Transaction Risks

• Author: Robert J. Spjut
• Pages: 19-34

2

Transaction Risks

RISK, HAZARD, CAUSE, AND OUTCOME

Each risk in a transaction has four aspects, the understanding of which is

critical to managing such risk:

● the hazard that creates the potential for harm,

● the cause of the hazard,

● the chance or probability the hazard will result in an adverse

transaction outcome, and

● the potential adverse outcomes.

Hazard

Black’s Law Dictionary defines a hazard as a “danger or peril; esp., a factor

contributing to a peril.”1 It is a peril or threat of a harm or loss. Aperil

or threat occurs in connection with an action or actions or a realm of

activity. For example, a driving hazard is a risk of injury or death while

using a road. Specific hazards include poor driving, bad road conditions,

1 B’ L D 834 (10th ed. 2014).

19

speeding, driving while tired, driving while intoxicated, texting, speaking

on a cell phone, and answering emails. The chance of harm or loss while

engaged in an activity is the essence of risk.

A hazard is a potential for harm—a condition or circumstance

that, when combined with events, develops into an active agency of

harm. Ahazard is a peril or danger that exists or occurs and could,

but will not always, lead to a harm. In Frigaliment Importing Co.,2

the hazard was the ambiguous word “chicken” used to describe the

chickens to be sold, which could mean young or old birds. Though the

buyer ultimately suered a loss because the seller delivered old birds

that also fit the description, the seller might have shared the buyer’s

understanding and delivered young birds. In Leasco Corp., the hazard

was the error in the unaudited income statement on which Taussig

relied. Though he too suered a loss as a result, that outcome might

have been avoided, for example, by linking price to actual net income.

In Chic Organization, Ltd., the hazard was the potential that Diana

Ross might not collaborate if Chic exercised its option to produce

a second record. Though Chic suered a loss because Ross was not

obligated at contract formation to later cooperate, Ross might have

renewed her contract with Motown or, notwithstanding the absence

of a contract with Motown, cooperated with Chic because of the

successful sales of the first record. The lurking of a hazard creates or

contributes to the creation of potential for an adverse outcome while

not always causing it.

Cause

The cause of a hazard in a transaction will be either

● one or both of the parties to the transaction or

● other causes.

The parties to a transaction can be subdivided into

● those who create or contribute to the creation of a hazard and

● the other party or parties.

2 190 F. Supp. 116 (S.D.N.Y. 1960).

Overview of Transaction Risk Management

20