Mitigating Legal Risks Through Contracts

Mitigating Legal Risks Through Contracts
Poorvi Chothani, Esq.

LawQuest, Mumbai, India
LawQuest 2009. All Rights are Reserved.
Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai
What is a Contract?
A contract is an agreement between two or more individuals, businesses, organizations or government agencies to do, or to refrain from doing, a particular thing in exchange of something in value.
In law, a contract is a binding legal agreement that is enforceable in a court of law.

A contract is an exchange of promises for the breach of which the law will provide a remedy. As long as the goods or service provided are legal, any oral agreement between two parties can constitute a binding legal contract.
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 old agreements for new deals
What are the Risks Associated With Contracts?
What is Risk?
Definition hazard: a source of danger; a possibility of incurring loss or misfortune Financial Political Fidelity Legal
Types of Business Risk
Oxford Dictionary
as a chance or probability of danger, loss, injury or other adverse consequence peril, hazard or chance of loss a chance of encountering a situation in which one has to suffer loss or injury
Legal Parlance Common Usage
Godrejs Businesses
Furniture FMCG Real Estate Agriculture Audio Visual Solutions Electrical and Electronic Products Locks Process Equipment Security solutions Machine Tools Vending Tools Chemicals Construction IT and Software Solutions Service Material Handling Motors Precision Engineering Precision systems
Types of Contracts Godrej Employees Need to Deal With

Marketing Contracts
Engineering Products) (With Dealers, Agents) (Consumer Goods, Electrical, Electronics and
Distribution Agreements Agency Agreements
(Sole Selling Godrej Agents)
Procurement Agreements
(All Godrej Companies)

(All Godrej Companies)
Sale and Purchase Contracts
Job Work, Production or Manufacturing Contracts
(FMCG)
Warranty Agreements (Consumer Goods, Retail Industry) Employment Contracts (All Godrej Companies)
Need to Identify, Predict, Mitigate and Manage Risk

Remember the law affects all every entity, whether natural or artificial, is governed by law right from birth to death. Lack of these might cause:
Business losses Loss of clients Penalties Imprisonment
Risk Exposure
Business Organizations
Regulated Statutes (Laws) Business Relations Corporate Policies Legal Risks Contractual Risks Loss of Business Complete and clear risk treatment systems Managing Expectations
Commercial
Minimized
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Types of Legal Risks

Organizational Legal Risk Associated with maintenance of the companies assets and properties Internal affairs of the Company Examples Failure to protect intellectual property Conflict of interest between shareholders and the board of directors Legal Methodology Risk Methods adopted and steps taken to protect the companys assets Protection against claims by others Liability to pay compensation The company does not ask its counterparties for warranties but relies instead on its due diligence process
Example
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Contractual and/or Business Risks

Operational Legal Risk Example Obligations or liabilities that were not foreseen, or are greater than were foreseen The possibility that contractual rights will be void or unenforceable due to: illegality; a technical defect (e.g. lack of restriction or registration); lack of capacity (of either party); Two Types of Loss/ Injury
Pecuniary Loss
Damages Borne by Company
Risk suffered by Companies
Corporate Loss
Imprisonment Borne by Directors
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Legal Risks Associated With Contracts

Reasons Contractual provisions unenforceable Example Contract for Prostitution Unenforceable in India / Middle East Countries Enforceable in Australia
Contractual Provisions Liabilities of parties not documented inadequately drafted Obligations of the A agrees to sell 10 mtrs of cloth Parties ambiguous No description of the cloth
13
Legal Risk Associated With Contracts

Responsibility Company Officers In Charge conduct of the affairs of the company Civil i.e. compliance defaults, breach of contract etc. or Criminal i.e. cheating, breach of trust, fraud etc.
Offence
14
Kinds of Legal Risk

Product Liability (Commercial and Statutory) Employee Liability (Contractual and Statutory) Management Liability (All encompassing, corporate governance,
statutory compliance, etc.)
Compliance Default (Statutory and Organizational Policies) Tax Compliance (Statutory) Environmental (Statutory and Organizational Policies) IPR Protection (Management, Internal Systems and Enforcement)
15
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 imperative to manage client or customer relationships Written contracts mitigate ambiguities and misunderstandings Reduce risks
16
Product Liability Risk

