Contract risk: May the odds be ever in your favour
Every business, whether it’s a global corporation or a small operation, runs on contracts. You might not think about them daily, but they’re the invisible infrastructure that holds your company together. From employment agreements to supplier contracts and customer deals, everything from who you hire to where you buy your toilet paper is governed by a contract.
Yet, for something so fundamental, contracts are often ignored until something goes wrong.
The reality is a bad contract won’t hurt you… until it does.
When contracts go pear shaped
Most contract disputes don’t happen because of one massive red flag. They usually unravel because of a series of small, overlooked factors that build up over time. Based on our experience at Sharpe & Abel, here are the five biggest contract risks that could leave you looking for your lawyers, guns and money - well, maybe not the guns, but definitely the money.
1. Poor operational relationships
When you're starting out, contracts are often little more than a formality. You rely on relationships to resolve issues. If you have good operational relationships with the guys on the ground, you can resolve issues with a conversation. If Bob drops the ball, you call Bob and sort things out.
But as companies scale, especially above the $30 - 50 million revenue per annum mark, relationships become more transactional. Your customer's contract manager may know more about contracts than management and when something goes wrong, they'll just turn to the contract rather than manage the relationship. That’s how minor issues turn into contractual disputes.
So always ensure key operational contacts on both sides communicate regularly and effectively. When people leave, which will inevitably happen in multi-year contracts, make sure there’s a smooth handover. If things get rocky, escalate before a contract dispute becomes a legal mess.
2. Bad pricing from the start
A bad contract doesn’t always mean bad terms, it can also mean bad pricing assumptions. If your company underprices a job, you’ll end up cutting corners, and guess what? Customers aren’t stupid. They’ll notice when quality drops, and soon enough, you’re fighting over deliverables.
So, get the pricing right. If margins are tight, ensure the contract has buffer clauses you can call on to accommodate unforeseen costs. You can’t always control the market, but you can control how much contractual risk you take on.
3. Poor corporate-level relationships
Sometimes work at an operational level can get messy but if you have worked to build good corporate relationships, you can lean on them to smooth things over. After all, when someone owns a P&L, there's a strong incentive to deliver the numbers and minimise revenue risk and expenses!
If you don’t have pre-existing strong corporate relationships with the other party’s leadership team, a minor issue at the operational level can quickly spiral. After all, it's normal for any organisation to protect their own, right?
So, build relationships at multiple levels in your customer’s company. If project teams clash, you want someone higher up to be able to step in and sort things out sensibly.
4. A crappy contract
Yes, some contracts are just bad. Badly written, unclear, or loaded with hidden risks: one of our favourites is Zhong v Guan [2024] NSWCA 300 where one of the judges understatedly said about a contract downloaded from the internet "There is good reason to argue that something has gone awry in the (amateur) drafting of the Deed". But a bad contract alone doesn’t usually cause a dispute. It’s only when combined with poor pricing, bad relationships, or delivery failures that it becomes a real problem.
Not every contract needs a lawyer to draft or review it. As a rule of thumb, for deals under $1M, a smart checklist might be enough. But for high-value or complex contracts, getting professional eyes on it before you sign should save you at least five times the fees you pay.
5. Poor quality or service delivery
This one is simple, if you deliver a bad product or service, expect pushback and the potential to find yourself in a contract dispute.
If you get all five of the above, you’re almost guaranteed to end up talking to your legal team.
To avoid this, be clear on the contract before signing, spend the time to price accordingly and work on building key relationships before and while you execute the project. Mistakes happen, but how you handle them can mean the difference between a sensible settlement and a costly lawsuit.
How to stay out of court
At Sharpe & Abel, we’re all about keeping clients out of court. We call it preventative law. Why? If you go to court, you’re not going to get much change out of $100,000. And there’s no way to make it cheaper. Someone once told me:
“The most expensive thing you can get is a cheap lawyer.”
Better just avoid court altogether.
