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‘Risk’ is omnipresent. The challenge lies in identifying
risks, assessing risks, evaluating risk mitigation measures, and
executing such risk mitigation measures. ‘Risk’ is seldom
eliminated, it must be managed.
The focus presently is on contractual arrangements that the
businesses enter into and insight into the philosophy of risk
allocation under such contractual arrangements. There are varied
contracts; therefore, to state that ‘one philosophy’ fits
all would trivialise the issue. However, a key factor for
successful contract implementation is ‘co-operation’ among
the parties – this is true possibly for all kinds of
contracts. A contract which addresses the risks involved equitably
often encourages ‘co-operation’ among the parties. For
instance, the owner of a project is more likely to be diligent with
the performance of its role and extend active co-operation where
the contractor is not the only party burdened with all the project
A balanced approach to risk management is likely to result in
successful contract implementation. The ‘co-operative game
theory’ is about applying co-operative decision-making
techniques to find optimal choices that will help achieve the
desired outcome. The theory pertains to making decisions
collectively and establishing a coalition to maximise rewards above
individual actions. This theory entails the following:
- Value Creation: Value creation is the primary
aim of a business. This goal can be achieved by co-operation
between parties, which is more likely to result in a win-win
situation when compared with burdening of one party by the
For instance, in a contract between the owner and contractor, the
parties can come to an agreement to put a “cap” on the
liability of the contractor and the owner can require carve-outs
from the overall cap on liability, so that liability for matters
such as death, personal injury, and fraud can be excluded from the
“cap”. Therefore, this reasoned risk allocation strategy
would be a “win-win” proposition for both the owner and
- Equitable Distribution: Allocating risk fairly
and equitably often leads to successful contract implementation.
For instance, in the case of a force majeure event, the allocation
of risk between the parties should be such that liability does not
fall entirely upon one party and can be avoided to the extent such
a force majeure event affects the party’s contractual
obligations. Thus, a contract should be negotiated and drafted to
state each party’s rights and duties once the force majeure
event is triggered.
- Goal-oriented approach: Allocation of risk
should be in a manner that the needs of each party are considered.
Thus, each party should co-operate to allocate risk so the other
party can manage it properly.
To illustrate, under a contract, instead of burdening one party
with all risks, the owner and contractor may agree to allocate any
risk associated with design errors to the owner. Similarly, a
project owner might assign the risk of a construction-related
injury to the contractor, who is best equipped to ensure a safe
Applying co-operative techniques for risk allocation among
parties to a contractual arrangement should thus help achieve a
balance of distribution in terms of responsibilities and risk
involved in such arrangements. Risk management in a co-operative
way also reduces the time and cost of contract negotiation and,
eventually, legal disputes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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