Association Final product Arising from the performance of the product and spare parts or components Inserting clauses clearing defining liability and limiting it Limiting liability of the manufacturer and fixing the liability on the sub-contractors wherever appropriate Manufacturing Companies - Exposed Minimized by outsourcing the work
Minimized by
Example
17
Employment Liability Risks

Association Deduction and/or payments of employee welfare statutory dues like provident fund, ESI contribution, bonus, gratuity, wages etc. Company held responsible for the act of its employees/directors/managers Execution of proper Employment contract Statutory compliances like labour laws Limiting liability of the Company for the acts of its employees/ directors/ manager.
Minimized By
18
Management Liability Risk

Satyam Case Promoter and Chairman of the Company issued misleading financial information Indulged in falsification of accounts, overstatement of profits and debt owed to the Company and understatement of liabilities Charged with offences of criminal conspiracy, cheating, impersonation, forgery etc.
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Management Liability Risk.Contd

Satyam Case
Price Waterhouse Coopers independent auditors of the Company verified the accounts and approved it The role of Price Waterhouse Coopers - the statutory auditors in Indias Enron comes under the spotlight amid allegations that large Indian companies regularly use misleading accounting techniques and bully analysts, accountants and auditors into staying quiet Proceedings started against Auditors also The Company as a whole and the all the employees of the Company had to suffer as a result of the fraud by the Promoters and the Chairman Third Party Fault - Company liable - Price Waterhouse Coopers failed to discharge its duties.
20
Compliance Default Risk

Association Compliance with laws e.g. (i) Companies Act (ii) Income tax Act, (iii) Labour legislation (iv) Banking Regulation Act by banking companies (v) Electricity Act by electricity companies etc. (vi) Contract Act, 1872 Entails Penal Provisions Exposure to legal actions by regulatory authorities Legal Compliance Systems and Periodic Audits
Consequences
Minimized by
21
Tax Compliance Risk

Association Non-payment of direct or indirect taxes Short payment thereof TDS deductions Results in severe penal actions Attachment of property Fine / Penalty
Consequences
22
Intellectual Property Rights Protection Risk

Registered IPRs Patents, copyrights, Trademarks and Designs registration.
Know-how and trade secrets Inserting confidentiality and non-disclosure clauses in the contract Representation on ownership of IPR
Unregistered IPRs Minimized by
23
Mitigation of Risk
Definition Ways Reduction of the loss or injury arising out of legal risk Limiting the liability of parties to the contract Quantifying Damages Insurance Specific representations and warranty clauses Due Diligence Indemnity
24
Contract and Risk Management

Impact of Contract Role in management Operations Business activities of enterprises Decides the legitimate rights enterprises Contract Review Contract Drafting
and
interests
of
Ways
25
Management and Reduction of Risk

Risk Management Risk Mitigation Estimation of probability of risk Implementation of risk treatments Is the exercise aimed at reducing loss or injury arising out of legal risk exposure. Risk avoidance Risk reduction Risk transfer Risk retention
Risk Treatment
26
Risk Treatment
Risk avoidance Activities that may invite risk are not performed or minimized Example - Not buying a disputed property Reduction of the severity of the loss Example Due Diligence, Background Check Acceptance of loss. Risks that are incapable of being avoided or reduced are retained by default. Example Events of Force Majeure The loss is transferred to a third party Example - Insurance Non assuming of third party claims in Contracts
Risk reduction
Risk retention
Risk transfer
27
Key Elements of a Contract

Developing key contractual elements
Negotiate Examine Maintain key elements of the contract concepts of consideration clear communication record of all contracts tabulate time lines to ensure compliance tabulate deliverables to ensure compliance conditions and warranty clauses
Analyze
28
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 techniques to obtain the desired outcome when commercial leverage is absent risk of offers and acceptance will your client be inadvertently contracted
Utilize Analyze
29
Key Elements of a Contractcontd.

Effective dispute resolution clauses
Examine Identify Forum Identify Applicable Law Determine Dispute resolution options Which will be the city and court where you will bring a dispute? This is important in cross border or international contracts Courtroom Litigation v Arbitration Forum Applicable Law For feasible method of identifying the arbitrator Enforceability of arbitration award
Provide Ensure
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Key Elements of a Contract contd.

