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Contracts and Risk Management: A View From Asia

November 22, 2010

Today I interviewed Terence Teo, General Counsel for the Asia-Pacific region at Edwards, a precision engineering company.

We discussed risk management – and in particular, how companies can improve their ability to take and manage risk. But first I asked Terence whether he observed significant cultural differences in the view of risk. His answer was broadly no, that he found little variation in the way that specific nations see risk today. He observes more variations based on the level of experience than he does on culture. And he commented that most managers and business unit personnel tend to see risk management as ‘a nuisance’, something that ‘holds things up’.

A number of his observations I found especially interesting. For example, we discussed the use of contract terms in managing risk and especially the tendency by powerful multi-nationals to push risk onto their counter-parties. Terence commented that he is seeing an awakening by companies in the Asia-Pacific region, that an increasing number are questioning this approach and asking ‘What is this risk? Do I want to accept it?’

He also mentioned that a growing number of companies in the region are learning from those in the west and have introduced contract standards of their own, often mimicking the terms they receive. “But in some cases, they clearly do not understand the terms they have inserted, when and how they make sense,” he commented.

I particularly liked one of Terence’s ideas about the approach to selling the creation and use of standard terms. He was discussing the push-back that we often receive when we propose the adoption of standards within the business, how many suggest that flexibility and competitiveness will be lost. “I suggest that standard terms are not simply a form of contract, but rather a tool, a checklist, a way of educating that supports more rapid and accurate risk analysis,” Terence suggested.

We also reviewed a number of important market trends – for example, increasing demand for performance bonds, parent guarantees and other forms of security. Terence also confirmed the steady shift away from thinking of the contract as something split between legal terms and business terms. “The tendency to leave scope and service levels to technical staff has changed; contracts staff must ensure (the whole document) makes sense, hangs together. They must engage in structuring and adopt a systems approach throughout the relationship.”

“People tend to run away from risk,” according to Terence. To gain their attentionand support requires ‘a diplomatic approach’. “Talk, explain, use the language they are speaking. Explain issues through case studies based on events within your company. Show people that risk is a universal problem, but that there are solutions.”

In the view of this General Counsel, global variations in the perceptions of risk and the role of the contract are narrowing fast – and in his company at least, there is a strong focus on the role of Legal and contracts staff in providing the types of training that ensure business-wide understanding and consistent approaches to risk management.

The full recording of the interview with Terence Teo can be accessed in the IACCM member library at www.iaccm.com

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