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mitigating risk

There are legal steps that businesses can take to ensure that they maximise their protection in the event of an adversity
Charles Schofield

The recent disastrous events in Oman have caused a significant amount of pain and loss within the business community. When disasters such as these strike and once the cleaning up is complete and people begin to rebuild from the whatever is left behind, stringing their lives together, this is an appropriate time to consider what lessons can be learnt to better protect our businesses and organisations against any such future occurrences.

There is no doubt that today in many businesses in Oman, people will be checking to see whether their insurance policies suitably protect their risks of another event such as Cyclone Gonu. They will also be assessing their preparation as to whether they are ready to cope with any other unforeseen crisis that might occur from time to time.

Most risk protections are practical matters. For example, a corporate house, no matter what its business is, can asses whether its premises is suitably protected against fire, flooding and other such hazards. They can put in place a contingency plan for evacuating staff and securing property. Many will also be devising specific plans for establishing operations in alternative premises, if the main business premises is, for whatever reason, put out of action.

Most risk protection measures are practical in nature. There are, however, some legal steps that businesses can take to ensure that they maximise their protection in the event of any further disaster.

Moving risks
By use of contracts between various organisations, businesses can shift risks from themselves. Usually, the allocation of risk to another involves the payment of a risk premium. In return, another party will agree to bear the relevant risk.

The most obvious form of assigning risk is through insurance protection. Under an insurance contract, another party will agree to compensate you for particular categories of loss. In return, the insured party pays the insurance company a premium.

The first step that any prudent business should take in protecting against unforeseen events is to identify which risks may affect its operations. It then needs to identify what insurance policies are available and whether the risks justify the premium to be paid for those insurance policies.

Insurance policies themselves are notoriously detailed contracts. Reputable insurance companies will be very clear at the outset as to what is covered and what is not. However, often the details of an insurance policy are where the issues will lie.

Businesses insuring significant risks should take care to ensure that the details of those policies meet their risks. They should identify what major exclusions are available and have a process in place to check that these policies are kept up to date. There may also be conditions which need to be fulfilled to ensure the validity of the policy. For example, significant items of equipment may need to be separately identified and notified to the insurer.

Risk of an asset
Usually, the risk in an asset follows with ownership of that asset. If loss is caused to a business asset, then the owner will bear the loss, subject to any insurance the owner may have.

One advantage of leasing an asset, therefore, is that the risk lies with another party, should unforeseen damage be caused to the asset. Whilst this may not be a determining factor for preferring leasing arrangements over ownership, it is something that businesses may want to consider if they regularly suffer damage through incidents such as flooding.

Force majeure
Contracts between suppliers and their customers should, if they are significant contracts which are performed over a period of time, include a clause that deals with unforeseen events outside the control of both parties.

Force majeure is the term that is typically used to describe such events. Typical force majeure events include floods and storms, and other such natural disasters which are entirely outside of either party's control.

Usually, it is in the interest of a supplier to include as wide a definition of a force majeure event as it can. On the other side of the contract, the customer who is receiving the services will want to make sure that it is as narrow as possible. In particular, so that it only applies to events within the control of the supplier and for which it could not have avoided if it had exercised reasonable diligence.

Force majeure can become an abused term in a contract. It is not uncommon for supplier contracts to include matters that the supplier is best positioned to protect against (for example, a delay in a sub-contractor performing services should not be a force majeure event for the contractor). In those circumstances, the supplier should have managed his own risks better and had a contingency plan to deal with them.

An underlying question that may arise with many force majeure provisions is whether it is reasonable to allow one at all. For example, force majeure clauses are not appropriate in contracts for disaster recovery services. Some companies specialise in providing alternative business facilities to companies whose premises or equipment has been rendered inoperable by disasters. In those contracts, it does not make sense to have a force majeure clause, as the very service provided by the supplier will only be needed in a disaster situation.

Business continuity plans
Contracts can not only help shift risks, by saying who will be liable in certain circumstances, they can also document preventative risk measures. An example of this is contracts that require suppliers to agree a business continuity plan. This will be appropriate in the case of contracts with business critical suppliers (i.e. those suppliers that the customer depends on to carry out its business). It is reasonable and prudent for the customer in that type of relationship to make extensive enquiries of the supplier as to how it will cope with disasters.

The contract between the customer and the critical supplier may also attach a business continuity plan which will be reviewed, tested and updated by the parties from time to time.

Shifting risks
The available legal framework provides a way for businesses to shift risks through the use of contracts. These may include insurance contracts, leasing arrangements and key supplier contracts. Risk can, however, be shifted in any arrangement between parties which contain agreements about who will be liable in specific circumstances.
However, the key protection for any business planning for disaster will be practical ones. Regard should also be had to the risks that the business assumes through its contracts with insurers and other parties with whom it interacts.