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Understanding Legal Risks in Commercial Contracts

July 7, 2023

Legal Talent Outsourcing

Managing Legal Risks with Contract Management Systems

Every business must navigate the complex terrain of commercial contracts. But the path is fraught with potential legal risks, which can often derail operations, compromise revenue, and expose companies to unforeseen liabilities. While ignoring these risks can result in serious consequences such as regulatory penalties or strained business relationships, addressing them proactively is a crucial aspect of operational risk management. Fortunately, effective contract management systems can equip businesses with sophisticated tools to mitigate such threats.
 

Understanding Legal Risks in Commercial Contracts

To begin contract risk mitigation, one must first understand the breadth of potential legal risks present in commercial contracts. These risks can materialize in several forms. Non-compliance with laws and regulations, for instance, can expose a business to regulatory penalties, lawsuits, and reputational damage. Contracts might include unfavorable terms that weigh heavily against a company's interests or carry heavy penalties for contractual breaches. Auto renewal provisions can lock companies into unprofitable contracts with unfavorable terms. And indemnification clauses can create significant contingent liabilities.

Moreover, these legal risks are not uniform across all industries. Each sector carries its unique legal challenges and complexities. Whether it's compliance with strict regulatory frameworks in healthcare or addressing intellectual property rights in technology contracts, understanding these specific challenges is the first crucial step towards effective mitigation.

Accordingly, it’s important for businesses to assess:
  • Which contracts have higher risk exposure? 
  • Which specific contracts, or broad contract types, include regulatory compliance risks that must be managed, such as OSHA, HIPAA, or data privacy?
  • Are there different geographic legal and regulatory risks that must be taken into account for different states or countries?
 

The Role of Contract Management Systems in Mitigating Legal Risks

As business environments evolve and grow increasingly complex, contract management systems are becoming increasingly important tools for identifying, managing, and effectively curbing legal risks, transforming these potential threats into opportunities for improving operational excellence and increasing profitability.

Contract management systems are built on a core premise of simplifying and streamlining contract management. They facilitate the standardization of contractual terms, reducing the chances of unfavorable or inconsistent terms. Automated alerts ensure crucial contract dates and milestones don't go unnoticed. A thorough review process ensures that contracts comply with relevant laws and regulations, greatly reducing the risk of non-compliance.
 

Benefits of Contract Management Systems in Risk Mitigation

Contract management systems bring a host of benefits to risk mitigation strategies. One of the most noteworthy is improved contract visibility. This aspect enables enhanced monitoring and proactive risk identification. With a bird's-eye view of all contracts, in-house legal counsel can monitor every contract's progress, identify potential issues, and address them before they escalate into significant legal problems.

The standardization of contracts also plays an invaluable role. By using predetermined terms and conditions, companies ensure a consistent approach to contract formulation. This uniformity significantly reduces the risk of non-compliance, misunderstandings, or inadvertent commitments, ensuring contracts align with a company's broader risk management strategies.

In today’s rapidly paced business environment, missed deadlines and unnoticed automatic renewals are common culprits of unnecessary legal issues. Here too, contract management systems provide a solution. Automated alerts and notifications mean businesses can stay ahead of the curve, ensuring they're responding to contractual obligations proactively rather than reactively.

Finally, an effective contract management system can help companies manage all of their legal risks better—not just those related to commercial contracts—by freeing up in-house legal professionals who would otherwise be spending an inordinate amount of time managing contracts, and allowing them to elevate to their highest and best use.
 

The Symbiotic Role of Humans and Technology in Mitigating Risk

The utility of contract management systems is undeniable. Still, it's essential to understand these tools don't replace the need for skilled professionals; instead, they create a synergistic relationship that maximizes risk mitigation effectiveness. Humans bring to the table the nuances of legal interpretation, judgment, and strategy, while technology provides scalability, efficiency, and precision.

In the context of contract management, professionals set the direction for risk mitigation. They define the contractual terms that align with company strategy, ensure compliance with regulations, and structure negotiations to protect the company's interests. Technology, on the other hand, acts as an enabler, amplifying these efforts. It standardizes processes, automates routine tasks, and ensures thorough documentation, allowing legal professionals to focus their efforts on more strategic, high-level tasks.

Furthermore, the technology in contract management systems offers insights and data-driven analyses that inform and refine legal strategies. By tracking patterns and trends in contract performance, these systems help legal professionals identify potential areas of risk or opportunity they might otherwise overlook. Thus, technology not only complements but enhances the human aspect of legal work, creating a powerful combination for comprehensive legal risk management.

This symbiotic relationship also extends to the design of contract management systems. At Lexitas, our commercial contracts outsourcing experts work with in-house legal professionals to provide advice and recommendations for developing effective contract management systems tailored to their specific needs. We also help our clients set up workflows and processes, and provide support in the development and execution of their systems. The result is a customized process that addresses the unique challenges and risks inherent in a company's contracts.

Ultimately, effective risk mitigation relies on the combination of skilled professionals and advanced technology. While humans provide the insight and strategic direction, technology offers the tools to implement these strategies at scale, with precision and efficiency.
 

Conclusion

In a world of swift technological advancements and evolving regulatory landscapes, managing legal risks in commercial contracts isn't just beneficial; it's imperative for success. Contract management systems are critical, offering powerful capabilities to streamline contract processes, reduce risks, and protect a company's bottom line.

Investing in robust contract management systems is more than just keeping pace with technological advances—it's about future-proofing the business, skating "to where the puck is going," and ensuring longevity and resilience in the face of both present and future challenges. 

Lexitas can help your business in the creation, implementation and management of effective contract management systems. To learn more, contact our commercial contracts outsourcing team.
 
Author Image

Meron Hewis

President, Legal Talent Division

Meron Hewis is the President of the Legal Talent Outsourcing Division of Lexitas. Ms. Hewis has over 20 years of experience in legal consulting, project management, and alternative legal talent outsourcing solutions. She is a thought leader in the industry, providing unique legal solutions and designing the operations of various legal programs internationally.

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