Reseller c) 5) Franchise Sales Agent License agreement 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) Sales office 2) Direct export sales Subsidiary MARKET GOVERNANCE 3) 4) a) b) Joint Venture Franchise Sales Agent License agreement 6) Reseller SYMBIOSIS GOVERNANCE c) 5) Firm A

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) Sales office 2) Direct export sales Subsidiary POWER GOVERNANCE MARKET GOVERNANCE 3) 4) a) b) Joint Venture Franchise Sales Agent License agreement 6) Reseller SYMBIOSIS GOVERNANCE c) 5) Firm A

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) - Alternative governance mechanisms for business transactions? 3) 4) a) b) c) 5) 6) - Alternative contractual instruments?

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools More detailed? 1) Yes! No! Sales office 2) Direct export sales Subsidiary 3) 4) a) b) Joint Venture Firm A Reseller c) 5) Franchise Sales Agent License agreement 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) Sales office 2) Direct export sales Subsidiary 3) 4) a) b) Joint Venture Firm A Reseller c) 5) Franchise Sales Agent License agreement 6)

Strategic Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) - Alternative governance mechanisms for business transactions? - Alternative contractual instruments? 3) 4) a) b) - Alternative model contracts? c) 5) 6) - Alternative standard clauses? - Tailored contract clauses?

Strategic Contractual risk mitigation: C-RM Prediction and development of the viability of the contractual RM-tools 1) 2) - Personal/organizational experience of the viability of the alternatives? 3) 4) a) b) - Case law examples of non-viable alternatives? - Law, economics & organization-analyses of the alternatives? c) 5) 6) - Examples of success stories?

Strategic Contractual risk mitigation: C-RM Contractual risk allocation 1) 2) Golden rules of risk allocation: - don’t take larger risks than what you can not bear - don’t take large risks to gain little 3) 4) a) b) c) 5) - don’t think that others do so Golden rules of contractual risk manangement: - don’t take risks that fall under the influence of your contracting/subcontracting party - don’t take large risks just to please your contracting party 6) - don’t think others do so

Strategic C-RM STRATEGIC CONTRACTUAL RISK MANAGEMENT: 1) Identification of business and risk management strategies 2) a) Risk identification a) Identification of general risks connected to the business and business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms b) c) 3) Risk evaluation 4) a) b) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation c) 5) 6) Monitoring and control of contractual risk management a) Monitoring of changes in legal norms and their distribution of risks b) Monitoring and control of the viability of the contractual risk management

Strategic C-RM Monitoring and control of contractual risk managment: Monitoring of changes in the legal norms and their distribution of risks 1) 2) What’s new in transnational commercial law? CISG-database at PACE http: //www. cisg. law. pace. edu/ 3) 4) Transnational Commercial Law-database at CENTRAL http: //www. tldb. de/ 5) a) b) 6) Lex mercatoria http: //www. lexmercatoria. com

Strategic C-RM Monitoring and control of contractual risk managment: Monitoring of changes in the legal norms and their distribution of risks 1) 2) 3) Are there any new contractual risk management tools available? National Contract Management Association (NCMA) http: //www. ncmahq. org/ 4) National Center for Preventive Law (NCPL) http: //www. preventivelawyer. org 5) a) b) 6)

Strategic Monitoring and control of contractual risk managment: C-RM Monitoring and control of the viability of the contractual risk management 1) 2) Did the contract function in an unexpected way? 3) Why did the contract fail? 4) Has the company’s riskposition changed? 5) a) b) 6) What must be done differently when planning the next transaction?

Strategic C-RM STRATEGIC CONTRACTUAL RISK MANAGEMENT: 1) Identification of business and risk management strategies 2) a) Risk identification a) Identification of general risks connected to the business and business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms b) c) 3) Risk evaluation 4) a) b) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation c) 5) a) b) Monitoring and control of contractual risk management a) Monitoring of changes in legal norms and their distribution of risks b) Monitoring and control of the viability of the contractual risk management 6) Development of business and risk management strategies and procedures

Strategic C-RM Development of business and risk management strategies 1) 2) 3) Can contractual risk management support company’s business according to its strategies? According to risk management strategies? 4) If not, should these strategies be reviewed? 5) What has the contractual risk management to offer for the development of these strategies? 6)

Strategic C-RM STRATEGIC CONTRACTUAL RISK MANAGEMENT: 1) Identification of business and risk management strategies 2) a) Risk identification a) Identification of general risks connected to the business and business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms b) c) 3) Risk evaluation 4) a) b) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation c) 5) a) b) Monitoring and control of contractual risk management a) Monitoring of changes in legal norms and their distribution of risks b) Monitoring and control of the viability of the contractual risk management 6) Development of business and risk management strategies and procedures

