Legal Risk Management

This article discusses the importance of contracts in mitigating risks in projects and explores the impact of opportunistic and adversarial behavior in contracts. It emphasizes the concept of Right-For-Purpose in contract making and highlights the need for collaboration and proper approval of terms and conditions. The article also examines the Design-Bid-Build process and its potential risks.

Running head: LEGAL RISK MANAGEMENT
Legal Risk Management
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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
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Introduction
The contract can be considered to be a vital activity in any project, as it creates a legal promise
between the parties. Various types of risk exist in different projects such as uncertainty, event
delays, liquated damages, high costs, and low quality among others (Pawar, Jain, & Gaikwad,
2015). Hence, the parties involved in different projects have to develop a contract for
establishing a reliable work process, wherein both parties need to perform their obligated tasks as
per the contract. Moreover, a contract helps in executing a project successfully. This mainly
focuses on the Right-For-Purpose of a contract to reduce risks related to different projects. At the
same time, limitations related to the ‘Opportunistic’ and ‘Adversarial’ behaviour of a contract
has been evaluated through this study.
Discussion
The key associate of a project generally develops various types of contracts such as lump sum,
incentive, cost-plus, design-build, and integrated project delivery among others contract
(Associated Builders and Contractor, 2013). Each of the contracts has its own purpose for
providing legal security against various risks. Through a contract, a party receives a
responsibility to other parties. This responsibility can be changed on the basis of the mentioned
contract type. For this reason, the key management of different projects modify responsibilities
as well as the conditions based on the contract type along with its impact on the project (Legal
Services Commission, 2019). This helps in establishing a proper contract in different projects,
wherein the reliability of both parties can be significantly increased. The success of different
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projects depends on it, which can be considered as the main importance of ‘Right-For-Purpose’.
Trust can be considered as the main risks in any construction projects. Besides, a construction
project faces various work conditions such as bad weather, machine dispute, and labour delays
among others. For this reason, an uncertain work dispute has been initiated, wherein the cost of
any project can be increased. It can be considered to be a risk of a project. In addition, the
construction can delay due to late payments and fewer workers’ interest in work. This type of
risk can incur a loss, which can lead to customer dissatisfied (Zhang, Zhang, Gao, & Ding,
2018). A huge amount of indemnification or compensation may be paid by the contractor due to
high negligence at the time of the construction process. On the other hand, a proper budget is
prepared prior to every construction project. Hence, failed to achieve budget cost and revenue
can lead to causing liquidated damages, which also considered to be a major risk related to the
project contract. However, the management of any project must hold enough contractual
documents so that the issue associated with trust can be reduced. Lack of contract documents can
also lead to a risk for different projects. It can further result in different projects towards failure.
For the mentioned reasons, parties of different projects such as construction must develop a
contract so that risks can be mitigated successfully.
Based on the above discussion, it has identified that a project can be affected for various reasons.
Financial risk has identified as the most feasible risk with respect to various projects (Ross,
2016). Simultaneously, a project needs various approvals as well as planning to get expected
results. Client satisfaction is considered to be one of the major facts, which leads a project
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manager to operate efficiently and effectively. The ‘Right-For-Purpose’ has developed a sense in
every contract, wherein both the parties are conducting meetings on the basis of proper
documents along with contractor past performance. The issue of any contract has emerged due to
the motive of both parties. Moreover, the considered terminologies within a contract are
perceived as the main reason behind the aforesaid issues (Zhang, Zhang, Gao, & Ding,
2018).The process of ‘Right-For-Purpose’ provides a legal way of making a successful contract.
Initially, a person or entity must express the particular purpose of the contract. At the same time,
a contract must present the data of supplier, receiver, seller, buyer, and product so that a promise
can be established legally. Moreover, guaranty and warranty associated with a service or product
need to be mentioned in a contract. A person or entity must act on the basis of the contract. By
following these rules, a legal contract can be formed, wherein the trust risk can be reduced in an
effective manner. Contextually, the trust risk can be mitigated using Right-For-Purpose rule of a
contract (VIU, 2012).
