Risk Allocation In Commercial Contracts

Introduction

Contracts are instruments expressing commercial intent, with definitive clauses¹ for scope, consideration, termination, etc., and ancillary clauses for safeguarding parties. In addition to outlining counter-obligations, commercially sound agreements should anticipate a response to unforeseen regulatory shifts, operational delays, and disruptions (be it natural or manmade). Contracts typically deploy these protective mechanisms to streamline expectations, mitigate risk and limit exposure.

This article examines popular mechanisms for contractually allocating and limiting risks to the benefit of all parties: clauses for events of force majeure and change-in-law to provision for uncertain contingencies; and clauses for liquidated damages and limitation of liability to calibrate financial exposure. The analysis in this article is confined to the terms of a contract between parties and does not examine any statutory provisions for risk allocation.