C RM THEORY OF CONTRACTUAL RISK MANAGEMENT: 1) Identification of strategies 2) Risk identification Go to Strategic C-RM 3) Risk evaluation 4) Contractual risk mitigation Go to Operative C-RM 5) Monitoring and control of contractual risk management The end 6) Development of strategies and procedures

Operative C-RM OPERATIVE CONTRACTUAL RISK MANAGEMENT: 1) Identification of contractual risk management strategies and procedures 2) Risk identification The abbreviation functions as a link to the beginning of the presentation The numbers also function as 4) navigation links to the beginning of the section Contractual risk mitigation memory notes and as to the content of the section (point them by your mouse) 5) Monitoring and control of contractual risk management 6) Development of contractual risk management strategies and procedures 3) Risk evaluation

Operative C-RM 1) 2) 3) 4) 5) 6) OPERATIVE CONTRACTUAL RISK MANAGEMENT: Identification of contractual risk management strategies and procedures

Operative C-RM Identification of contractual risk management strategies and procedures 1) 2) 3) What is the company’s contractual risk management strategy? What are the company’s contractual risk management procedures? 4) If such strategies and procedures do not exist, how should they be formed? 5) 6) What goals do these strategies and procedures set for the operational contractual risk management?

Operative C-RM OPERATIVE CONTRACTUAL RISK MANAGEMENT: 1) Identification of contractual risk management strategies and procedures 2) Risk identification a) Identification of risks connected to the business transaction b) Identification of legal norms regulating the transaction c) Identification of risks and risk distribution created by legal norms 3) 4) 5) 6)

Operative Risk identification: C-RM Identification of risks connected to the business transaction 1) 2) a) b) c) General risks connected to the business: 1) Financial risks (currency risk and risk of buyer’s insolvency, etc. ) 3) 4) 2) Political risks (risk of change in legislation, etc. ) 3) Risk of interruption 4) Risk of dependency 5) 6) 5) Product risk

Operative Risk identification: C-RM Identification of risks connected to the business transaction 1) 2) a) b) c) Risks connected to the coordination of the different parts of a transnational business transaction: Finance C Sales C 3) 4) TBT 5) Insurance C 6) Transport C

Operative Risk identification: C-RM Identification of risks connected to the business transaction 1) 2) a) b) c) Risks connected to the coordination of the different parts of a transnational business transaction: Payment modalities Sales C Finance C 3) 4) INCO TERMS, The 1982 Institute Cargo Clauses IN CO CO TE RM M BI S, TE RM S 5) Insurance C 6) Transport C

Operative Risk identification: C-RM Identification of risks connected to the business transaction 1) Risks connected to the coordination of the central parts of a sales transaction: 2) a) b) c) Spesifications for the goods Delivery terms 3) 4) Sales C 5) 6) Mechanism for the adaption of the contract Payment terms

Operative Risk identification: C-RM Identification of risks connected to the business transaction 1) 2) a) b) c) Risks connected to a single business transaction: Negotiation risk Risk for contractual disputes Information risk 3) 4) Risk for product liability Risk for changing circumstances 5) 6) Risk for damage to or loss of the goods Risk for nonperformance Sales C Risk for delayed performance Risk for nonconforming performance

Operative Risk identification: C-RM Identification of risks connected to the business transaction 1) Need for contractual allocation of risks? 2) a) b) c) 3) 4) Negotiation risk Risk for contractual disputes ISC Risk for product liability § 1 § 2 Information risk Risk for nonperformance § 3 Risk for changing circumstances Sales C § 4 § 5 Risk for delayed performance § 6 5) 6) Risk for damage to or loss of the goods Risk for nonconforming performance

Operative Risk identification: C-RM Identification of legal norms regulating the transaction 1) 2) a) b) c) 3) 4) 5) 6) What to look for? Where to look for?

Operative Risk identification: C-RM Identification of legal norms regulating the transaction: what legal norms? 1) Traditional approach: 2) a) b) c) BUILDING BLOCKS OF TRANSNATIONAL SALES CONTRACTS, MATERIAL FOR INTREPETATION and MATERIAL FOR GAP-FILLING: Interpretation Tailored guidelines of the contract terms contract standards ORDRE PUBLIC 3) 4) Standard contract clauses Standard contract terms International trade usage Established usages and/or practices between the parties ? Law of the contract 5) CISG 6) Contracting standards PECL, UPICC & CENTRAL TLDB LEX MERCATORIA

Operative Risk identification: C-RM Identification of legal norms regulating the transaction: what legal norms? 1) RM approach: 2) a) b) c) TYPES OF LEGAL NORMS REGULATING THE CONTRACT 3) 4) INDIVIDUAL CONTRACTUAL NORMS STANDARD CONTRACTUAL NORMS (optional default norms) 5) 6) MANDATORY LEGAL NORMS DEFAULT LEGAL NORMS

