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Mitigating Risks Through Contracts - Poorvi Chothani


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This slide deck was presented by Poorvi Chothani at the TiE Business Builder Breakfast in Mumbai.

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Mitigating Risks Through Contracts - Poorvi Chothani

  1. 1. Mitigating Legal Risks Through Contracts Poorvi Chothani, Esq. LawQuest, Mumbai, India
  2. 2. What is a Contract?
  3. 3. <ul><li>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. </li></ul><ul><li>In law, a contract is a binding legal agreement that is enforceable in a court of law. </li></ul><ul><li>A contract is an exchange of promises for the breach of which the law will provide a remedy. </li></ul><ul><li>As long as the goods or services provided are legal, any oral agreement between two parties can constitute a binding legal contract. </li></ul>
  4. 4. Traditionally We: <ul><li>Are “contract averse” </li></ul><ul><li>Perceive lawyers as black-coat-sporting litigators </li></ul><ul><li>Do not perceive any harm in having contracts drawn up by a Chartered Accountant or a Company Secretary </li></ul><ul><li>Do not perceive any harm in using templates or old agreements for new deals </li></ul>
  5. 5. What are the Risks Associated With Contracts?
  6. 6. What is Risk? 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 <ul><li>Financial </li></ul><ul><li>Political </li></ul><ul><li>Fidelity </li></ul><ul><li>Legal </li></ul>Types of Business Risk hazard: a source of danger; a possibility of incurring loss or misfortune Definition
  7. 7. Types of Contracts <ul><li>Marketing Contracts (With Dealers, Agents) </li></ul><ul><li>Distribution Agreements (Consumer Goods, Electrical, Electronics) </li></ul><ul><li>Agency Agreements (Sole Selling Agents) </li></ul><ul><li>Procurement Agreements </li></ul><ul><li>Sale and Purchase Contracts </li></ul><ul><li>Job Work, Production or Manufacturing Contracts </li></ul><ul><li>Warranty Agreements </li></ul><ul><li>Employment Contracts </li></ul><ul><li>Web portal Terms and Conditions </li></ul><ul><li>Share Holder Agreements </li></ul>
  8. 8. Need to Identify, Predict, Mitigate and Manage Risk <ul><ul><li>Remember – the law affects all – every entity, whether natural or artificial, is governed by law right from birth to death. </li></ul></ul><ul><li>Lack of these might cause: </li></ul><ul><ul><li>Business losses </li></ul></ul><ul><ul><li>Loss of clients </li></ul></ul><ul><ul><li>Penalties </li></ul></ul><ul><ul><li>Imprisonment </li></ul></ul>
  9. 9. Legal Risks Associated With Contracts <ul><li>A agrees to sell 10 mtrs of cloth </li></ul><ul><li>No description of the cloth </li></ul>Obligations of the Parties ambiguous Liabilities of parties not documented Contractual Provisions inadequately drafted Example Reasons <ul><li>Contract for Prostitution </li></ul><ul><li>Unenforceable in India / Middle East Countries </li></ul><ul><li>Enforceable in Australia </li></ul>Contractual provisions unenforceable
  10. 10. Contract Management <ul><li>Civil i.e. compliance defaults, breach of contract etc. or </li></ul><ul><li>Criminal i.e. cheating, breach of trust, fraud etc. </li></ul>Offence <ul><li>Company </li></ul><ul><li>Officers In Charge – conduct of the affairs of the company </li></ul>Responsibility
  11. 11. Advantages of Contracts <ul><li>Contracts help define the scope of services and the deliverables of a product </li></ul><ul><li>They help define expectations and obligations </li></ul><ul><li>Well defined expectations and obligations are imperative to manage client or customer relationships </li></ul><ul><li>Written contracts mitigate ambiguities and misunderstandings </li></ul><ul><li>Reduce risks </li></ul>
  12. 12. Contracts Help Manage Product Liability Risks <ul><li>Inserting clauses clearing defining liability and limiting it </li></ul><ul><li>Limiting liability of the manufacturer and fixing the liability on the sub-contractors wherever appropriate </li></ul>Minimized by <ul><li>Final product </li></ul><ul><li>Arising from the performance of the product and spare parts or components </li></ul>Association
  13. 13. Intellectual Property Rights Protection Risk <ul><li>Inserting confidentiality and non-disclosure clauses in the contract </li></ul><ul><li>Representation on ownership of IPR </li></ul>Minimized by Know-how and trade secrets Unregistered IPRs Patents, Copyrights, Trademarks and Designs registration. Registered IPRs
  14. 14. Mitigation of Risk <ul><li>Limiting the liability of parties to the contract </li></ul><ul><li>Quantifying Damages </li></ul><ul><li>Insurance </li></ul><ul><li>Specific representations and warranty clauses </li></ul><ul><li>Due Diligence </li></ul><ul><li>Indemnity </li></ul>Ways <ul><li>Reduction of the loss or injury arising out of legal risk </li></ul>Definition
  15. 15. Contract and Risk Management <ul><li>Contract Review </li></ul><ul><li>Contract Drafting </li></ul><ul><li>Contract Management </li></ul>Ways <ul><li>Role in management </li></ul><ul><li>Operations </li></ul><ul><li>Business activities of enterprises </li></ul><ul><li>Decides the legitimate rights and interests of enterprises </li></ul>Impact of Contract
