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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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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LawQuest
Areas of Practice
Corporate Law
Intellectual Property Law
Real Estate Law Employment Law
Global Work Permits and Business
VisasThe U.S. The U.K.
Canada IndiaPoland Mauritius
Australia New Zealand
About LawQuest Provides Client Centric Legal Solutions
Member of the NY State Bar Association, the
ABA, IBA
Member of the American ImmigrationLawyers Association
Founder Member of the Global Migration
Action Group in AILA
Former Member of the Alliance of Business
Immigration Lawyers (ABIL)
Member of the European Association of
Attorneys A Worldwide Network of Lawyers
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Thank You
103, Maker Tower F,
10th Floor, Cuffe Parade,
Mumbai 400005
Tel: +91 22 40020954
Fax: +91 22 22163215
Email: info@lawquestinternational.com
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