3 tips for evaluating and managing risks in partnership agreements

Katie Cook

ContractRoom

by Katie Cook

teamwork-with-gears_business_partnership.jpegFailure to properly investigate and evaluate the integrity of businesses with which your company has entered into partnership agreements can lead to several negative consequences.  

For example, your own company’s reputation may be tarnished by the unscrupulous acts of a partner business or you may incidentally incur losses or extra costs when a partner does not deliver on a business commitment.  Also, regulatory laws in some countries can make your own company liable for the dishonest behaviours of your business partners.  Businesses often neglect to carry out proper due diligence and monitor risk in the business partner context. This is because businesses already have a lot to concern themselves with for ensuring their own compliance with regulatory obligations and assessing and properly addressing their internal risks.*

So what are some processes businesses can develop to ensure they properly address business partnership risks?

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1. Establish a framework for calculating the potential risk of new business partners.

Establish procedure for going about the risk assessment.  Work out what information you should gather about a prospective partner, establish a process to ensure the information you collect is independently verifiable and establish a system for ranking each partner’s level of risk.  

Some examples of information you may want to gather and assess may include:

  • credit checks;
  • information your company holds about the prospective business partner e.g.
    • notes about past dealings;
    • any news articles that relate to the integrity of prospective partner (subscribing to  RSS feeds or setting up something like Google Alerts to monitor news about the relevant company may be useful here); or
    • information about laws or regulations they may have been found to have breached.

You could also interview representatives of other companies that have in the past or currently work with them to get an understanding about their experience.  You may also want to ask the prospective partner a series of questions relating to their past and present business integrity practices and experiences and then compare their answers to the information you have found independently.  In this way you can assess how honest they have been in supplying you with information.  

Once you have completed your assessment, find a way to rank the level of risk each business partnership poses.  This ranking will help you determine how often to reassess the risk posed by individual business partnerships and carry out risk mitigation strategies e.g. in your contracting process.

2. Establish procedures for regularly reassessing the risks posed by business partners

Determine how often to reassess the risk of your business partners.  You may decide to reconsider the risk of those you have assessed as being high risk more often than those you have deemed to be low risk.  You may also decide you want to reassess the risk of your business partners upon the completion of certain milestones in your business relationship, such as upon the commencement of a new large-scale project, or upon the occurrence of a significant event, e.g. change in management of your business partner.

3. Establish a framework for drafting all relevant contracts according to level of risk posed by business partners

There may be certain terms in contracts between you and your business partner that can be reworded to lessen your exposure to risks or at least lessen the likelihood of a detrimental occurrence due to poor behaviour of your business partner.  The wording you want to choose for various terms within contracts may be different depending upon the level of risk you have assessed them as posing.  

For example, if you are working with a business partner in the context of construction and your assessment of them reveals that they in the past have misrepresented the amount of progress their company has made at various points in time, you may want to include a term in the contract that allows you to inspect their worksite without providing notice. In this way you can carry out regular inspections and if work does appear to be behind schedule you can develop contingency plans to address this as soon as possible rather than being caught off guard at a later date.  Other examples include adding representations, warranties and covenants requiring all parties to comply with laws and perhaps even specific assurances about not engaging in corrupt practices such as bribery. Or you may add terms that address other issues that may have arisen in your due diligence process.

Automating the creation of various versions of contracts/clauses/provisions that are worded appropriately according to relevant level of risk in the document assembly process is something with which a contract management software should assist.

So there you have some tips and tricks for managing risks posed by potential business partners.  What are your thoughts?  What do you believe are the best methods to employ to reduce risks posed by business partners?

ContractRoom is a leading cloud-based negotiation and contract lifecycle management software that assists you in the document assembly process for contracts where you wish to tweak wording according to how you have assessed the risks posed by your business partner.  To find out more visit www.contractroom.com or book a free demo here: Request Demo

*https://www.pwc.de/de/risiko-management/assets/business-partner-compliance-screening_en.pdf

About the author

Katie Cook

Katie Cook

Katie Cook is the Director of Marketing, Communications and Legal Standards at ContractRoom. Originally from the east coast of Australia, she has a background as an Attorney having practiced in both public and private practice in Brisbane and Melbourne. While working as an Attorney Katie completed studies in journalism and is now combining her legal and writing skill sets in her role at ContractRoom.

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