No contract without the “5 Pillars of Wisdom”

Contractual Risk Management & Reps

One of the economic and cultural shocks for European firms is having to think their respective transactions through to the last clause and then describe these intentions in a contract. The U.S. has no direct equivalent to the Civil Code, Commercial Code, or General Terms and Condition Regulations, and terms such as “good faith” or “merchant status” are unheard of in this context. Standard concepts under civil law, such as the impossibility of performance and default, are not regulated anywhere. Added to this is the aforementioned cultural difference: In European countries, a handshake and a promise of the business partner still count for something. Raising too many contractual points shows a lack of trust and puts the business at risk. Not so in the U.S. Written agreements with gaps or gray areas are ultimately detrimental to the European company and its U.S. subsidiary. The European company is not only encouraged to think through and finalize all relevant aspects of the transaction, it is obligated to do so as a result of the business partner’s expectations. Those who do business in the U.S. should not shy away from these business practices: “When in Rome, do as the Romans do…” It is almost always worthwhile (if not essential) to include the following five pillars of wisdom of contractual risk management in standard contracts:

  • An exclusion of consequential damages
  • An overall liability cap
  • A “time is of the essence” provision
  • A “deal is the deal” clause
  • Arbitration agreement

Adequate contractual risk management is essential in the U.S. and offers a significant financial advantage to the European company. An arbitration provision usually simplifies and accelerates a commericial dispute more than litigation. The arbitration association selects expert arbitrators for the process -- chemists, engineers, etc -- which facilitates communication regarding complex issues at hand. In a litigation proceding, a jury of laymen must decide those points.



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