Here’s how we help clients stay out of court and keep contracts working for them, not against them.
When you might include a lawyer
If you’re supplying into a major project or going to tender, there’s a few reasons you might want a lawyer to review.
The first question is, if it’s 100+ pages of dense legalese, will you know what you’re reading? And do you have the time to learn?
Second, if it’s over $1M and it’s a new customer you’ve never dealt with, this increases your risk.
In addition, if the contract has particularly risky provisions like pain share/ gain share models, abatements or "incentives", these can put not just that job but your company's financial sustainability at risk.
What do we look for? Dissecting contracts
At the end of the day, money is the lifeblood that keeps all companies alive. So we look for the risks that can kill a company (financial and reputation) and the risks that can lose you money.
First step
We assess the overall project and our client’s role within it. What is our client is doing? Are they supplying services, products or both?
This is really important because if, like a lot of companies, your customer is using standard template contracts, that contract will be a "one size fits most" contract and may not fit what you quoted for the job.
Second step
We examine the project itself. Where it is and what it is?
Context creates meaning.
For example, if it’s in the backend of nowhere and you’re delivering services, you’ve got to get a whole team there which means your costs are going to be high. And let’s say you have liquidated damages for being late because your people couldn’t get there due to a severe flood. That’s going to be a big risk for you versus a contract in the CBD – two very different scenarios.
Third step
We look at the actual contract and how it’s constructed:
Scan for hidden risks before you commit: not just the clauses but the meaning in the context.
Identify the parts of the contract that could cost you big money later.
Draft commercial departures so you don’t sign something that puts you in a chokehold.
The Sharpe & Abel approach: surgical changes
It’s a fine balance between ensuring our client takes on as little risk as possible and ensuring they don’t scare off the customer. Many lawyers redline a contract to death, which sends their clients' customers running for the hills. We don’t do that.
We take a surgical approach, making the smallest possible changes for the biggest impact so that you don’t lose deals over legal technicalities.
From tender to operation
We help our clients during the tender process with a schedule of departures right through to operational stage. It’s quite common during delivery of contract for the customer to switch around the sequence and change the program, leading to our clients bleeding money because they can’t get their people on board to work as planned.
In light of such events, we can help put together extensions of time and variation claims and use the contract to make the job profitable. The approach we take is to try and make our clients as self-sufficient as possible- no one needs lawyers running their projects.
We can create templates and teach them how to do it. Our job during operational phase is to enable people.
And if something goes really wrong, we can step in, deescalate and minimise the risk and keep our client out of court.
Ultimately our role is to make sure that if you want to, you and your customer can do business together in the future. (link to case study)
The role of AI in contract risk
We’ve invested in AI over the last ten years and are constantly testing its capabilities to understand how it might expedite this review process.
What AI can do is scan contracts for common clauses and flag risks, which may or may not be correct.
What AI can’t do is understand your business, the context of the contract, or the nuanced risks that could cost you millions.
While AI is constantly improving, it still struggles with:
Contextual understanding: AI doesn’t know if a clause is critical for your specific project.
Legal nuance: it often confuses similar but legally distinct terms.
Limits: Long contracts (200+ pages) break many AI tools.
And of course, there are risks associated with it.
If you’re using a free AI tool, any information you upload is going into the public domain and your competitors could get hold of it.
We liken it to Googling your health symptoms. You have a cold, you Google it and all of a sudden, you’ve got meningitis or cancer. It’s similar with trusting AI to review your multi-million-dollar contract…. Don’t do it.
By all means, use it, play around with it, but don’t rely on it to make existential decisions.
When to call a lawyer
If you’re signing a seven-figure deal with a new customer, or dealing with a complex contract over 100 pages long, get it reviewed. If you’re bidding on a massive infrastructure project, make sure you understand where the risk really sits before signing your name to it.
If you’re in the middle of a high-risk project and unsure whether your contract is a safety net or a liability, we can help.