PETRI KESKITALO
From
assumptions to risk management
An analysis of risk management for changing circumstances in commercial
contracts, especially in the Nordic countries
The theory of contractual risk management and the default norms of risk
allocation
SUMMARY
In
Nordic contract law, the traditional way to deal with changing contractual
circumstances has operated on the assumption that changing circumstances can be
managed by categorizing the changes in circumstances either as foreseen or
unforeseen. The dualistic perception of changing circumstances was useful as
long as contract law was unable to find more precise tools for such an
analysis. However, the increasing awareness of the unavoidability of risks in
decision-making undermines the usefulness of such treatment for changing
circumstances. Such a post-modern awareness of risks as an essential part of
our world necessitates the creation of new tools of analysis because risks are
now recognized as being more or less foreseeable. It can be assumed that the
advocates of the test of foreseeability might find it attractive to argue that
instead of abandoning the old tools, they could be adjusted by increasing the
precision of the test of foreseeability through the adoption of the analysis of
the probability of the changes. However, such an adjustment does not affect the
awareness of the unavoidable risks in decision-making.
These
changes in our understanding of decision-making under uncertainty suggest that
an adjustment of the general doctrines on commercial contracts is in order.
Consequently, Nordic contract law should abandon the test of foreseeability as
the mental framework for treating changing circumstances. Even the ex post-oriented
approach to the problem of changing circumstances, displayed by the concept of
changed circumstances, should be abandoned in favour of an ex ante-oriented
perspective, where the focus in directed away from the causes for changes in
circumstances towards the management of the consequences of such changes. The
change of the temporal perspective to contracts, in other words the adoption of
an ex ante-approach, necessitates the terminological and conceptual
separation of danger, risk, and liability. Together these methodological
adjustments necessitate an adjustment of contract paradigms through an
adjustment of the temporal perception of commercial contracts. Consequently,
commercial contracts should not be seen as ‘recorded momentums’
that regulate the contractual obligations completely, once and for all. Neither
should commercial contracts been seen as ‘processes’, where the content
of contractual obligations is defined contextually by adjusting the contract to
the changes in circumstances while preserving the contractual equilibrium as
defined by the contract, as if the contract provided a sacred exchange rate.
Commercial contracts should rather be understood as ‘managed processes’,
where the contract parties have chosen a certain type of governance structure
for their transactions that regulates the nature of the mechanisms of ex
post adjustment of the contractual obligations. Together with the awareness
of risks, this adjustment of the temporal dimension of the paradigm of
commercial contracts will enhance our perception of commercial contracts as
tools for management of commercial transactions.
The
recognition of commercial contracts as tools for risk management necessitates
the identification of the nature of such contractual risk management. Because
of the novelty of the contractual risk management approach, it has been
necessary to develop a theory of contractual risk management based on contract
law, law and economics, and risk management literature. The proposal for a
theory of contractual risk management consists of five phases:
1) Identification of business strategies,
2) Identification and evaluation of risks,
including the risks created by the default norms of risk allocation,
3) Spotting and reconstruction of
alternative contractual tools of risk management,
4) Evaluation and forecasting of the
viability of the alternative tools of risk management, and
5) Contractual allocation of risks.
Whereas
phases 1 and 5 are too contextual to be subject to analysis within the frames
of this study, and a detailed analysis of phases 3 and 4 is excluded from the
study due to the limitations of the time set for this study, phase 2 for the
identification and evaluation of risks is limited to the analysis of the
default norms for allocation of risk for changing circumstances. This analysis
shows that the default norms need to be customized and adopted to the
contextual needs of the contract parties and their contracting environment if
the creation of credible commercial commitments and the protection of the
contract specific investments is to be promoted. The analysis shows also that
there has been an ongoing evolution of the inner logic of the default norms for
risk allocation towards an increasingly conscious logic of risk management.
Naturally,
contractual risk management has its limitations and, as the first phase of the
theory suggests, the usefulness of contractual risk management is limited by
the general strategies of risk management and the policies of the contract
parties. Consequently, the availability of non-contractual tools of risk
management will limit the application of contractual risk management as long as
that is cost-effective. Regardless, the contractual risk management approach
will presumably offer a common language for the three dimensions of commercial
decision-making: economics, legal and social, as well as for the professionals
representing those dimensions. The common language will hopefully provide
non-legal professionals with an insight into contract law and illustrate the
fact that the legal approach to contracts is not only a ‘legal-risk’ but also a
resource for risk management. For contract consultants, the awareness of the
contractual risk management approach will hopefully provide an opportunity to
refer to the theoretical framework as an aid to their pragmatic and
‘encyclopedic’ working methods. For judges, the introduction of the theory of
contractual risk management will presumably provide evidence of a higher
rationality in the contractual allocation of risks by the contract parties than
what has been expected, which in its turn suggests that judges should be
particularly careful when adjusting commercial contracts and focus on the
procedural reasonability of commercial contracts in terms of reasonable
contractual protection of the contract specific investments.
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Updated 20.02.2001