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, 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 services provided are legal, any oral agreement between 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 old agreements 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 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

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Types of Contracts
Marketing Contracts
(With Dealers, Agents) (Consumer Goods, Electrical, Electronics)

Distribution Agreements

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, 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

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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 inadequately drafted Obligations ambiguous of the

Provisions Liabilities of parties not documented Parties 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 Civil i.e. compliance defaults, breach of contract etc. or Criminal i.e. cheating, breach of trust, fraud etc.

Offence

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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 imperative to 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.
Know-how and trade secrets Inserting confidentiality and non-disclosure clauses in the contract Representation on ownership of IPR

Unregistered IPRs Minimized by

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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

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Contract and Risk Management

Impact of Contract Role in management Operations Business activities of enterprises Decides the legitimate rights enterprises Contract Review Contract Drafting Contract Management

and

interests

of

Ways

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Key Elements of a Contract

Developing key contractual elements
Negotiate key elements of the contract

Examine
Maintain

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

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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 techniques to obtain the desired outcome when commercial leverage is absent risk of offers and acceptance will your client be inadvertently contracted

Utilize Analyze

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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

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Key Elements of a Contract Contd.

Drafting effective Indemnity Clauses
Indemnity Identify Consider Be sure to 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

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Contract Enforceability
Examine legal enforceability - clause example - Contract of wagering - void in India but enforceable in Australia ambiguity impact of recent indemnities case law on contractual

Remove Review

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 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

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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

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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
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

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Any Queries???

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About LawQuest

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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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