Contractual Risk Management

One of the economic and cultural shocks for SMEs is having to think their respective transactions through to the last clause and then draft these intentions in a contract. The U.S. has no direct equivalent to the German Civil Code, German Commercial Code, or General Terms and Conditions, and terms such as “good faith” or “merchant status” are unheard of in this context. Standard concepts under civil law, such as the impossibility of performance and default, are not regulated anywhere. Added to this is the aforementioned cultural difference: In European countries, a handshake and a promise of the business partner still count for something. Raising too many contractual points shows a lack of trust and puts the business at risk. Not so in the U.S. Written agreements with gaps or gray areas are ultimately detrimental to the European company and its U.S. subsidiary. The European company is not only encouraged to think through and finalize all relevant aspects of the transaction, it is obligated to do so as a result of the business partner’s expectations. Those who do business in the U.S. must not shy away from these business practices: “When in Rome, do as the Romans do…” It is almost always worthwhile (if not essential) to include the following five pillars of wisdom of contractual risk management in standard contracts:

  • An exclusion of consequential damages
  • An overall liability cap
  • A “time is of the essence” provision
  • A “deal is the deal” clause

An arbitration provision Adapting contractual agreements to the U.S. system usually simplifies the insurability of the U.S. business’s risk and lowers the risk of litigation. If the contractual provisions are clear and there is no room for interpretation, it is hard to build a claim out of it. Adequate contractual risk management is essential in the U.S. and offers a significant financial advantage to the European company.