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, a particular thing in exchange of something in value. In law, a contract is a binding legal agreement that is enforceable in a court of law. A contract is an exchange of promises for the breach of which the law will provide a remedy. As long as the goods or services provided are legal, any oral agreement between two parties can constitute a binding legal contract.

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Traditionally We:
Are contract averse 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 old agreements 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 Financial Political Fidelity Legal

Types of Business Risk

Oxford Dictionary

as a chance or probability of danger, loss, injury or other adverse consequence peril, hazard or chance of loss a chance of encountering a situation in which one has to suffer loss or injury

Legal Parlance Common Usage

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Need to Identify, Predict, Mitigate and Manage Risk

Remember the law affects all every entity, whether natural or artificial, is governed by law right from birth to death. 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 Policies Legal Risks Contractual Risks Loss of Business Complete and clear risk treatment systems Managing Expectations

Commercial

Minimized

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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 The company does not ask its counterparties for warranties but relies instead on its due diligence process

Example

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Contractual and/or Business Risks

Operational Legal Risk Example Obligations or liabilities that were not foreseen, or are greater than were foreseen 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) Two Types of Loss/ Injury
Pecuniary Loss
Damages Borne by Company

Risk suffered by Companies

Corporate Loss
Imprisonment Borne by Directors

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Legal Risks Associated With Contracts

Reasons Contractual provisions unenforceable Example Contract for Prostitution Unenforceable in India / Middle East Countries Enforceable in Australia

Contractual Provisions inadequately drafted Obligations ambiguous of the

Liabilities of parties not documented Parties 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) (Consumer Goods, Electrical, Electronics)

Distribution Agreements

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 Civil i.e. compliance defaults, breach of contract etc. or Criminal i.e. cheating, breach of trust, fraud etc.

Offence

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Advantages of Contracts
Contracts help define the scope of services and the deliverables of a product They help define expectations and obligations Well defined expectations and obligations are imperative to manage client 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 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

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Patents and Trademarks

Registered IPRs Patents, Copyrights, Trademarks and Designs registration.
Know-how and trade secrets Inserting confidentiality and non-disclosure clauses in the contract Representation on ownership of IPR

Unregistered IPRs Minimized by

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Reducing Risk
Definition Ways Reduction of the loss or injury arising out of legal risk 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 enterprises Contract Review Contract Drafting Contract Management

and

interests

of

Ways

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Key Elements of a Contract

Developing key contractual elements
Negotiate key elements of the contract

Examine
Maintain

concepts of consideration
clear communication record of all contracts tabulate time lines to ensure compliance tabulate deliverables to ensure compliance conditions and warranty clauses

Analyze

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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 techniques to obtain the desired outcome when commercial leverage is absent risk of offers and acceptance will your client be inadvertently contracted

Utilize Analyze

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Key Elements of a Contractcontd.

Effective dispute resolution clauses
Examine Identify Forum Identify Applicable Law Determine Dispute resolution options Which will be the city and court where you will bring a dispute? This is important in cross border or international contracts Courtroom Litigation v Arbitration Forum Applicable Law For feasible method of identifying the arbitrator Enforceability of arbitration award

Provide Ensure

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Key Elements of a Contract contd.

Dispute Resolution Litigation
Formal No control over Judges Public Domain

Arbitration
Informal Arbitrators appointed by parties Confidentiality

No experience in the subject matter of the dispute

Judges powers limited determine and enforce the contractual rights of parties

Practical experience of technicalities in question

Arbitrators can modify the contractual rights of the parties May substitute their discretion as rights expressly given by agreement

Very Lengthy Process Less costly than arbitration

Less time Consuming Costly affair

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Key Elements of a Contract Contd.

Drafting effective Indemnity Clauses
Indemnity safeguard against established risk

Identify
Consider Be sure to Understand Define

critical issues
consequential loss and exclusion clauses utilize clauses to protect against ambiguity probability of loss may arise as a consequence of breach of contract consequential loss

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Contract Enforceability
Examine legal enforceability - clause example - Contract of wagering - void in India but enforceable in Australia ambiguity impact of recent indemnities case law on contractual

Remove Review

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 contingencies

Post Drafting Review - Review of the Contract taking into account the
Divisions requirement and anticipating practical issues

Operational Review - Pertaining to the financial viability and internal

regulations

Legal Review - Two types: Formal Review and Substantive Review

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Contract Review..Contd
Authorized Signatory Ensure Compliance with Current Policies Ask for proof of requisite registrations or licenses Insist on Board Resolution Granting Authority Domestic/Foreign FDI Direct/Indirect RBI Approvals 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
Capacity to Contract Example

Review every clause of the Agreement/Contract

Examine Capacity and Authority of Contracting Party Manufacturing and Supply Agreements Purchase Orders/Tenders Private Limited- Rs 1,00,000 Public Limited Rs 5,00,000 Private Limited- 2 Public Limited 7 Preferably odd number of directors Decisions taken by majority

Capital Structure

Shareholder

Directors

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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 GoodsDress material/ ready made garment fabric/textile items with imprints or verses from Indian Holy Scriptures. Export of restricted goods requires a license from the Government of India.

Prohibited GoodsAll wild animals or animal articles. Prohibited goods are not allowed to 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 submitted to 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 policy for 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 means that the goods will be shipped on CIF terms to the port of Amsterdam.

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FOB
Means free on board which indicates that the seller will bear all costs up to the point where the goods are loaded onto the ship. E.g., he will bear transportation costs (to take the goods to the ship) and loading costs (to put them on the ship). However, the buyer is responsible for paying the freight and insurance. The port named in a FOB contract is the port of shipment where the goods will be loaded. So a contract FOB Mumbai indicates that the goods will be shipped on FOB terms and will be loaded at the port of Mumbai.

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Difference between CIF and FOB Contracts

CIF
To fulfill the contract, the seller can buy good already afloat, he does not have to physically load goods Seller always pays the cost for transporting the goods to The ship, plus freight and insurance It is a destinations contract; e.g.., CIF London, means the ship will offload in London. The seller always takes out the contract of carriage 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 foreign destination. There can be constructive delivery of the goods via transfer of the Bill of Lading

FOB
To fulfill the contract, the seller must load actual goods onto the ship, he cannot buy goods already afloat. The buyer is usually responsible for paying freight and insurance, only for additional services FOB Kingston, means the ship will be loaded at Kingston for loading. Depending on the type of FOB, either seller or buyer can take out Contract of Carriage, so either can be shipper. The ship and port must be nominated by the buyer

FOB contracts can be for either import or export of goods.

Constructive delivery is not allowed under an FOB contract, there must be delivery of the actual goods shipped 35

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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 for loading 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 made to 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 creditor upon 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 to understand 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

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Distribution & Agency Contacts in the EU

Notice period for termination of contracta) 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 and subsequent 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

About LawQuest

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Thank You
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