This contract tip is about how to figure out what level of risk to accept in your contracts.
[Quick note - Of all the 400ish contracts tips I've shared on LinkedIn and the 300+ in my book, I consider this one to be the number one most important and most critical of all. This message is SO critical for anyone working with commercial contracts.]
I'll start by saying life is risky. We cannot control everything that happens or predict what will happen. This is true with contracts as well.
How you draft and negotiate your contracts depends on your willingness to accept risk in exchange for the product delivered or the price paid by your counterparty. And that requires you to figure out what risks are reasonable for this deal and your client.
You may be thinking, "Well, how do I do that?"
My first piece of bad news is that there is no book or course that will answer that for you. You can’t download clauses or a contract or a playbook from the internet and think you are done.
These external sources reflect the risk choices made by the people who wrote or drafted them. Even if they are the smartest contract gurus in the world, their risk decisions are the ones they made for themselves based on what they know about the deal and the client. Those decisions may or may not be right for you or your client and this particular contract or transaction.
To figure out the right risk levels for you and your client, you will have to make a judgment call.
That leads me to the other piece of bad news - you may decide incorrectly. And knowing that you may decide incorrectly often triggers a lot of fear.
Your fear of making the wrong choice may lead you to blindly rely on what some contract expert said or the standard clauses and templates you found. Your fear may make you adopt unreasonable positions in your negotiations that delay or prevent deals from happening. That fear may lead you to heap criticism on yourself and your skills, criticism that in most cases is not warranted for someone with your experience level.
That's the hardest part of working with contracts - the fear and worry about not knowing and possibly making the wrong decision about how to draft or negotiate something.
I've found that the best way past that fear is a combination of learning and acceptance.
Start by learning.
Learn as much as you can about the business strategy (so you understand the real risks facing the company not just what risks exist), the products (so you understand what can go wrong with this product not just what goes wrong with others), and the legal consequences for your jurisdiction (so you know what could happen if things go wrong in your specific circumstance).
Even if you could learn more, you will get to a point when you have to take what you've learned make the call on what to do and how to advise the client. That's when you'll decide and give your advice.
After you've done that, you move to acceptance.
Accept that you’ve done your best to make the right decision. Accept that you are not in control of what happens. Find peace with the fact that you did your best and that is all you can do, even if the deal does end up going sideways. Even if in retrospect a different choice may have led to a better outcome.
They don't teach this technique in any training I've attended. But this is the most true thing I know. I believe from my own experience that learning and acceptance are the most important tools that we have for figuring out how to make judgment calls about managing risk in contracts.
What advice would you give newer lawyers and professionals who are trying to figure out how to approach risk in their contracts?