Operative Risk identification: C-RM Identification of legal norms regulating the transaction: what legal norms? 1) RM approach: 2) a) b) c) TYPES OF LEGAL NORMS REGULATING THE CONTRACT 3) 4) INDIVIDUAL CONTRACTUAL NORMS STANDARD CONTRACTUAL NORMS (optional default norms) 5) 6) MANDATORY LEGAL NORMS DEFAULT LEGAL NORMS Unavoidable default legal norms Alternative sets of default legal norms (legal orders)

Operative Risk identification: C-RM Identification of legal norms regulating the transaction: what legal norms? 1) RM approach: 2) a) b) c) MANDATORY LEGAL NORMS, DEFAULT LEGAL NORMS, STANDARD CONTRACTUAL NORMS and INDIVIDUAL CONTRACTUAL NORMS: Interpretation Tailored guidelines of the contract terms contract standards ORDRE PUBLIC 3) 4) Standard contract clauses Standard contract terms International trade usage Established usages and/or practices between the parties ? Law of the contract 5) CISG 6) Contracting standards PECL, UPICC & CENTRAL TLDB LEX MERCATORIA

Operative Risk identification: C-RM Identification of legal norms regulating the transaction: where to look for? 1) 1) Are you making an offer (order)? 2) a) b) c) Analyse the standard contracting documents provided by the firm’s contractual risk management strategy or procedure 2) Are you replying to an offer (order)? 3) 4) 5) Analyse the terms of that offer (order)! 3) Have you received a reply to your offer (order) or to your reply? Check the terms against your offer/reply! Are your terms accepted or modified? Analyse the eventually modified terms of the reply in relation to the other terms of your original offer/reply! 4) Remember to analyse the default norms regulating such transactions! 6)

Operative Risk identification: C-RM Identification of risks and risk distribution created by legal norms 1) 2) a) b) c) 3) 4) What is the default legal distribution of the risks to the business transaction according to: - the standard contracting documents of the firm? - the offer received by the firm? - the reply received by the firm? Are contract-specific investments adequately protected? Do the legal norms give adequate protection against the opportunistic behaviour of the contracting party? 5) Do legal norms create risks of their own? 6)

Operative C-RM OPERATIVE CONTRACTUAL RISK MANAGEMENT: 1) Identification of contractual risk management strategies and procedures 2) a) b) c) Risk identification a) Identification of risks connected to the business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms 3) Risk evaluation 4) 5) 6)

Operative Risk evaluation C-RM 1) 2) The goal is to allocate risk management resources with help of determination of the risk exposure Risk exposure is determined as a multiple of the likelihood of the risk and its extent: 3) 4) Extent of the risk Insignificant 5) 6) L i k e l y h. Great Catastrofical Unlikely 1 2 3 Likely 2 4 6 Very likely 3 6 9

Operative Risk evaluation C-RM 1) 2) Determination of the likelihood and extent of risks connected to contracts is often difficult and a three-way classification might be sufficient: 3) 4) Extent of the risk Insignificant 5) 6) L i k e l i h. Great Catastrofical Unlikely III 1 II 2 3 I Likely III 2 II 4 6 I Very likely II 3 6 I 9 I

Operative Risk evaluation C-RM 1) Allocation of resources of the company’s legal department based on a similar classification could be highly cost-efficient 2) The resources would then be allocated according to and in relation to the risk exposure: I Preventive law II Preventive law & remedial law III Remedial law 3) 4) Extent of the risk Insignificant 5) 6) L i k e l i h. Great Catastrofical Unlikely III 1 II 2 3 I Likely III 2 II 4 6 I Very likely II 3 6 I 9 I

Operative C-RM OPERATIVE CONTRACTUAL RISK MANAGEMENT: 1) Identification of contractual risk management strategies and procedures 2) a) b) c) Risk identification a) Identification of risks connected to the business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms 3) Risk evaluation 4) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation 5) 6)

Operative Contractual risk mitigation: C-RM Golden advices: 1) 2) - predict eventual contractual problems and agree on meaningful governance mechanisms for the contract and the contractual relationship 3) 4) a) b) c) - remember cost effectiveness considering negotiating, designing, monitoring and enforcement of contracts - protect contract-specific investments - remember to build exits 5) - prepare for contractual disputes 6)

Operative Contractual risk mitigation: C-RM Identification and evaluation of contractual risk management tools 1) 2) - Alternative model contracts? 3) 4) a) b) c) 5) 6) - Alternative standard clauses? - Tailored contract clauses?

Operative Contractual risk mitigation: C-RM Prediction and development of the viability of the contractual RM-tools 1) 2) - Personal/organizational experience of the viability of the alternatives? 3) 4) a) b) - Case law examples of non-viable alternatives? - Law, economics & organization-analyses of the alternatives? c) 5) 6) - Examples of success stories?

