Risk

RISK IN LEGAL CONTRACTS APURVA AGARWAL PARTNER UNIVERSAL LEGAL August 14, 2009

PREDICTING AND MITIGATING LEGAL RISK THROUGH ACTIVE RISK IDENTIFICATION WHILE STRESSING ON EFFECTIVE RISK MANAGEMENT EFFORTS

Nothing is pervasive like law as a person, whether natural or artificial, is governed by law right from birth to death.

RISK
Financial
Political
Fidelity
Legal
Types of Risk - Business hazard: a source of danger; a possibility of incurring loss or misfortune Definition

Legal Risk…..Definition a chance of encountering a situation in which one has to suffer loss or injury Common Usage peril, hazard or chance of loss Legal Parlance as a chance or probability of danger, loss, injury or other adverse consequence Oxford Dictionary

RISK EXPOSURE
Business organizations
Well tailored risk treatment plans Minimized Legal Risks Contractual Risks Exposure Applicable Laws Business Relations Governed

Kinds of Legal Risk
failure to protect its intellectual property assets
shareholders decision contrary to the decision of the management of the company
Example
Associated with maintenance of the companies assets and property
Internal affairs of the Company
Organizational Legal Risk

Kinds of Legal Risk the company does not take warranties from its counterparty, but relies instead on its due diligence procedures Example
methods adopted and steps taken to protect the company’s assets
protection against
claims by others
liability to pay compensation
Legal Methodology Risk

Kinds of Legal Risk
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 );
Example Obligations or liabilities that were not foreseen, or are greater than were foreseen Operational Legal Risk

LEGAL RISK….Contd Risk suffered by Companies Two Types of Loss/ Injury
Imprisonment
Borne by Directors
Corporeal Loss
Damages
Borne by Company
Pecuniary Loss

Legal Risk….Contd Example Reasons
Contract for Prostitution
Unenforceable in India / Middle East Countries
Enforceable in Australia
Contractual provisions unenforceable

Legal Risk….Contd
A agrees to sell 10 mtrs of
cloth
No description of cloth
Obligations of the Parties ambiguous Liabilities of parties not documented Contractual Provisions inadequately drafted

LEGAL RISK….Contd
Civil i.e. compliance defaults, breach of contract etc or
Criminal i.e. cheating, breach of trust, fraud etc
Offence
Company
Officers In Charge – conduct of the affairs of the company
Responsibility

Kinds of Legal Risk
Product liability
Employee liability
Compliance default
Tax compliance
Environmental
IPR

Product Liability Risk
Inserting proper Liability limitation Clauses
Limiting liability of the manufacturer and fixes the liability on the sub-contractors.
Minimized by
Manufacturing Companies - Exposed
Minimized by outsourcing the work
Example
Final product
Arising from the performance of the spare parts or components
Association

Management Liability Risk
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
Deduction and 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
Association

Management Liability Risk….Contd
Case Law
Enron a US Company accounts were “WINDOW DRESSED” show a healthy financial position. Filed for bankruptcy in December 2001.
Andersen - internal and external auditor of Enron since the mid-1990s
Security and Exchange Commission (SEC) investigating various charges against Enron
Arthur Anderson Case

The DOJ, found Andersen guilty of obstructing SEC's proceedings.
The SEC revoked Andersen's license to audit public limited companies and ordered the firm to pay a fine of $1,000 for obstructing state investigation (this was the highest fine that a state board could charge).

The whole firm punished and its thousands of employees for the misdeeds of a handful of corrupt partners.
Andersen's fall can be seen as a perfect example of how even great institutions founded on integrity, value, stewardship and personal growth, could collapse in the absence of internal controls of management, a good work culture, and sound values.

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
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 “India’s 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
Satyam Case

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.
Satyam Case

Compliance default risk
Compliance with laws e.g.
Companies Act
Income tax Act,
Labour legislation
Banking Regulation Act by banking companies
Electricity Act by electricity companies etc
Contract Act, 1872
Association

Compliance default risk Legal Compliance Audit Minimized by
Entails Penal Provisions
Exposure to legal actions by regulatory authorities
Consequences

Tax compliance risk
Results in severe penal actions
Attachment of property
Fine / Penalty
Consequences
Non-payment of direct or indirect taxes
Short payment thereof
TDS deductions
Association

Environmental risk Cola major fined for painting advertisements in the hilly regions of Himalayas Example
Environmental offence
Penal provisions enforced
Consequences Discharge of polluting materials Association

Environmental risk…Contd
Taj Trapezium Case
Courts held – since emissions generated by the coke consuming industries are damaging the Taj Mahal -such industries have to use natural gas or relocate
Example

Environmental risk…Contd
Business entity is required to restrict carbon and harmful gas emissions.
Minimized by
Bhopal Gas Leak case
Forty tonnes of toxic gases escaped into the air from the Union Carbides chemical plant and took lives of 3500 people
Supreme Court directed the company to pay US $ 470 million as compensation
Example

IPR protection risk
Inserting confidentiality and non-disclosure clauses in the contract
Representation on ownership of IPR
Minimized by know-how and trade secrets Non Registrable IPR’s patent, copyright, trademark and designs registration. IPR Legal Protection

