How do you evaluate contract risks in foreign markets?

When it comes to identifying risks in cross-border contracts, in my opinion, it is crucial to maintain an open mindset as to the what may constitute a risk. Matters that may be typical in your home jurisdiction could be risky in the jurisdiction where the contract is to be fulfilled, and vice versa. For example, signing a letter of intent may be nothing more than a common prelude to actual contract negotiations in one jurisdiction, but it could potentially already be considered the final contract in another jurisdiction.

Understanding the differences of culture, economics, political, social, religious and is imperative. I often give examples of something Peter Frankopane wrote in his book 'The Silk Road'. He mentions there that the British during their rule over India were perpetually perplexed when it came to contractual dealings with Afghanistan. What the British thought of as binding contracts were seen by their Afghan counterparts as mere declarations of intent and from their perspective contracts are formed after performance. This example is one that I continue to see when dealing with contracts between the east and the west

Based on the four risks category such as legal, political, economics, and cultural factors, develop and apply appropriate risks management strategies based on the analysis and impact assessment tools (risk matrices, SWOT analysis or scoring systems). For instance, applicable laws should be agreed (including jurisdiction for possible arbitration should it be necessary) and ensure this is specified in the contract. Also, political risks should be quantified with appropriate intervention strategies defined in the contract (for example, if regulatory or policy changes impact the contractual agreement by specific cost percentages then the parties should consider reopening of relevant terms and conditions to mitigate the impact).

Outcome of SCOT or SWOT analysis should be used to evaluate impacts and develop mitigation strategies - such strategies should be dynamic and agile (especially since some of the risks factors such as political and economics can be potentially fluid). Mitigation strategies should appropriately address the strengths, concerns, opportunities and threats.

In my experience, one of the best ways of monitoring and reviewing risks is filing of incidence reports. These are common place in the IT industry when dealing with software risks and I find this concept useful in a contract lifecycle too. Whenever a risk is encountered in a contract, it is identified, categorized by severity and the entire incident is logged. Moreso, a quick study is conducted to figure out how it could have been avoided and what steps can then be implemented to avoid it. This clears out risks that can be avoided and in cases where risks cannot be avoided, it is then balanced against the opportunity presented.