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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Intellectual Property Law

Real Estate Law

Employment Law

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Thank You

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Mitigating Risks Through Contracts

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