On the other hand, the functionality of a contract can be developed through Right-For-Purpose,
as it provides legal assurance to a party involved in a contract. In any of the circumstances of
breach of contract, then the other party can easily sue a case against a defaulter using the rule of
Right-For-Purpose. Furthermore, the cost of a project can be increased due to natural disaster,
wherein both parties may not be responsible for the damage. For this reason, the Right-For-
Purpose provides a professional liability to the entire supplier as well as the receiver so that a
risk-free contract can be created, wherein both parties are benefited (Sammons, 2008). For
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example, company A and B establish a contract related to product shipment via waterways. The
key associate of A states that, ‘our company will receive products from the XYZ warehouse’. In
this contract, B has professional liberality to deliver the product without any damage. After the
shipment, A will receive the product from the XYZ warehouse. Moreover, A will pay after
receiving the produced without any damages.
Behaviour can be measured as a major aspect in any contract, as it helps in creating a proper
collaboration with the parties. Fundamentally, a meeting is conducted when a contract is
designed for the business. A price of the product has been selected in the process to develop a
fair contract. However, the ‘Opportunistic’ and ‘Adversarial’ behaviour can harm parties of a
contract, wherein one party may not receive any benefit at all. Sometimes, the parties involved in
a contract try to use opportunities for obtaining an entire benefit. In this case, one party does not
think about the loss of the other party. This approach can be called as an opportunistic behaviour
of the party (Kundakchyan & Grigoryeva, 2017; Laan, Voordijk, & Dewulf, 2014)). The
traditional process of fixed- pricing of the product can be ineffective, as one party will breach the
contract for the purpose of gaining more profit. This can be considered to be the major
limitations of the opportunistic behaviour in a construction contract, wherein the supplier can
take advantages from the contractor. Conversely, adversarial behaviour also plays a major role in
contract making. An individual with adversarial behaviour can create a conflict in the contract
process (Rajivan & Gonzalez, 2018; Lisy, Jakob, Tozicka, & Pechoucek, 2014).
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Simultaneously, this type of individual may not consider the offer of other party associated with
the product price. Hence, a traditional fixed- price approach has can be adopted due to this type
of behaviour, wherein the cost of a construction project can be increased. Hence, this can be
considered to be a major limitation of adversarial behaviour in a contract.
In relation with the Design-Bid-Build, it is referred to as the process of a construction project
development, wherein the project manager trying to fix various issues related to a construction
such as a cost, quality, and time. Fundamentally, a construction project is mainly operated by
various parties. Each party has a different contract with others. Any type of change in behaviour
can affect other parties. The basic diagram of ‘Design-Bid-Build project’ has been shown below
in the form of figure 1.
Figure 1: Design-Bid-Build Project
Source: (Brookwoodgroup, 2011)
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From figure 1, the owner is the head, who possesses major power to operate a project. Mainly the
owner has a contract with three individuals in any project, which includes program manager,
engineers or architects, and general contractor. Hence, each individual has its own role in a
project to make the construction successful. With respect to the general contractor, it has
observed that an individual has a business relationship with various sub-contractors and trade
activities. In each section of the model has a legal contract among the parties. Moreover, the
opportunistic behaviour of the owner can ruin the entire project along with the people related to
the construction. On the other hand, the opportunistic behaviour of architect and engineers can
affect the quality of the project, wherein the owner as well as the program manager can face
issue (Brookwoodgroup, 2011). In the case of a general contractor, the opportunistic behaviour
will hamper the entire project by breaching the contract. Overall, a breach of contract can lead
parties towards legal arbitration, wherein the court can charge anyone based on the case scenario
(Plusquellec, Lehoux, & Cimon, 2017).
In relation to the fixed- price design, the general contractor may face issue related to the
construction materials, wherein the material providers can display an adversarial behaviour. This
can significantly hamper the budget of the project. On the other hand, adversarial behaviour of
architects as well as the engineers can force the owner to hire low rated individuals in the
construction. It can decrease the project cost but the quality will be highly affected by this type
of activity. In addition, the project may not get completed within the specified time, which will
introduce a huge problem in the work process. The entire project can fail due to this type of
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activity. For this reason, collaboration can be considered to be a major aspect of any project. Bad
behaviour and approach of any parties can affect project success (Brookwoodgroup, 2011).
