|Date | Version||August 29, 2022| 1.0|
|Keywords||‘Risk’, ‘Risk Management’, ‘Co-operation’, ‘Contractual Arrangements’|
‘Risk’ is omnipresent. The challenge lies in identifying risks, assessing risks, evaluating risk mitigation measures, and executing such risk mitigation measures. ‘Risk’ is seldom eliminated, it must be managed.
The focus presently is on contractual arrangements that the businesses enter into and insight into the philosophy of risk allocation under such contractual arrangements. There are varied contracts; therefore, to state that ‘one philosophy’ fits all would trivialise the issue. However, a key factor for successful contract implementation is ‘co-operation’ among the parties – this is true possibly for all kinds of contracts. A contract which addresses the risks involved equitably often encourages ‘co-operation’ among the parties. For instance, the owner of a project is more likely to be diligent with the performance of its role and extend active co-operation where the contractor is not the only party burdened with all the project execution risks.
A balanced approach to risk management is likely to result in successful contract implementation. The ‘co-operative game theory’ is about applying co-operative decision-making techniques to find optimal choices that will help achieve the desired outcome. The theory pertains to making decisions collectively and establishing a coalition to maximise rewards above individual actions. This theory entails the following:
- Value Creation: Value creation is the primary aim of a business. This goal can be achieved by co-operation between parties, which is more likely to result in a win-win situation when compared with burdening of one party by the other. For instance, in a contract between the owner and contractor, the parties can come to an agreement to put a “cap” on the liability of the contractor and the owner can require carve-outs from the overall cap on liability, so that liability for matters such as death, personal injury, and fraud can be excluded from the “cap”. Therefore, this reasoned risk allocation strategy would be a “win-win” proposition for both the owner and the contractor.
- Equitable Distribution: Allocating risk fairly and equitably often leads to successful contract implementation. For instance, in the case of a force majeure event, the allocation of risk between the parties should be such that liability does not fall entirely upon one party and can be avoided to the extent such a force majeure event affects the party’s contractual obligations. Thus, a contract should be negotiated and drafted to state each party’s rights and duties once the force majeure event is triggered.
- Goal-oriented approach: Allocation of risk should be in a manner that the needs of each party are considered. Thus, each party should co-operate to allocate risk so the other party can manage it properly. To illustrate, under a contract, instead of burdening one party with all risks, the owner and contractor may agree to allocate any risk associated with design errors to the owner. Similarly, a project owner might assign the risk of a construction-related injury to the contractor, who is best equipped to ensure a safe work environment.
Applying co-operative techniques for risk allocation among parties to a contractual arrangement should thus help achieve a balance of distribution in terms of responsibilities and risk involved in such arrangements. Risk management in a co-operative way also reduces the time and cost of contract negotiation and, eventually, legal disputes.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.