mitigating risks through contracts
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LawQuest 2010. All Rights are Reserved. 1TiE Business Builder Breakfast, February 23, 2010
Mitigating Legal Risks Through
Contracts
Poorvi Chothani, Esq.
LawQuest, Mumbai, India
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What is a Contract?
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A contract is an agreement between two or more individuals, businesses,
organizations or government agencies to do, or to refrain from doing, aparticular thing in exchange of something in value.
In law, a contract is a binding legal agreement that is enforceable in acourt of law.
A contract is an exchange of promises for the breach of which the law willprovide a remedy.
As long as the goods or services provided are legal, any oral agreementbetween two parties can constitute a binding legal contract.
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Traditionally We:
Are contract averse
Perceive lawyers as black-coat-sporting litigators
Do not perceive any harm in having contracts drawn up
by a Chartered Accountant or a Company Secretary
Do not perceive any harm in using templates or oldagreements for new deals
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What are the Risks Associated With
Contracts?
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What is Risk?
Definition hazard:
a source of danger;
a possibility of incurring loss or misfortune
Types of Business
Risk
Financial
Political
Fidelity
Legal
Oxford Dictionary as a chance or probability of danger, loss, injury or other
adverse consequence
Legal Parlance peril, hazard or chance of loss
Common Usage a chance of encountering a situation in which one has to suffer
loss or injury
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Types of Contracts
Marketing Contracts(With Dealers, Agents) Distribution Agreements(Consumer Goods, Electrical, Electronics)
Agency Agreements(Sole Selling Agents) Procurement Agreements
Sale and Purchase Contracts Job Work, Production or Manufacturing Contracts
Warranty Agreements
Employment Contracts
Web portal Terms and Conditions
Share Holder Agreements
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Need to Identify, Predict, Mitigate and Manage
Risk
Remember the law affects all every entity, whethernatural or artificial, is governed by law right from birth todeath.
Lack of these might cause:Business losses
Loss of clients
Penalties
Imprisonment
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Legal Risks Associated With Contracts
Reasons Example
Contractual provisions
unenforceable
Contract for Prostitution
Unenforceable in India / Middle East
Countries
Enforceable in Australia
Contractual Provisions
inadequately drafted
Liabilities of parties not documented
Obligations of the Parties
ambiguous
A agrees to sell 10 mtrs of cloth
No description of the cloth
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Contract Management
Responsibility Company
Officers In Charge conduct of the affairs of
the company
Offence Civil i.e. compliance defaults, breach ofcontract etc. or
Criminal i.e. cheating, breach of trust, fraud
etc.
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Advantages of Contracts
Contracts help define the scope of services and the
deliverables of a product
They help define expectations and obligations
Well defined expectations and obligations are imperativeto manage client or customer relationships
Written contracts mitigate ambiguities and
misunderstandings
Reduce risks
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Contracts Help Manage Product Liability Risks
Association Final product
Arising from the performance of the product and
spare parts or components
Minimized by Inserting clauses clearing defining liability and
limiting it
Limiting liability of the manufacturer and fixing the
liability on the sub-contractors wherever appropriate
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Intellectual Property Rights Protection Risk
Registered IPRs Patents, Copyrights, Trademarks and Designs
registration.
UnregisteredIPRs
Know-how and trade secrets
Minimized by Inserting confidentiality and non-disclosure
clauses in the contract
Representation on ownership of IPR
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Mitigation of Risk
Definition Reduction of the loss or injury arising out of legal risk
Ways Limiting the liability of parties to the contract
Quantifying Damages
Insurance
Specific representations and warranty clauses
Due Diligence
Indemnity
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Contract and Risk Management
Impact of
Contract
Role in management
Operations
Business activities of enterprises
Decides the legitimate rights and interests ofenterprises
Ways Contract Review
Contract Drafting
Contract Management
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Key Elements of a Contract
Developing key contractual elements
Negotiate key elements of the contract
Examine concepts of consideration
Maintain clear communication
record of all contracts
tabulate time lines to ensure compliance
tabulate deliverables to ensure compliance
Analyze conditions and warranty clauses
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Key Elements of a Contractcontd.
Ensuring the foundations of the contract are secure at the
bargaining table
Understand requirements to ensure the contract protects their business
interests
technical and legal expectations
special inclusions / exclusions required
Utilize techniques to obtain the desired outcome when commercial
leverage is absent
Analyze risk of offers and acceptance will your client be inadvertently contracted
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Key Elements of a Contractcontd.
Effective dispute resolution clauses
Examine Dispute resolution options
Identify Forum Which will be the city and court where you will bring a dispute?
Identify Applicable
Law
This is important in cross border or international contracts
Determine Courtroom Litigation v Arbitration
Forum
Applicable Law
Provide For feasible method of identifying the arbitrator
Ensure Enforceability of arbitration award
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Key Elements of a Contract contd.
Dispute Resolution
Litigation Arbitration
Formal
No control over Judges
Informal
Arbitrators appointed by parties
Public Domain Confidentiality
No experience in the subject matter of the
dispute
Practical experience of technicalities in question
Judges powers limited determine and enforce
the contractual rights of parties
Arbitrators can modify the contractual rights of the
parties
May substitute their discretion as rights expresslygiven by agreement
Very Lengthy Process Less time Consuming
Less costly than arbitration Costly affair
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Key Elements of a Contract Contd.
Drafting effective Indemnity Clauses
Indemnity safeguard against established risk
Identify critical issues
Consider consequential loss and exclusion clauses
Be sure to utilize clauses to protect against ambiguity
Understand probability of loss may arise as a consequence of
breach of contract
Define consequential loss
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Contract Enforceability
Examine legal enforceability - clause
example - Contract of wagering - void in India but
enforceable in Australia
Remove ambiguity
Review impact of recent case law on contractual
indemnities
Understand scope of recoverable loss or damages
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Contract Review
A rational analysis of Contract includes:
i. feasibility of contract
ii. forecast of contract risks
Prior Drafting Review - A review of the Contract from legal perspective with
special attention emphasis on potential contingenciesPost Drafting Review - Review of the Contract taking into account theDivisions requirement and anticipating practical issues
Operational Review - Pertaining to the financial viability and internal
regulationsLegal Review - Two types: Formal Review and Substantive Review
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Contract Review..Contd
Authorized Signatory Insist on Board Resolution Granting Authority
Ensure Compliance with
Current Policies
Domestic/Foreign
FDI Direct/Indirect
RBI Approvals
Ask for proof of requisite
registrations or licenses
Governments and other statutory authority/ies
Example: Labour Laws
Procedural Compliance relating to Securities
laws i.e. Stock Exchange/ SEBI requirements
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Contract Review..Contd
Execution of
Agreements
Proper stamp duty been paid on the agreements
Immovable property valuing Rs.100 or more
Registration, admitted execution and registered by
the registrar.
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Substantive Review
Scope and Deliverables Rights and Obligations of parties to the Contract
Substantive Review Review every clause of the Agreement/Contract
Capacity to Contract Examine Capacity and Authority of Contracting Party
Example Manufacturing and Supply Agreements
Purchase Orders/Tenders
Capital Structure Private Limited- Rs 1,00,000
Public Limited Rs 5,00,000
Shareholder Private Limited- 2
Public Limited 7
Directors Preferably odd number of directors
Decisions taken by majority
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Any Queries???
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