The document discusses various types of legal risks that companies may face and strategies to mitigate them. It outlines risks including contractual risks, product liability, employee liability, compliance defaults, taxes, intellectual property, and environmental issues. It emphasizes the importance of properly drafting contracts, conducting due diligence, buying insurance policies, and complying with applicable laws to minimize exposure to legal risks.

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

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

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

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

5. 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

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

7. 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

8. 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

9. 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

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

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

12. 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

13. 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

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

15. 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

16. 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

17. 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

18. Management Liability Risk….Contd 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). Arthur Anderson Case

19. Management Liability Risk….Contd 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. Arthur Anderson Case

20. Management Liability Risk….Contd 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

21. Management Liability Risk….Contd 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

22. Management Liability Risk….Contd 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

23. 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

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

25. 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

26. 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

27. 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

28. 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

29. 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

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

31. 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

32. 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

33. 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

34. 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

35. 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

36. Drafting of Contract 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

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

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

39. 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

40. 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

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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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

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