Overview
Contract management is crucial for businesses but comes with risks, particularly around service type, quality, timeliness, omissions, fees, and service providers.
These risks can impact various aspects of an organisation, including director and officer liability, corporate governance, culture, and reputational risk.
While exposure cannot be completely eliminated, effective risk mitigation strategies can reduce it.
Key risks from contract disputes
Financial Risks:
Delays in execution can lead to missed deadlines, penalties, and lost business opportunities.
Payment errors may cause financial losses.
Litigation over disputes can strain financial resources.
"Commercially transmitted liability" (vicarious liability) can arise from poorly vetted contractors or third-party systems.
Legal and regulatory risks:
Non-compliance with laws or ambiguous contract terms can result in legal disputes, fines, or regulatory investigations.
Directors and officers may be implicated in legal proceedings, especially if they fail to comply with regulations or fail to exercise sound judgement.
Operational risks:
Disputes can disrupt operations, causing delays in execution, resource misallocation, poor communication, and internal morale issues.
Staff may be impacted which can affect work environments.
Security, privacy, and copyright breaches:
Breaches, such as those involving sensitive data or patents, can expose organisations and individuals to legal liabilities.
Insurance Risks:
Insurance policies have terms that must be followed to ensure coverage. Failure to inform insurers about claims or settlements could lead to reduced liability coverage.
Key overarching risks
Reputational Damage: Contract mismanagement can harm the organisation’s reputation, impacting trust, share price, client retention, and revenue.
Uninsured Loss: Unfavourable contract clauses or poor risk management can lead to uninsured losses.
Mitigating contractual risks
Ensure contracts are clear, tailored, and aligned with insurance terms.
Implement comprehensive contract management processes.
Provide employee training on best practices and legal requirements.
Conduct regular risk assessments for compliance, financial, and operational issues.
Directors’ Duties and Obligations
Directors and officers must act in the company’s best interests, ensuring proper governance, compliance, and dispute resolution.
Directors are liable for breaches and must understand legislative changes affecting contracts.
Directors should ensure contracts are legally binding and in the company’s best interest.
When disputes arise, directors must manage risks, negotiate settlements, or pursue legal action, always consulting insurers to avoid breaching policy terms.
Impact on Directors and Officers (D&O) Insurance
D&O insurance policies need regular reviews to align with contractual and legal changes.
Insurers must be consulted early in disputes to ensure compliance with policy conditions.
With increasing regulatory scrutiny, directors and officers must remain vigilant in reviewing policies, procedures, and contracts to minimise risks. Oversights can multiply risks, making proactive risk management a priority.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action based on the content in this publication.
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