  16. 16. Key Elements of a Contract <ul><li>Developing key contractual elements </li></ul><ul><li>conditions and warranty clauses </li></ul>Analyze <ul><li>clear communication </li></ul><ul><li>record of all contracts </li></ul><ul><li>tabulate time lines to ensure compliance </li></ul><ul><li>tabulate deliverables to ensure compliance </li></ul>Maintain <ul><li>concepts of consideration </li></ul>Examine <ul><li>key elements of the contract </li></ul>Negotiate
  17. 17. Key Elements of a Contract… contd . <ul><li>Ensuring the foundations of the contract are secure at the bargaining table </li></ul><ul><li>risk of offers and acceptance </li></ul><ul><li>will your client be inadvertently contracted </li></ul>Analyze <ul><li>techniques to obtain the desired outcome when commercial leverage is absent </li></ul>Utilize <ul><li>requirements to ensure the contract protects their business interests </li></ul><ul><li>technical and legal expectations </li></ul><ul><li>special inclusions / exclusions required </li></ul>Understand
  18. 18. Key Elements of a Contract… contd. <ul><li>Effective dispute resolution clauses </li></ul><ul><li>This is important in cross border or international contracts </li></ul>Identify Applicable Law <ul><li>Which will be the city and court where you will bring a dispute? </li></ul>Identify Forum Enforceability of arbitration award Ensure For feasible method of identifying the arbitrator Provide <ul><li>Courtroom Litigation v Arbitration </li></ul><ul><li>Forum </li></ul><ul><li>Applicable Law </li></ul>Determine Dispute resolution options Examine
  19. 19. Key Elements of a Contract… contd. Dispute Resolution Costly affair Less costly than arbitration 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 Less time Consuming Very Lengthy Process 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
  20. 20. Key Elements of a Contract… Contd. <ul><li>Drafting effective Indemnity Clauses </li></ul>consequential loss Define probability of loss may arise as a consequence of breach of contract Understand utilize clauses to protect against ambiguity Be sure to safeguard against established risk Indemnity consequential loss and exclusion clauses Consider critical issues Identify
  21. 21. Contract Enforceability <ul><li>impact of recent case law on contractual indemnities </li></ul>Review <ul><li>scope of recoverable loss or damages </li></ul>Understand <ul><li>ambiguity </li></ul>Remove <ul><li>legal enforceability - clause </li></ul><ul><li>example - Contract of wagering - void in India but enforceable in Australia </li></ul>Examine
  22. 22. Contract Review <ul><li>Operational Review - Pertaining to the financial viability and internal regulations </li></ul><ul><li>Legal Review - Two types: Formal Review and Substantive Review </li></ul><ul><li>Prior Drafting Review - A review of the Contract from legal perspective with special attention emphasis on potential contingencies </li></ul><ul><li>Post Drafting Review - Review of the Contract taking into account the Divisions’ requirement and anticipating practical issues </li></ul><ul><li>A rational analysis of Contract includes: </li></ul><ul><ul><li>feasibility of contract </li></ul></ul><ul><ul><li>forecast of contract risks </li></ul></ul>
  23. 23. Contract Review….. Contd Governments and other statutory authority/ies Example: Labour Laws Procedural Compliance relating to Securities laws i.e. Stock Exchange/ SEBI requirements Ask for proof of requisite registrations or licenses Domestic/Foreign FDI – Direct/Indirect RBI Approvals Ensure Compliance with Current Policies Insist on Board Resolution Granting Authority Authorized Signatory
  24. 24. 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
  25. 25. Substantive Review Rights and Obligations of parties to the Contract Scope and Deliverables Examine Capacity and Authority of Contracting Party Capacity to Contract 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 Manufacturing and Supply Agreements Purchase Orders/Tenders Example Review every clause of the Agreement/Contract Substantive Review
  26. 26. Any Queries???
  27. 27. LawQuest <ul><li>Areas of Practice </li></ul><ul><li>Corporate Law </li></ul><ul><li>Intellectual Property Law </li></ul><ul><li>Real Estate Law </li></ul><ul><li>Employment Law </li></ul><ul><li>Global Work Permits and Business Visas </li></ul><ul><ul><li>The U.S. The U.K. </li></ul></ul><ul><ul><li>Canada India </li></ul></ul><ul><ul><li>Poland Mauritius </li></ul></ul><ul><ul><li>Australia New Zealand </li></ul></ul><ul><li>About LawQuest </li></ul><ul><li>Provides Client Centric Legal Solutions </li></ul><ul><li>Member of the NY State Bar Association, the ABA, IBA </li></ul><ul><li>Member of the American Immigration Lawyers Association </li></ul><ul><li>Founder Member of the Global Migration Action Group in AILA </li></ul><ul><li>Former Member of the Alliance of Business Immigration Lawyers (ABIL) </li></ul><ul><li>Member of the European Association of Attorneys – A Worldwide Network of Lawyers </li></ul>
  28. 28. Thank You 522 Maker Chambers V 221 Nariman Point Mumbai 400021 Tel: +91 22 6615 6555 Fax: +91 22 2287 2080 Email: [email_address]