Is Investment Risk Different to Legal Risk?

I have been asked to chair the 3rd Annual Contracts Conference at Legalwise Seminar next Monday.

I will also be presenting a paper at the first session on “Good Contract Drafting: Costs, Consistency, Formatting and Variations.” Come along if it’s not too late or ask Legalwise for a copy of the paper.

I am also on an expert panel at the lunch time session on “Trends in Risk Allocation”. The other panellists include John Kenny Director of John Kenny & Co/Entre Law, Brett Heath from Carter Newell and Tim Dwyer of Shirlaw’s Australia.


In thinking about how the panel discussion was going to work, I had the opportunity to venture outside my ‘legal wall’ and peer over to the business side of risk as Shirlaw’s Coaching see it.

I actually went on-line and did Shirlaw’s Risk Indicator analysis to see what type of business risk profile I had as a business owner.

Fascinating stuff.

It made me think even more than I usually do about the ‘intersect’ of business investment risk and legal risk/drafting and negotiation.

Good lawyers get the ‘intersect’ right. Less than optimal business outcomes result from overly conservative or commercially inexperienced lawyers getting it wrong sometimes.

I think investment risk and legal risk are different. Do you?

Lawyers ‘future cast’ when they draft. You can measure the legal risk by the pound (in terms of the bigger the risks the more pages that will be in the contract).

Our profession are sometimes accused of being dangerous to a deal because we are perceived as too nit-picky, conservative and pessimistic. I think that is not an accurate picture of the modern corporate/commercial lawyers in Australia. We are not pessimists but realists. We are constantly involved in ‘progressive visioning’. where we anticipate the potholes up ahead and plan for those contingencies in the contract. We are kind of like ‘precogs’ ( designed to stop misdeeds before they happen, from the movie with Tom Cruise, Minority Report). We bring to the table our collective experiences (built into our precedents by generations of lawyers learning from each other’s clauses). If some lawyers could, I guess they would be tempted to allocate all the risk to the other counterparty and zero to their client. Good lawyers however know, that’s not the way the business world works. and that their client’s best interests are served by a sustainable and workable contract. They know when to ‘back off’ and think commercially understanding more about the investment risk the parties are trying to maximize by committing their capital and energy to the deal before them. Good corporate and commercial lawyers temper their predisposition to insert into contracts clauses shifting risk to the other party to keep their client safe from future shock by understanding that the viability of a deal contains a balance between the risks of all the parties. Often the very process of negotiating the terms of a contract will ensure that balance is achieved.

So the drafting process including the ebb and flow of emailed ‘mark ups’ of a draft contract is an invaluable opportunity for a client and his commercial counterparty to know and understand their rights obligations and the law of contract that applies to their dealings. In the ‘tussle of the drafts’, the parties can test the limits of how far they can push risk to the other side without breaking the deal. It is much better to have a heated exchange over the drafts than it is litigation of a poorly considered executed contract. A contract properly negotiated and drafted and redrafted by lawyers on both sides will not only flush out the hidden agendas, differences and potential problems the deal may have during the course of commercial dealings between the parties but it will also stand the test of time. A few thousand spent here will save tens or hundreds of thousands later in the ‘litigation vortex‘.

One ‘pass’ over the document will never be enough in my opinion for a client to get it right. If you have not gone through at least three versions that is to say an original version, then another marked up with amendments by the other party then a revision by a second set of marked-up amendments by the first party, the document will be poorer for the lack of effort by the lawyers and clients concerned.

Any client who does not agree in the retainer to go through that process but would rather sign an off-the-shelf precedent his lawyer has prepared (or worse that he gets off the internet) is not only ‘penny wise and pound foolish’ but moreover his lawyer is probably dilatory in his duty to his client as would the lawyer on the other side be for not having gone through the process of properly considering the wording of the agreement in the context commercial relationship by going through the exchange of marked up amendments indispensable for any good and sustainable deal.

Peter Janssen

Corporate First ®
Estate First ®



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