Management of Risk
Risk avoidance
Risk reduction
Risk transfer
Risk retention
Risk Treatment
Estimation of probability of risk
Implementation of risk treatments
Definition

Risk Treatment
Reduction of the severity of the loss
Example – Due Diligence, Background Check
Risk reduction
Activities that may invite risk are not performed or minimized
Example - Not buying a disputed property
Risk avoidance

Risk Treatment…..Contd
The loss is transferred to a third party
Example - Insurance
Non assuming of third party claims in Contracts
Risk transfer
Acceptance of loss.
Risks that are incapable of being avoided or reduced are retained by default.
Example – Events of Force Majeure
Risk retention

Mitigation of Risk
Limiting the liability of parties to the contract
Quantifying Damages
Insurance
Specific representations and warranty clauses
Due Diligence
Indemnity
Ways
Reduction of the loss or injury arising out of legal risk
Definition

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

Drafting of Contract
Developing key contractual elements
conditions and warranty clauses
Analyse
clear communication
Maintain
concepts of consideration
Examine
key elements of the contract
Negotiate

Ensuring the foundations of the contract are secure at the bargaining table
techniques to obtain the desired outcome when commercial leverage is absent
Utilise
requirements to ensure the contract protects their business interests
technical and legal expectations
special inclusions / exclusions required
Understand

Ensuring the foundations of the contract are secure at the bargaining table
risk of offers and acceptance
will your client be inadvertently contracted
Analyse

Effective dispute resolution clauses
Ensure enforceability of award Aim
Courtroom Litigation v Arbitration
Forum
Applicable Law
Determine Dispute resolution options Examine

Drafting of Contract Confidentiality Public Domain Practical experience of technicalities in question No experience in the subject matter of the dispute Informal Arbitrators appointed by parties Formal No control over Judges ARBITRATION LITIGATION

Drafting of Contract….Contd Arbitrators can modify the contractual rights of the parties May substitute their discretion as rights expressly given by agreement Judges powers limited Determine and enforce the contractual rights of parties Costly affair Less costly than arbitration Less time Consuming Very Lengthy Process

Drafting of Contract….Contd
Drafting effective Indemnity Clauses
safeguard against established risk Indemnity consequential loss and exclusion clauses Consider critical issues Identify

Drafting of Contract….Contd
Drafting effective Indemnity Clauses
utilise clauses to protect against ambiguity Learn probability of loss may arise as a consequence of breach of contract Understand consequential loss Define

Contract Enforceability
impact of recent case law on contractual indemnities
Review
scope of recoverable loss or damage
Understand
ambiguity
Remove
legal enforceability - clause
example - Contract of wagering
void in India but enforceable in Australia
Examine

Contract Review
Prior Review
A review of the Contract from legal perspective
Post Review
Review of the Contract taking into account the Clients requirement
Classification
A rational analysis of Contract
Includes feasibility of contract and forecast of contract risks
Definition

Contract Review…..Contd
Operational Review
Pertaining to the financial viability and internal regulations
Legal Review - Two types
Classification
Rights and Obligations of parties to the Contract
Substantive Review
Subject Matter
General Information
Qualification
Credibility and contractual capacity
Formal Review

Contract Review…..Contd Private Limited- 2 Public Limited – 7 Shareholder Preferably odd number of directors Decisions taken by majority Directors Private Limited- Rs 1,00,000 Public Limited – Rs 5,00,000 Capital Structure Joint Venture Agreement Incorporation of Company in India Example Review every clause of the Agreement/Contract Substantive Review

Contract Review…..Contd Governments and other statutory authority/ies Example: Labour Laws Procedural Compliance relating to Securities laws i.e. Stock Exchange/ SEBI requirements Approval Domestic/Foreign FDI – Direct/Indirect RBI Approvals Financial Policy Appointment Remuneration Chief Executive Officer

Contract Review…..Contd Proper stamp duty been paid on the agreements Immovable property valuing Rs 100 or more Registration, admitted execution and registered by the registrar. Execution of Agreements

Preventive Measures
Legal Compliance Audit (LCA)
periodical audit to verify, check and confirm compliance by statutory laws including rules, guidelines, notifications and any amendments related to company laws, banking laws, property laws, securities laws, commercial laws, constitutional laws, consumer laws, taxation laws and other relevant laws depending upon the nature of business .
Example
Hotel Business- Food and adulteration act

Preventive Measures
LCA assumes greater importance. LCA helps the management
to ensure that legal compliances are adequately made
to take corrective action in case of non-compliance

Risk Registers
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
Provides
spreadsheet, or a database system
Simple document
identified risks, their severity, and the actions/steps to be taken
Records

Risk Registers…Contd current risk or if risk can no longer arise and impact the project. Indicates Individual - for the ensuring this risk is appropriately managed and counter measures are undertaken Responsibility prevent, reduce or transfer the risk. Includes - production of contingency plans. Action

ANY QUERIES ????

THANK YOU !
Universal Legal, Advocates
5th Floor, Kimatrai Building,
77/79, Maharshi Karve Road,
Mumbai – 400 002
Tel: +91 22 22034293-95
Fax: +91 22 2209845
Email: [email_address]

Risk

by apurvaagarwal

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