LEGAL ASPECTS OF RISK MANAGEMENT BY JACQUELINE AIKIN

LEGAL ASPECTS OF RISK MANAGEMENT BY JACQUELINE AIKIN ASSOCIATE PARTNER SOLOMON & CO. 1 ©

Parties perform as per terms of the Contract WHEN A CONTRACT IS EXECUTED • Contract implementation is successful Parties are not able to perform as per terms of the Contract • For reasons attributable to the party – breach, dispute, termination • For reasons beyond their control (Force Majeure) – delayed performance, frustration, suspension or termination 2 ©

• FOR CONVENIENCE – USUALLY FOR PAYMENT FOR A CERTAIN TERMINATION FEE • CHANGE OF TECHNOLOGY OR BUSINESS REQUIREMENT • NO REASON AT ALL CONTRACT TERMINATION EVENTS • CHANGE IN CONTROL • INSOLVENCY • BREACH INCAPABLE OF BEING CURED – TRIGGER OF LIABILITIES AND DISPUTE RESOLUTION • PROLONGED FORCE MAJEURE 3 ©

POSITION UNDER INDIAN LAW: • EFFECTS OF FORCE MAJEURE (FM) DOCTRINE OF FRUSTRATION: SEC 56, INDIAN CONTRACTS ACT, 1872 • INDIAN LAW EXCUSES THE PERFORMANCE OF A CONTRACT UPON THE FRUSTRATION OF A CONTRACT. • FRUSTRATION - A CONTRACT TO DO AN ACT WHICH, AFTER THE CONTRACT IS MADE, BECOMES IMPOSSIBLE, OR, BY REASON OF SOME EVENT WHICH THE PROMISOR COULD NOT PREVENT, UNLAWFUL, BECOMES VOID WHEN THE ACT BECOMES IMPOSSIBLE OR UNLAWFUL. POSITION UNDER CONTRACTS: • FORCE MAJEURE CLAUSE: CIRCUMSTANCES BEYOND THE REASONABLE CONTROL OF THE PARTY INCLUDING, WITHOUT LIMITATION, NATURAL CALAMITIES, GOVERNMENTAL ACTIONS, WAR OR NATIONAL EMERGENCY, ACTS OF TERRORISM, PROTESTS, RIOT, CIVIL COMMOTION, FIRE, EXPLOSION, FLOOD, EPIDEMIC, LOCK-OUTS, STRIKES OR OTHER LABOUR DISPUTES (WHETHER OR NOT RELATING TO EITHER PARTY'S WORKFORCE), OR RESTRAINTS OR DELAYS AFFECTING CARRIERS OR INABILITY OR DELAY IN OBTAINING SUPPLIES OF ADEQUATE OR SUITABLE MATERIALS. • NOTICE OF FM TO BE PROVIDED TO THE OTHER PARTY, SETTING OUT THE CIRCUMSTANCES THAT TRIGGER FM AS PER THE CONTRACT AND THEIR INABILITY TO PERFORM • ONUS ON AFFECTED PARTY TO TAKE STEPS TO MITIGATE RISK RELIEFS: • RELIEF FROM OBLIGATIONS UNDER THE CONTRACT • IN CASE OF DELAYED PERFORMANCE, NO LIABILITY • TEMPORARY SUSPENSION OF CONTRACT • FRUSTRATION OF CONTRACT • PROLONGED FM (E. G. 3 MONTHS) – TERMINATION OF CONTRACT 4 ©

RISK Breach, dispute, termination Delayed performance, suspension, frustration, termination While the risks of non-performance of contractual obligations in the event of breach can be overbearing, the practical risk in a force majeure event cannot be undermined or ignored. With growing uncertainties, in order to avoid litigation as well as reduce the risk 5 due to FM events, Risk Management becomes essential. ©

