Understanding contract risk is essential to protecting your business from unforeseen financial, legal, and operational consequences. Every agreement, from supplier and customer arrangements to leases and loan contracts, comes with its risk profile.
If these risks are not adequately evaluated and managed, they can quickly erode value, damage your brand, or hinder future growth. That’s why a tailored approach to contract risk is vital. Our experienced commercial law solicitors work closely with you to assess contract terms, identify hidden liabilities, and negotiate favourable conditions that align with your risk appetite. With our support, you can confidently move forward, knowing your contracts are structured to safeguard your business and maximise opportunity.
Contents:
What is a contract risk profile and why do you need to know yours?
Risk is inherent in every contract that you sign, but the risk profile will be different from one contract to the next. This depends on various factors, such as whether you are the supplier or the customer, and the subject matter of the contract. If you are a supplier, it could be that the most fundamental risk is exposing your business to a higher level of liability than is justified or acceptable to you. In other cases, it could be a key risk is non-performance by your business or the other party, such as by failing to deliver on time or at all, not meeting a quality specification or order volume, or by the payments not being made. In other contracts, it could mean you not getting the rights you think you are getting (such as ownership of intellectual property rights or a licence that is wide enough) - or inadvertently giving away your current right. These are just a few examples.
It is important to understand your risk profile in relation to every contract that you sign so that you can put in place processes to manage those risks. Fundamental to this is understanding your own attitude to risk.
A contract risk profile is a matrix through which you understand the risks, the probability of each risk occurring and the consequences if the specific risk does occur. This matrix allows you to rank risks in terms of importance and also likelihood. So, for example, the risk of non-payment of a loan or overdraft repayment may be low, however if it were to occur, then the consequences could be severe - your lender could potentially freeze your bank accounts, prevent you from doing business and seize any assets offered as security for the loan. In this example, ensuring that you meet your monthly loan repayments will therefore be a business priority for you.
Knowing your risk profile enables you to be proactive, rather than reactive, when it comes to managing the risk flowing from your contracts and also your overall business activity. It also allows you to prioritise and to put in place mitigation strategies and contingency plans.
How your risk profile impacts your ability to do profitable deals
If you do not fully understand the risks associated with the contracts that you enter into, it could lead to value leakage. In other words, the ‘upside’ is eroded by the ‘downside’.
If you don’t understand the risks associated with a customer contract, you may fail to fulfil your obligations resulting in either a reduced payment or no payment at all, a claim for damages or it costing you more than anticipated to fulfil the contract.
Even if you fulfil your customer contracts perfectly and realise profits, if your other business contracts are not fully understood and the risks are not mitigated, then you the profits you make could be eroded.
What are the different types of contract risk you should consider?
In pulling together your risk profile, the types of risks that are most often associated with contracts are the following:
Financial
Financial risks are contract risks that mean you lose money, whether from a customer failing to pay you, a customer bringing a claim against you, or a supplier failing to perform or deliver.
Other examples include losing money if you miss key elements of a contract, such as contract renewal options or, equally, the ability to terminate a disadvantageous contract.
Equally, if you do not fully understand your contract obligations, performing the contract may cost you more than you quoted, or you may find yourself in breach of contract with potential associated damages and warranty claims.
Practical assessment and mitigation of customer and supplier contract risk can significantly reduce the likelihood of financial loss and support more resilient commercial relationships.
Legal
Legal risks arise when there is a breach of contract with associated legal claims and potential litigation.
If you fail to meet your contractual obligations, you run the risk of a claim for damages and litigation. Equally, if a supplier fails to deliver, you face making claims and incurring legal costs, which could cause you to breach your contracts with your customers.
Contract disputes often arise when you and the other party have a different opinion regarding whether a contract has been adequately fulfilled. In other words, have you done exactly what you said you would do in the contract? This can relate, for example, to confidentiality, quality or timeliness.
Contractual disputes can be costly and time-consuming. These risks can be mitigated by adopting contract lifecycle management, which involves streamlining and standardising contracts to clarify obligations and make risks easier to manage.
Other legal risks stem from compliance and regulatory obligations, the infringement or misuse of your intellectual property, or your infringing the intellectual property of others.
Security
Security risks stem from failure to protect sensitive contractual or personal information, as required by the contract or by data protection legislation.
This can lead to financial and legal consequences and impact your brand and reputation.
Operational
Operational risk involves loss caused by inefficient internal or third-party processes.
For example, if the sales team do not communicate key contract dates and requirements to the operations team, then the operations team may well overlook these. This may lead to additional and unnecessary resources being spent at the last minute to make the product or service fit for purpose, or facing disputes and claims for damages for poor performance or quality.
Operational risk often relates to your suppliers' performance and the effective supply chain process management. Many of these issues arise from poorly understood or unaddressed risks in supply chain management, which can significantly impact delivery, quality, and overall business performance.
Brand
Brand risk is associated with all the other risks listed above and results from negative public, supplier and customer opinion.
If your brand becomes known for poor performance, for slow payment or for data breaches, then suppliers, customers, lenders and investors will be reluctant to trust you and do business with you.
Mitigating brand risk involves managing all the other risks above.
Risk management is a term familiar to every business owner. The management of contractual risks should form part of every overarching risk management process or plan.
How to manage your contract risks with confidence
No business is immune to contract risk, but understanding your unique risk profile puts you in a stronger position to manage it effectively. By identifying the key risk areas, whether financial, legal, operational, or reputational, you can implement strategies that protect your business and drive long-term success.
Our commercial law solicitors are here to guide you through this process, helping you design robust contracts, avoid common pitfalls, and negotiate terms that serve your commercial interests. With proactive legal advice and strategic insight, we can help you turn risk into a tool for growth.
