Reducing Legal Risks Through Contracts

7/28/2019 Reducing Legal Risks Through Contracts

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LawQuest 2013. All Rights are Reserved. 1

Reducing 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 contractaverse

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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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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Risk Exposure

Business Organizations

Regulated Statutes (Laws)

Business Relations

Corporate PoliciesCommercial Legal Risks

Contractual Risks

Loss of Business

Minimized Complete and clear risk treatment systems

Managing Expectations


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Types of Legal Risks

Examples Failure to protect intellectual property

Conflict of interest between shareholders and the board of

directors

Legal Methodology

Risk

Methods adopted and steps taken to protect the companys

assets

Protection against

claims by others

Liability to pay compensation

Example The company does not ask its counterparties for warranties

but relies instead on its due diligence process


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Contractual and/or Business Risks

Operational Legal Risk Obligations or liabilities that were not foreseen, or are greater

than were foreseen

Example 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)

Risk suffered by

Companies

Two Types of Loss/ Injury

Pecuniary Loss

Damages

Borne by CompanyCorporate Loss

Imprisonment

Borne by Directors


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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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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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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 aproduct

They help define expectations and obligations

Well defined expectations and obligations are imperative to manageclient 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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Employment Liability Risks

Association Deduction and/or 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

Minimized By Execution of proper Employment contract

Statutory compliances like labour laws

Limiting liability of the Company for the acts of its

employees/ directors/ manager.


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Patents and Trademarks

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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Reducing 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 contractDefine 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 a 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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Exports

Export of goods is divided into three categories.

Restricted Goods

Prohibited Goods

Dual Use good (SCOMET list)

Note: Table A/B of the ITC (HS) Export Code deals with the

classification of goods.


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Examples

Restricted Goods-Dress material/ ready made garment fabric/textile items with imprintsor verses from Indian Holy Scriptures.Export of restricted goodsrequires a license from the Government of India.

Prohibited Goods-All wild animals or animal articles. Prohibited goods are not allowedto be exported.

Dual Purpose Goods (SCOMET List)Nuclear materials, Electronics, Computers, Micro-organisms,Toxins. In order to obtain a license for the purpose of exporting

SCOMET goods, the Aayat Niryat Form must be filled and submittedto the Directorate General of Foreign Trade.


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Export Contracts

Contracts which apply exclusively to the sale of

goods.

Types of export contracts:a) CIF

b) FOB

c) FAS

d) C & F


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CIF Means cost, insurance and freight.

Price of goods includes, the cost of getting them to the ship(e.g., transportation costs from the factory to the ship),loading costs and money for taking out an insurance policyfor the goods.

Both seller and buyer have specific duties

In a CIF contract, it is the port of destination that is named;

e.g., a CIF contract which says, CIF Amsterdam meansthat the goods will be shipped on CIF terms to the port ofAmsterdam.


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FOB

Means free on board which indicates that the seller willbear all costs up to the point where the goods are loadedonto the ship. E.g., he will bear transportation costs (totake the goods to the ship) and loading costs (to putthem on the ship).

However, the buyer is responsible for paying the freightand insurance.

The port named in a FOB contract is the port of shipment

where the goods will be loaded. So a contract FOBMumbai indicates that the goods will be shipped onFOB terms and will be loaded at the port of Mumbai.


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Difference between CIF and FOB ContractsCIF

To fulfill the contract, the seller can buygood already afloat, he does not have tophysically load goods

Seller always pays the cost for transportingthe goods to The ship, plus freight andinsurance

It is a destinations contract; e.g.., CIF

London, means the ship will offload inLondon.

The seller always takes out the contract ofcarriage so he is always the shipper

No need for nomination of ship or port

CIF contracts are always export contracts;i.e., the ship is always going to a foreigndestination.

There can be constructive delivery of thegoods via transfer of the Bill of Lading

FOB To fulfill the contract, the seller must load

actual goods onto the ship, he cannot buygoods already afloat.

The buyer is usually responsible for payingfreight and insurance, only for additionalservices

FOB Kingston, means the ship will be loaded

at Kingston for loading.

Depending on the type of FOB, either seller orbuyer can take out Contract of Carriage, soeither can be shipper.

The ship and port must be nominated by thebuyer

FOB contracts can be for either import orexport of goods.

Constructive delivery is not allowed under anFOB contract, there must be delivery of theactual goods shipped


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FAS

FAS means free alongside. The seller delivers the goods

to the ship that will carry the merchandise. The buyer

pays to load onto the ship and takes responsibility from

there. FAS Mumbai, for example, means that the seller

will deliver and store the goods until they are ready forloading onto the ship.


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C & F

C & F means cost and freight. The seller pays

the freight charges. The buyer insures the

merchandise and takes full responsibility after

the destination.


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LawQuest 2013. All Rights are Reserved.

Letters of Credit

A letter to serve as a guarantee for payments madeto a specified person under specified conditions

Issued only by a financial institution

Typically between banks in different countries

A promise by a debtor's bank to pay the creditorupon presentation of specified documents

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Making Contracts

Identify the buyer

Due Diligence

Foreign Trade Policy and FEMA regulations

Chamber of Commerce in buyers country tounderstand laws followed therein.


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More Information on Exports

Foreign Trade Policy Customs Tariff Act, 1985

Office of Additional Director General

Foreign Trade (Marine Lines)

Exchange Control Regulations Manual

ITC (HS) Export Code

www.dgft.gov.in

www.rbi.org.in
http://www.dgft.gov.in/http://www.rbi.org.in/http://www.rbi.org.in/http://www.dgft.gov.in/


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Distribution & Agency Contacts in the EU

Notice period for termination of contract-

a) One month for the first year of the contract;

b) Two months for the second year commenced

c) Three years for the third year commenced andsubsequent years

Indemnity or Compensation


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Important Pointers

Care before Cure Approach Term sheet Preparation

Engage in what if scenarios

Ask for a similar contract Check for contract forms

Signing of the letter of intent


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Reducing Legal Risks Through Contracts