• FAST EVOLVING BUSINESS ENVIRONMENT – WITH INCREASED UNCERTAINTY AND CHANGE IN TYPE OF RISK • ACHIEVE BUSINESS OBJECTIVES WITHIN TARGETED TIMELINES • MAXIMIZE BUSINESS POTENTIAL IMPORTANCE OF RISK MANAGEMENT • COST CONTROL • AVOID DISTRACTION FROM THE CORE ASPECT OF DOING BUSINESS • AVOID DAMAGE TO BUSINESS RELATIONSHIPS, COMPANY’S REPUTATION IN THE INDUSTRY, AMONG INVESTORS, STAKEHOLDERS, CONSUMERS • RISK NOT IDENTIFIED AND MANAGED IN TIME COULD END UP IN DISPUTES, AND EVENTUALLY IN FINANCIAL IMPACT OR LITIGATION 6 ©

RISK MANAGEMENT 7 ©

• IDENTIFY RISK AT THE START OF THE TRANSACTION • FACILITATE UNDERSTANDING THROUGH INFORMATION SHARING (AMONG DIFF CROSS FUNCTIONAL TEAMS – EXPECTATION MANAGEMENT) • ANALYZE RISK AND ITS EFFECT ON THE BUSINESS APPROACH TO RISK MANAGEMENT (PREPARE A RISK MANAGEMENT CHECKLIST) • PREVENT VIOLATION OF LAW • PREVENT OPERATIONAL AND FINANCIAL OBSTACLES IN THE TRANSACTION • ACTION / MITIGATION - MANAGE RISK BEFORE THE TRANSACTION IS CONCLUDED • PLANNING AND COLLABORATION • CREATIVE PROBLEM SOLVING • TAKING A WELL INFORMED DECISION • MONITOR THROUGH PERFORMANCE AND WITHIN RISK PARAMETERS • CONTROL ELEMENTS OF RISK 8 ©

KEY ASPECTS IN SUPPLY CONTRACTS 9 ©

KEY ASPECTS IN SUPPLY CONTRACTS Term Product Specifications Seller Risk • • Product Quantity • • • Mitigation Unnecessary exposure to unwarranted product-related claims Deemed delayed delivery • Delay in purchase Failure to purchase Reduce quantities • • Purchaser Risk Mitigation Define Product in detail. Specify designs, drawings etc. Entire scope of delivery to be specified Ambiguous specifications of Products can lead to difficulty in raising claims • Take or pay clauses Seller to supply based on confirmed POs only. Inability to honor quantity commitments due to: • Market uncertainty • Cash flow issues • Product obsolescence • Products with advanced technology • • • Define Product in detail. Specify designs, drawings etc. Entire scope of delivery to be specified Flexibility to short close quantities in the event that the business requirement for the Products change, Short term commitments with permissible variations – ROF – confirmed POs 10 ©

KEY ASPECTS IN SUPPLY CONTRACTS Term Delivery Terms Seller Risk • Damages for delayed delivery could be significant Mitigation • • Price • • Fixed supply prices in long term contracts – risky Risk of exposure to taxes and duties Delivery schedules to be defined to prevent claims for Liquidated Damages (LD)s and incomplete deliveries Indirect costs to be excluded from liabilities Price indexation, on account of • Foreign exchange fluctuations • Commodity prices • increase in labour costs Purchaser Risk Mitigation Delayed Delivery – Entitlement to: LDs may not • Quicker mode of justify the delivery to make practical good the delayed consequences of delivery delayed or • Short close the PO incomplete and purchase the deliveries Product from an alternate supplier at the cost (and risk) of the Supplier; • Supplier to procure from alternate source • Additional charges • Claim other LDs • Price fluctuations could impact the business case • • While indexation is suggested, it may be relevant only for long term contracts Threshold limits to be maintained 11 ©