Based on the above discussion, it can be stated that a contract must be created on the basis of the
project needs. The owner must hire reliable individuals for creating an effective Design-Bid-
Build. Contact must be created as per the contract law, wherein both the parties must elaborate
there terms and conditions. Only proper approval of both parties can introduce Right-For-
Purpose, wherein the risk related to the behaviour can be easily mitigated. Risk related to the
project can easily be allocated by the confirmation of both the parties. Moreover, a standard of
care can be initiate, which can lead a Design-Bid-Build towards success. However, liquidated
damages can be introduced due to unexpected risks such as natural disaster. Therefore, each
party must develop a contract on the basis of the future risk scenario in Design-Bid-Build. Only
this approach can assist in reducing the issue related to the behaviour in fixed pricing of
materials (Motto & Schuck, 2012).
Conclusion
To conclude, Right-For-Purpose can be regarded as an important aspect of any contract. It
provides a guaranty to the parties regarding serviced and products. A truthful and reliable
contract has been developed with the support of Right-For-Purpose approach of contract making.
On the other hand, various behaviour of an individual can highly influence the contract meetings.
One party can take the opportunity of others to gain benefit. At the same time, one party may not
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accept the offer of other party, which can cause a major issue in Design-Bid-Build. Overall, a
perfect contract can be made, when both parties meet the terms and conditions of each other.
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References
Associated Builders and Contractor, 2013, Construction contract types, ABC, viewed 31 March
2019,
<http://www.abc.org/Portals/1/Documents/Membership%20Docs/MemberDiscountDocs/
ContractTypes.pdf>.
Brookwoodgroup, 2011, Design-Bid-Build, Brookwood Group, viewed 31 March 2019,
<http://www.brookwoodgroup.com/downloads/2011_design-bid-build(web).pdf>.
Kundakchyan, R. M. & Grigoryeva, N. S., 2017, ‘The influence of the opportunistic behavior on
the contractual relationship’, Journal of Economics and Economic Education Research, vol. 17,
iss. 1, pp. 68-73.
Laan, A., Voordijk, H., & Dewulf, G., 2014. ‘Reducing opportunistic behaviour through a
project alliance’, International Journal of Managing Projects in Business, vol. 4, no. 4, pp. 660-
679.
Legal Services Commission, 2019, Contracts, Legal Help for all South Australians, viewed 31
March 2019, <https://lawhandbook.sa.gov.au/ch10s02.php>.
Lisy, V., Jakob, M., Tozicka, J. & Pechoucek, M., 2014. ‘Utility-based model for classifying
adversarial behaviour in multi-agent systems’, Proceedings of the International Multiconference
on Computer Science and Information Technology, pp. 47–53.
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Motto, M. & Schuck, R., 2012. ‘Australian contract law’, Traditional Contracting Reform
Response to Consultation Paper, pp. 3-29.
Pawar, C. S., Jain, S. S. & Gaikwad, A. M., 2015, ‘Contract documents is effective tool for risk
management’, International Journal of Engineering Research and General Science, vol. 3, iss. 3,
pp. 678-682.
Plusquellec, T., Lehoux, N., & Cimon, Y., 2017. ‘Design-build and design-bid-build in
construction- a comparative review’, Proceedings IGLC, pp. 35-43.
Rajivan, P. & Gonzalez, C., 2018, ‘Creative persuasion: A study on adversarial behaviors and
strategies in phishing attacks’, Original Research, vol. 9, pp. 1-14.
Ross, J.M.D., 2016, Fitness for purpose contract clauses – some tips, Fitness for Purpose,
viewed 31 March 2019, <https://www.jmdross.com.au/fitness-for-purpose/fitness-for-purpose-
contract-clauses-some-tips/>.
Sammons, P., 2008. ‘Supply contract risks: An approach that may be adopted to support client-
supplier contract negotiations’, Buy Research Limited, pp. 2-12.
VIU, 2012, ‘Risk management in contracts’, Policy for Risk Management in Contracts, 1-8.
Zhang, S., Zhang, S., Gao, Y. & Ding, X., 2018, ‘Contractual governance: Effects of risk
allocation on contractors’ cooperative behavior in construction projects’, ASCE, pp.1-11.
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