RISK MANAGEMENT - CNPLaw · • Risk management is not about bureaucratic back-covering • It’s...
Transcript of RISK MANAGEMENT - CNPLaw · • Risk management is not about bureaucratic back-covering • It’s...
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RISK MANAGEMENTin Commercial Contracts
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Overview
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APPRECIATING RISK
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Areas
• Operational• Process• IT • Security
• International• Political• Environmental
• Market • Business• Financial• Credit• Liquidity
• Legal• Ethical• Tax• Regulatory
• Human • Fraud
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Types
• Poor contract management • Non-performance• Defective performance• Insolvency• Lack of financing/liquidity• Ownership disputes • Third party interference• Breaches of confidence• Fraud / misrepresentation
• Global downturn• Force majeure events• Supply chain interruption• Increased cost of goods• Forex losses• Tax liability• Security breaches• Promulgation of new
laws
• Wrong counterparty• Unauthorised execution• Poor drafting• Onerous terms• Excessive disclaimers• Inadequate remedies• Unenforceable security• Unenforceable judgements• Poor contract visibility
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Potential Impact
• Loss of assets• Damages claims• Indemnity claims• Third party claims• Rectification costs
• Increased costs• Loss of revenue• Cash flow issues• Enforcement costs• Insolvency
• Criminal liability• Reputational
damage
• Loss of approvals, licences & permits
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OBJECTIVES
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• ESTABLISH a framework to identify, assess and mitigate key risks throughout the contract lifecycle
To
• ADOPT a proactive and preventative approach toward risk, versus a reactive and reparative one
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Contract Lifecycle
CREATION(drafting &
negotiation)
EXECUTION (approvals &
authorisations)
PERFORMANCE(compliance, milestones &
time bars)
ADMINISTRATION (repository &
retrieval)
TERMINATION / RENEWAL(evaluation & optimisation)
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• Loss from risk can impact not just profitability and growth but financial and operational stability
• Risk management helps to alleviate exposure and provide a mechanism for conflict resolution
• If you haven’t assessed the risk, …
Why?
you are bearing it!
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Contracting process often relegated to mere ‘administrative’ function, with:
Problem
• inadequate verification • insufficient cost-benefit analysis• non-existent, fragmented or inconsistent policies • low or no visibility of terms• poor document management• ineffective monitoring and compliance • no review and performance analysis
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Dilbert on Risk Management
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FUNDAMENTALS
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The 5 Cs
Culture.
collaboration
clarity
compliance
continuity
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RISK ASSESSMENT PROCESS
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Process
• Assessment
• Evaluation
• Mitigation
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• Stakeholder discussions
• Surveys & audits
• Risk wheel & risk matrix
• Customisation
Assessment
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Dilbert on Risk Management
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Risk Wheel
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Catastrophic 5 10 15 20 25
Major 4 8 12 16 20
Moderate 3 6 9 12 15
Minor 2 4 6 8 10
Insignificant 1 2 3 4 5
Very
UnlikelyUnlikely Possible Likely
Very
Likely
CO
NS
EQ
UE
NE
PROBABILITY
Risk Matrix
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Evaluation
Weightage
WCGW
ALARP
Key Assumption
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• What can go wrong?
• How likely is it to go wrong?
• What’s the impact if it goes wrong?
• Can the risk be removed, moderated or tolerated?
WCGW
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ALARP
• As low as reasonably possible
• Point at which cost to reduce risk becomes disproportionate to benefit to be gained
• Aim is to reduce risk value down to ALARP level
• Steps taken must be lawful and reasonable
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• Developing & implementing appropriate safeguards to eradicate, control & monitor risk
Mitigation
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SAFEGUARDS
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• Policies
• Process alignment
• Extra-contractual measures
• Contractual measures
Safeguards
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• Contract creation, approval & renewal• Document retention & management• Privacy & data protection• Email & social media• IT security & BYOD• Procurement• Gifts & disclosure• AML / KYC• Crisis / dispute management• Whistleblowing• Business continuity
Policies
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• Due diligence • Credit searches• Public register & court searches• Inspections• Interviews• References• Contingency plans• Insurance
Extra-Contractual Measures
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• Standard forms• Approved clauses library• Contractual terms (including security arrangements)• Internal stakeholder review• Legal review• Contract repository• Checklists• CLM systems• Contract ownership
Contractual Measures
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• Counterparty• Authorisation• Scope of obligations / rights• Performance standards• Payment terms & deduction rights• Adjustment & variation rights• Continuing disclosure obligations• Extent of liability imposition• Scope of limitations & exclusions
Contract-Specific Risks
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• Third party interference• Ownership disputes• Force majeure events• Third party claims• Forex loss & tax exposure• Compliance issues• Unlawfulness• Enforceability of security• Status post-breach
Contract-Specific Risks
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• Expiry & renewal• Termination rights• Adequacy of remedies• Impediments to enforcement • Breach of confidence• Data leakage • Governing law & dispute resolution• Post-termination dependency• Post-termination obligations
Contract-Specific Risks
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USE OF CONTRACTUAL TERMS
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Contracts…
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• Performance• Status• Asset protection• Security• Exposure• Renewal• Termination• Remedies• Enforcement• Post-termination
Using Terms to Manage Risk
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• subject to contract• conditions precedent & subsequent• representations & warranties• positive / negative covenants & undertakings • variation & adjustment provisions• assignment & change of control provisions• control of third party involvement• consequence of breach• impact of force majeure events
Performance
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• conditions precedent / completion deliverables • purpose / objects clauses• representations & warranties• reporting & continuing disclosure obligations• restrictions & disclaimers• subject to consent, deeming & discretionary provisions• precedence clauses• conclusiveness clauses• further assurance provisions• entire agreement provisions
Status
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• assertions / acknowledgements of ownership• assignment of interests• segregation requirement• retention of title • passing of title & risk• restrictions on use• insurance obligation• return / destruction of assets • confidentiality / data protection
Asset-Protection
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• deposit, escrow & trust arrangements• guarantees• charges, pledges & liens• audit & inspection rights• rights of entry
Security
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• exclusions • limitations • indemnities• liquidated damages• fee credits & debits• non-recourse• third party claims• tax, forex losses & costs
Exposure
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• fixed term• indefinite• with consent• automatic
Renewal
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• by expiry• by notice• upon breach • upon insolvency, etc.• upon cross-default• upon intervening events
Termination
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• suspension, withholding & set-off rights• return of deposit/goods • action for account• appointment of receiver / manager• power of sale• equitable relief• liquidated damages• power of attorney• default interest• recovery of enforcement costs
Remedies
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• governing law • submission to jurisdiction• dispute resolution mechanism
Enforcement
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• hand-over• transitional support• survival clauses
Post-Termination
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Specific Concerns
• Battle of the forms• Addendums & variations• Conditional language • Qualifying language• Cross-referencing• Contract management
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CONCLUSION
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• Risk management is not about bureaucratic back-covering
• It’s about taking sensible, practical steps to protect against potential loss
• Organisations should strive to formulate a robust risk management framework that is tailored to their specific needs
• All relevant stakeholders should be trained and motivated to implement the framework and made aware that a failure to manage key risks can lead to significant loss
Conclusion