Operative Contractual risk mitigation: C-RM Contractual risk allocation 1) 2) Golden rules of risk allocation: - don’t take larger risks than what you can not bear - don’t take large risks to gain little 3) 4) a) b) c) 5) - don’t think that others do so Golden rules of contractual risk management: - don’t take risks that fall under the influence of your contracting/subcontracting party - don’t take large risks just to please your contracting party 6) - don’t think that others do so

Operative C-RM OPERATIVE CONTRACTUAL RISK MANAGEMENT: 1) Identification of contractual risk management strategies and procedures 2) a) b) c) Risk identification a) Identification of risks connected to the business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms 3) Risk evaluation 4) a) b) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation c) 5) 6) Monitoring and control of contractual risk management a) Monitoring the transaction and it’s legal regulation b) Monitoring and control of the viability of the contractual risk management

Operative C-RM Monitoring and control of contractual risk management: Monitoring the transaction and it’s legal regulation 1) 2) Monitoring the transaction: Is the transaction being executed according to the firm’s expectations? 3) Are there any overhanging risks for the transaction not being executed according to the contract? 4) Are there any overhanging risks for the economic outcome of the transaction not being as excepted? 5) a) b) 6) Are there any actions that should be taken to prevent such risks from materializing? - renegotiations? - substitute transactions?

Operative C-RM Monitoring and control of contractual risk management: Monitoring the transaction and it’s legal regulation 1) 2) 3) 4) Monitoring the legal regulation of the transaction: Has the legal regulation concerning the transaction been changed? - by legislator? - by case law? Are such changes overhanging? What are the consequences of such changes for the outcome of the transaction? 5) a) b) 6) Can those consequences be avoided or remedied?

Operative Monitoring and control of contractual risk management: C-RM Monitoring and control of the viability of the contractual risk management 1) 2) Monitoring and control: 3) - before entering into the transaction 4) - during the execution of the transaction - after the execution of the transaction 5) a) b) 6)

Operative Monitoring and control of contractual risk management: C-RM Monitoring and control of the viability of the contractual risk management 1) 2) 3) 4) 5) a) b) 6) Monitoring and control before entering into the transaction: Are the contractual risk management strategy and procedures being followed? Has the planned transaction risks that have not been managed by the contractual risk management strategy or procedures? Can such risks be managed contractually?

Operative Monitoring and control of contractual risk management: C-RM Monitoring and control of the viability of the contractual risk management 1) 2) Monitoring and control during the execution of the transaction: Are the contractual risk management strategy and procedures being followed? 3) 4) Is that strategy and procedures able to manage that risks involved in the transaction? Has the company’s riskposition changed? 5) a) b) 6) What can be done to manage the unexpected riskposition?

Operative Monitoring and control of contractual risk management: C-RM Monitoring and control of the viability of the contractual risk management 1) 2) Monitoring and control after the execution of the transaction: Did the transaction fulfill the firm’s expectations? 3) 4) Did the contract function in an unexpected way? Why did the contract fail? Were the contractual risk management strategy and procedures followed? 5) a) b) 6) Did the company’s riskposition change?

Operative C-RM OPERATIVE CONTRACTUAL RISK MANAGEMENT: 1) Identification of contractual risk management strategies and procedures 2) a) b) c) Risk identification a) Identification of risks connected to the business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms 3) Risk evaluation 4) a) b) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation c) 5) a) b) Monitoring and control of contractual risk management a) Monitoring the transaction and it’s legal regulation b) Monitoring and control of the viability of the contractual risk management 6) Development of contractual risk management strategies and procedures

Operative C-RM Development of business and risk management strategies and procedures 1) 2) 3) Can contractual risk management support company’s business according to its strategies? According to risk management strategies? 4) If not, should the contractual risk management strategy or procedures be reviewed? 5) What has the operative contractual risk management to offer for the development of that strategy or procedures? 6)

Operative C-RM OPERATIVE CONTRACTUAL RISK MANAGEMENT: 1) Identification of contractual risk management strategies and procedures 2) a) b) c) Risk identification a) Identification of risks connected to the business transaction b) Identification of legal norms regulating the transaction c) Identification of the risks and risk distribution created by legal norms 3) Risk evaluation 4) a) b) Contractual risk mitigation a) Identification and evaluation of contractual risk management tools b) Prediction and development of the viability of the contractual risk management tools c) Contractual risk allocation c) 5) a) b) Monitoring and control of contractual risk management a) Monitoring the transaction and it’s legal regulation b) Monitoring and control of the viability of the contractual risk management 6) Development of contractual risk management strategies and procedures

Power Point-show available at: www. jus. uit. no/ansatte/keskitalo/CRM-TSC. pps Comments to: petri. keskitalo@jus. uit. no