A short case study in risk management

It’s not every day that we get a chance to be involved in a Space Mission and get paid for it, but that’s what happened to one manufacturer when he was asked to supply a part for a space rocket. He obviously jumped at the chance of getting involved in an intergalactic adventure and didn’t quite weigh up the risks involved.

It all began when the manufacturing not only agreed to accept the order but also agreed to accept his new customer’s Terms & Conditions that came with it. Unfortunately, by accepting these Ts&Cs he was also, unknowingly, accepting unlimited financial responsibility for any discrepancies or defects in the part, no matter how minor or how remote that failure was from causing any loss or damage to the customer. In other words, if the part was delivered just one day late, and this delayed the entire space programme, the manufacturer could be held responsible. Pardon the pun, but the losses could have been astronomical. Was it worth the gamble, since the value of the order was only £100?
If something had gone wrong, the manufacturer could have mounted various defences, one of which would be the extremely disproportionate risk compared to the value of the order. But with the potential for wasted management time and the costs involved in getting tied up in legal wrangles, was it really worth it?

It’s all about risk management

In this case, the manufacturer didn’t grasp the serious implications when he accepted his customer’s Ts&Cs so he wasn’t exactly making an informed decision. Making an informed decision is about understanding the legal risks you are taking and allow you to manage or minimise those risks effectively.
In Lawpoint’s view there were three key questions that needed to be asked:
1. What legal risks am I facing?
2. What is the likelihood of the risks becoming a reality?
3. Can I live with the worst case scenario?
These questions had not been fully addressed. If they had been, the order would probably not have been fulfilled without first trying to reduce some of the risks to ensure that they didn’t outweigh the benefits of fulfilment.
Possible measures to redress the balance could have been to negotiate new commercial terms. For example:
• A new price could have been quoted
• A commitment to follow-up orders could have been negotiated
• The Ts&Cs could have been negotiated to reduce the manufacturer’s liability
• Specific quality control procedures could have been put in place for orders that are high risk.

Solutions

The order for a rocket part was unusual, so the manufacturer should have spotted this by having systems in place to draw it to management’s attention. For example:
• There could have been a simple process to draw attention to orders that were out of the ordinary and might need further consideration; and/or
• There could have been a system of acknowledging all orders to ensure that a customer’s Ts&Cs did not automatically apply if the order details did slip through the net.

The bigger picture

It’s important to step back and look at the bigger picture and ask yourself about the potential legal risks that your business may be facing. Apart from the direct impact on losses, if you ever want to sell your business or get finance, potential buyers or investors will assess the legal risk that the business is exposed to and will often use this as a reason to negotiate down on the purchase price or to get more stringent finance terms.
In this short case study, we’ve highlighted some of the legal risks in relation to trading contracts, which will of course affect every business. But there are other legal aspects to your business that you should consider and, depending on your type of business, these may include the legal risks associated with, for example, employment, property, data protection, intellectual property, etc.

Let’s get real!

Ok, so not everyone receives orders for space rockets, but businesses do face real contractual issues every day. One web designer client used a template contract for its customers, but this inadvertently gave away the designer’s intellectual property. Another client had a good set of terms of business, but the terms never actually applied to some key customer accounts because of the contracting processes that were in place.
Ask the right questions without losing perspective. Work out what you can live with, then manage, minimise or eradicate what you can’t.
For a larger business, or a business that is growing quickly, it’s easy to visualise the benefit of a legal risk management strategy but, for a smaller business, even a one person consultancy, the issue of legal risk still needs to be addressed. Your strategy should, of course, be proportionate to your business needs, which means that you won’t need to go overboard and turn this into an unnecessarily complicated and lengthy process.

And in case you’re wondering…

A happy ending! The manufacture’s delivery of the rocket part went as planned with no claims that I’ve heard of.