Desktop version

Home arrow Sociology arrow A short guide to contract risk


If one sees the contract as a legal document intended to regulate relationships through legal norms, the question of interpretation (and misinterpretation) quickly comes to mind. Where a dispute arises, the parties seldom concur on the terms of their agreement and what those terms mean. The language in their contract may be vague or ambiguous. The contract may include words or abbreviations or refer to standards the parties did not fully understand or take time to check. In international business, contracts are frequently written in English, even when it is not the native language of the parties. Contract structures, forms, and templates based on common law and Anglo-American style drafting have increasingly spread to civil law countries. Some of the concepts may not translate well into other languages and cultures, and "legal transplants” can cause confusion and add to the language risks.

Are issues around contract wording and interpretation a primary source of contract risk? Even though such issues frequently arise in court and arbitration, how often do they create risk in contracts? Experience tells us that risks and disputes seldom arise due to such issues alone. Contract wording and legal matters typically only become issues when business objectives are not reached, trust is eroded, the relationship does not work, and a business dispute cannot be resolved by non-legal means.

So in order to find the true sources of contract risk, we need to go beyond contract wording and legal issues to people and decision making—and not just rational decision making. Research and experience lead us to people's goals, perceptions, and emotional decision making, which often comes into play after they have faced a negative surprise or disappointment. Both in private life and in business, people decide to bring a claim or begin legal proceedings not only on rational decision criteria and the right to do so, but also on a feeling of injury. Louis M. Brown, known as the "Father of Preventive Law,” once noted that legal claims and disputes usually do not arise because someone violates an agreement or a rule. instead, they emerge because someone feels a sense of injury and is moved by circumstances to see it redressed.1

This is not to say that contract wording or legal issues or rules are not important. They are, especially when disputes are resolved through legal means. Understanding them is a central part of contract literacy, one of the foundations of contract risk management. Yet to understand the true causes of contract risk, we will first need to look into people's perceptions and choices and how they are (or are not) reflected in contracts. [1]

  • [1] Dauer, E.A. (2006) The role of culture in legal risk management. in P. Wahlgren and C. Magnusson Sjoberg (Eds.), A Proactive Approach. Scandinavian Studies in Law,Volume 49. Stockholm: Stockholm institute for Scandinavian Law, pp. 93-108, 93-4,available at, citing Louis M. Brown, whosework has served as the foundational premise for the preventive aspects of the proactiveapproach.
< Prev   CONTENTS   Source   Next >

Related topics