Dispute Resolution
Litigation
Formal No control over Judges Public Domain No experience in the subject matter of the dispute Judges powers limited determine and enforce the contractual rights of parties
Arbitration
Informal Arbitrators appointed by parties Confidentiality Practical experience of technicalities in question Arbitrators can modify the contractual rights of the parties May substitute their discretion as rights expressly given by agreement
Very Lengthy Process Less costly than arbitration
Less time Consuming Costly affair
31
Key Elements of a Contract Contd.

Drafting effective Indemnity Clauses
Indemnity Identify Consider Learn Understand Define safeguard against established risk critical issues consequential loss and exclusion clauses utilize clauses to protect against ambiguity probability of loss may arise as a consequence of breach of contract consequential loss
32
Contract Enforceability
Examine legal enforceability - clause example - Contract of wagering - void in India but enforceable in Australia ambiguity impact of indemnities recent case law on contractual
Remove Review
Understand
scope of recoverable loss or damages
33
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 contingencies
Post Drafting Review - Review of the Contract taking into account the
Divisions requirement and anticipating practical issues
Operational Review - Pertaining to the financial viability and internal

regulations
Legal Review - Two types: Formal Review and Substantive Review
34
Contract Review..Contd
Authorized Signatory Ensure Compliance with Current Policies Ask for proof of requisite registrations or licenses Insist on Board Resolution Granting Authority Domestic/Foreign FDI Direct/Indirect RBI Approvals Governments and other statutory authority/ies Example: Labour Laws Procedural Compliance relating to Securities laws i.e. Stock Exchange/ SEBI requirements
35
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.
36
Formal Review
Subject Matter General Information Qualification Credibility and contractual capacity
37
Substantive Review
Scope and Deliverables Rights and Obligations of parties to the Contract
Substantive Review
Capacity to Contract Example
Review every clause of the Agreement/Contract

Examine Capacity and Authority of Contracting Party Manufacturing and Supply Agreements Purchase Orders/Tenders Private Limited- Rs 1,00,000 Public Limited Rs 5,00,000 Private Limited- 2 Public Limited 7 Preferably odd number of directors Decisions taken by majority
Capital Structure
Shareholder
Directors
38
Ongoing Risk Mitigation

Legal Compliance Audit (LCA)
periodical audit to verify, check and confirm compliance with statutory laws and contractual obligations
Example
Hotel Business - Food and Adulteration Act
39
Legal Compliance Systems

Records Simple document Provides identified risks, their severity, and the actions/steps to be taken spreadsheet, or a database system assessment on how likely it is that this risk will occur. assessment of the impact that the occurrence of this risk would have on the project
40
Legal Compliance Audits

Help the management:
To ensure statutory compliance To ensure compliance with contractual obligations To take corrective action in case of non-compliance
41
Any Queries???
42
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43
Thank You
522 Maker Chambers V 221 Nariman Point Mumbai 400021 Tel: +91 22 6615 6555 Fax: +91 22 2287 2080 Email: info@lawquestinternational.com
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Mitigating Legal Risks Through Contracts

Poorvi Chothani, Esq.

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

In law, a contract is a binding legal agreement that is enforceable in a court of law.

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

What are the Risks Associated With Contracts?

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Types of Business Risk

Legal Parlance Common Usage

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Types of Contracts Godrej Employees Need to Deal With

Distribution Agreements Agency Agreements

(Sole Selling Godrej Agents)

(All Godrej Companies)

Sale and Purchase Contracts

Job Work, Production or Manufacturing Contracts

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Need to Identify, Predict, Mitigate and Manage Risk

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Types of Legal Risks

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Contractual and/or Business Risks

Risk suffered by Companies

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Legal Risks Associated With Contracts

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Legal Risk Associated With Contracts

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Kinds of Legal Risk

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Product Liability Risk

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Employment Liability Risks

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Management Liability Risk

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Management Liability Risk.Contd

LawQuest 2009. All Rights are Reserved.

Saturday, December 19, 2009 at the Godrej Premises, Vikhroli, Mumbai

Compliance Default Risk