Transactional Risk: A Legal Guide to Contractual Management Strategies

By Robert J. Spjut

American Bar Association Book Publishing, Chicago, 408 pages, $129.95

According to Ed Catmull, the co-founder of Pixar Animation and recently retired president of Disney Animation, “[i]t is not the manager's job to prevent risks.  It is the manager's job to make it safe to take them.”  This is the primary focus of Robert Spjut's new book, which formulates a thoughtful approach to analyzing contractual risks and identifying the tools adroit counsel should use to manage them on behalf of clients. For lawyers involved in conceptualizing, planning, documenting and implementing significant transactions, the book provides valuable insights that examine the entire panoply of risk, from the genesis of a deal to dispute resolution.

The author is a retired partner of Pillsbury Winthrop Shaw Pittman.  Over his distinguished 47-year legal career, he has advised clients on significant transactions and restructurings in the U.S., Latin America, Africa, and Asia.  He has also served as the co-chair of the UCC subcommittee of the Business Law section of the State Bar of California and taught at several law schools in the U.S., U.K., and Africa.  As such, the book analyzes transaction risk from the standpoints of both a seasoned practitioner and a learned academic.

The author posits that competent transactional lawyering is a product of foresight, preparation, experience, judgment, negotiating skill, flexibility, analytical acumen, and deep knowledge of contract law.  In addition, an effective transactional lawyer must know the expectations of both her client and its counterparty, possess the ability to timely spot issues, provide her client with available options, be aware of the strengths and shortcomings of the courts that might become involved, and see the entire pertinent landscape—from contract formation to potential litigation.

The book is arranged in four parts, with a heavy emphasis on contract law.  In identifying each transaction risk, the author discusses case law in which the subject risk constituted the central dispute between the parties.  In analyzing each risk, the author opines on how the parties might have managed it more effectively.  This style not only illustrates the importance of each risk but also provides context and understanding for the reader.  Well-edited, the book should serve as a useful research tool, with its 906 footnotes, lengthy table of cases, and detailed index.

Entitled “Overview of Transaction Risk Management,” Part I starts from the premise that the “initial benchmark for a successful transaction” is whether a lawyer's client realizes the benefit the party expected it would receive, and not whether the counterparty has actually performed its obligations under the contract.  Thus, the author observes that the “starting point for identifying transaction risk is the nebulous, often half-baked subjective expectation and hope of a party, whether or not reduced to terms stated in a contract, that jurists eschew.”

This is a crucial insight because a lawyer who is inattentive to the nature and extent of his client's expectations is at risk of not only failing “to get the documentation sufficiently precise,” but also of “missing the initial benchmark for a successful transaction.”  As noted by Judge Henry Friendly in Frigaliment Importing Co. v. B.N.S. Intern. Sales Corp. (1960), a party's “subjective intention” about what it would buy or sell can differ from its “objective intention.”  Only the latter is relevant in court.

Another key concept analyzed in Part I is the identification of transaction “hazards” that create the potential for harm.  Attentive counsel will be ever mindful of three objectives in managing this type of transaction risk: (1) avoidance; (2) mitigation; and (3) allocation.  The objective of avoidance is to eliminate the risk.  The aim of mitigation is to reduce the chances that the risk will occur, and minimize the losses if it does.   For its part, allocation is a zero-sum game in which one party sheds responsibility for the risk by transferring it to another party.

The best part of the book is Part II, entitled “Planning and Documentation Risks,” which consist: of (1) oversight and rejection risks; (2) information and assumption risks; (3) uncertainty risks; and (4) commitment risks.

Of these four, the chapters dealing with the first two are the most insightful.  Regarding oversight and rejection risks, the author states that an attorney involved in planning a “major, non-routine transaction” should possess four aspirations.  The first is to identify all benefits that might be realized.  The second is to identify and describe all of the tasks that must be completed for the realization of the benefits. The third is to identify and describe all of the conditions and contingencies that will facilitate or impede the completion of such tasks and the realization of such benefits.  The fourth is to assign to one or both parties legal responsibility for the losses that will result if the benefits are not realized, the tasks are not completed, such conditions differ from expectations, and such contingencies do or do not occur.  Useful and embroidered with salient case law, this portion of the book highlights “the risks created by oversight and regrettable decisions about benefits, tasks, conditions, contingencies and responsibility.”

In analyzing information and assumption risks, the author identifies a valuable framework of hazards.  In the best case, all information and assumptions relied on by a party are correct, and the party correctly investigates, evaluates and processes the information received.  In the worst case, the information and assumptions relied on are incorrect, and the party incorrectly processes some or all of the information.

This portion of the book is a tour de force, describing transaction risks such as misconceptions about benefits, tasks, conditions and contingencies along with the failure to detect fraud, nondisclosure and mistake.  In analyzing the management of these risks, the author includes a useful discussion of guarantees, warranties, disclaimers, anti-reliance clauses, merger clauses, waiver of defenses, amendment and termination.

Part III of the book analyzes “Counterparty Risks” in three parts, including: (1) discretion risks; (2) performance risks; and (3) liability risks.  The author posits that the adoption of a detailed decision-making process is the “strongest mitigation of the risk that the adverse party will exercise its discretion in [an unacceptable] manner.”  In addressing performance risks, the book describes the many facets of performance risk allocation, mitigation of risk of breach and the mitigation of losses. Regarding liability risks, the author canvasses risk management tools such as liquidated damages, damages exclusions, remedy limitations, limits on money damages, recourse limitations, private statutes of limitations and periodic releases.

The final part of the book analyzes third party and uncontrollable event risks, including market-change risks. This portion of the book covers subjects dealt with in Parts I through III, but in the context of oft-recurring scenarios.  Transactional lawyers will find pertinent the author's discussion of the use of firm commitments, force majeure clauses, conditions precedent and subsequent and re-opener clauses.

A famous Chinese proverb states that: “Pearls don't lie on the seashore.  If you want one, you must dive for it.”  The same may be said for counsel responsible for transaction risk management.  According to this useful book, there is no substitute for the “deep dive.”

Jeffrey M. Winn is a management liability and insurance coverage litigation attorney for the Chubb Group, a global insurer, and is a member of and the secretary to the executive committee of the New York City Bar Association.