Risk Assessment of Business Contracts

Abstract

Enterprises conduct business transactions with other enterprises for a number of economic, business and strategic motivations. These business relationships are often governed through legal business contracts. Contracts are instruments in not only establishing the legality of the business relationships but also (1) to spell out the expected behaviour from all parties concerned, (2) to make explicit all the obligations and responsibilities that each party undertakes to fulfil and (3) to divide the potential risks and costs involved in the proposed business transaction so as to be a mutually satisfactory arrangement. In this paper, we focus on the risk assessment and evaluation of proposed business contracts. By analyzing the obligations and their fulfillment criteria as stipulated in the business contract and thereafter applying risk models, we propose a methodology for evaluating the suitability of a proposed contractual terms and conditions for a particular business organization.