© 2003 Associate Professor, doctor juris Petri Keskitalo The Faculty of Law, University of Tromsø C ONTRACTUAL R ISK M ANAGEMENT IN TRANSNATIONAL SALES.

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

- 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 RISK MANAGEMENT:CONTRACTUAL - 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 - Alternative methods are for example: production-technical solutions finance-technical solutions insurances

- 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 - Will enable the firms contracting activities also to fullfill the demands set by the ISO 9001-standard RISK MANAGEMENT:CONTRACTUAL - 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 - Operative contractual risk management will enable the firm to systematically manage it’s single business transactions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risk evaluation The goal is to allocate risk management resources with help of determination of the risk exposure Extent of the risk InsignificantGreatCatastrofical L i k e l y h. Unlikely Likely Very likely 123 426 963 Risk exposure is determined as a multiple of the likelihood of the risk and its extent: 1) 2) 4) 5) 3) 6) C-RM Strategic

Determination of the likelihood and extent of risks connected to contracts is often difficult and a three-way classification might be sufficient: 1III23 426 963 III IIII IIII Risk evaluation Extent of the risk InsignificantGreatCatastrofical L i k e l i h. Unlikely Likely Very likely 1) 2) 4) 5) 3) 6) C-RM Strategic

Allocation of resources of the company’s legal department based on a similar classification could be highly cost-efficient Risk evaluation IPreventive law IIPreventive law & remedial law IIIRemedial law 1III23 426 963 III IIII IIII Extent of the risk InsignificantGreatCatastrofical L i k e l i h. Unlikely Likely Very likely The resources would then be allocated according to and in relation to the risk exposure: 1) 2) 4) 5) 3) 6) C-RM Strategic

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

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

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

Firm A STRATEGIES FOR TRANSNATIONAL BUSINESS Identification and evaluation of contractual risk management tools Contractual risk mitigation: 1) 2) 4) 5) 3) c) b) a) 6) C-RM Strategic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Firm A F F b R JV F c F b A S L S Identification and evaluation of contractual risk management tools Contractual risk mitigation: 1) 2) 4) 5) 3) c) b) a) 6) C-RM Strategic

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

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

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

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

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

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

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

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

Identification of business and risk management strategies 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 Risk evaluation 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 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 Development of business and risk management strategies and procedures 1) 2) 4) 5) 3) b) a) c) b) a) c) b) a) CONTRACTUAL RISK MANAGEMENT:STRATEGIC 6) C-RM Strategic

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

Identification of business and risk management strategies 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 Risk evaluation 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 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 Development of business and risk management strategies and procedures 1) 2) 4) 5) 3) b) a) c) b) a) c) b) a) CONTRACTUAL RISK MANAGEMENT:STRATEGIC 6) C-RM Strategic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1) 2) 6) 4) 5) 3) a) c) b) Risk identification: Identification of legal norms regulating the transaction: where to look for? 1) Are you making an offer (order)? Analyse the standard contracting documents provided by the firm’s contractual risk management strategy or procedure 2) Are you replying to an offer (order)? 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! C-RM Operative

Identification of risks and risk distribution created by legal norms Risk identification: 1) 2) 6) 4) 5) 3) a) c) b) 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? Do legal norms create risks of their own? C-RM Operative

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

Risk evaluation The goal is to allocate risk management resources with help of determination of the risk exposure Extent of the risk InsignificantGreatCatastrofical L i k e l y h. Unlikely Likely Very likely 123 426 963 Risk exposure is determined as a multiple of the likelihood of the risk and its extent: 1) 2) 6) 4) 5) 3) C-RM Operative

Determination of the likelihood and extent of risks connected to contracts is often difficult and a three-way classification might be sufficient: 1III23 426 963 III IIII IIII Risk evaluation Extent of the risk InsignificantGreatCatastrofical L i k e l i h. Unlikely Likely Very likely 1) 2) 6) 4) 5) 3) C-RM Operative

Allocation of resources of the company’s legal department based on a similar classification could be highly cost-efficient Risk evaluation IPreventive law IIPreventive law & remedial law IIIRemedial law 1III23 426 963 III IIII IIII Extent of the risk InsignificantGreatCatastrofical L i k e l i h. Unlikely Likely Very likely The resources would then be allocated according to and in relation to the risk exposure: 1) 2) 6) 4) 5) 3) C-RM Operative

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2003 Associate Professor, doctor juris Petri Keskitalo The Faculty of Law, University of Tromsø C ONTRACTUAL R ISK M ANAGEMENT IN TRANSNATIONAL SALES.

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© 2003 Associate Professor, doctor juris Petri Keskitalo The Faculty of Law, University of Tromsø C ONTRACTUAL R ISK M ANAGEMENT IN TRANSNATIONAL SALES.

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Presentation on theme: "© 2003 Associate Professor, doctor juris Petri Keskitalo The Faculty of Law, University of Tromsø C ONTRACTUAL R ISK M ANAGEMENT IN TRANSNATIONAL SALES."— Presentation transcript:

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About project

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