KEY ASPECTS IN SUPPLY CONTRACTS Term Payment Terms Seller Risk Open Credit - Risk of delayed payments Payment risk if disputes arise between the parties Mitigation • • Warranty Risk of exposure to warranty claims is significant If packaging, handling, storage, operation manuals not followed by Buyer, Seller could be exposed to Warranty Risks. • • • Purchaser Risk Mitigation Secured payment terms such as Letters of Credit, Bank Guarantees, security deposits should be preferred Interest for delayed payments Risk of releasing payments if insufficient documents supplied • All documents required for affecting payment to be specified Define Defect Specify warranty exclusion events Instructions and manuals for packaging, handling, and storage must be clearly prescribed in the Contract Risk of defective Products if quality parameters are not detailed. • • Define Defect Specify Quality control parameters Right to inspect Warranty for replaced parts Serial defects provisions Extended warranty Purchaser to comply with packing, repackaging, handling, storage, ops manuals to ensure warranty exclusion 12 events are not triggered • • • ©

KEY ASPECTS IN SUPPLY CONTRACTS Term Seller Risk Intellectual Property Rights (IPR) – Risk of unauthorized improvements and upgradations by Buyer copyrights, manuals, know how, trademarks, designs, drawings, patent applications Mitigation • • Specify whether and the extent to which the Purchaser is entitled to improve and upgrade the products, and the manner in which IP rights in such cases will be recognized among the parties If IP rights are provided to the Buyer, it should be through a license agreement Purchaser Risks of third-party claims Mitigation • • IP diligence Obtain adequate representations and warranties from the Supplier pertaining to the IP Obtain IP indemnities for third party claims IP infringement claims can be very expensive 13 ©

KEY ASPECTS IN SUPPLY CONTRACTS Term Confidentiality Consequences of Termination Seller Risk of unauthorized access, distribution, and utilization of Product/ Business sensitive information / IP Risks due to premature termination of Contract Mitigation Purchaser Risk • NDA to be executed and implemented • • Cost factors such as CAPEX cost of mould, production lines, machinery, manpower, etc. , which have not been amortized due to short closure of the account, must be provided for as a liability Claim costs of inventory Return of confidential information Risk of nonfulfilment of pending POs • • Liabilities due to unauthorized usage of Seller’s IP by various stakeholders Return of confidential information Mitigation • Ensure strict channel of communication and utilization of confidential information • The supplier shall fulfil pending orders on termination of Contract. Liabilities for breach, which may include costs for alternate sourcing Raise claims for warranty, other delays, breaches • • 14 ©

KEY ASPECTS IN SUPPLY CONTRACTS – BOTH PARTIES Term Provisions Dispute resolution • • Mediation Forum of arbitration, venue, language, panel Governing law Jurisdiction of courts Liability • Limiting the liability of parties to the contract: it is important that liability of either party should be accepted and limited as per the risk appetite of the concerned party. Indemnities Obtaining indemnities with respect to: • Gross negligence, • Willful misconduct, • Non-compliance with applicable laws, • Third party IPR claims, • Third party claims - personal injury & fatalities 15 ©

KEY ASPECTS IN SUPPLY CONTRACTS – BOTH PARTIES Term Provisions Due Diligence background, commercial soundness, technical competency, market position, legal due diligence Representations and Warranties If not drafted accurately, can lead to disputes. Boiler plate clauses Notices, amendments, sub-contracting, assignments, waivers, severability, survival 16 ©

PRACTICAL STEPS TO MINIMIZE RISK • Improve discipline in documents, communications and agreements Discipline • Improve coordination (& Critical data sharing) between commercial, technical, finance, legal teams Coordination Decide • Carefully decide on communication of sensitive information • Read documents thoroughly, understand concepts and implications carefully, and where necessary, consult with your legal team, before issuing / confirming documents Read • Preserve evidence via data security and document retention policies Preserve • Expect the unexpected Expect Analyze • Analyze company’s past performance to understand problem areas • Rapidly address and respond to potentially risky developments in the earliest stage Address and respond Informed decision 17 ©

RISK CAN BE SUCESSFULLY MANAGED THROUGH RISK MANAGEMENT & TEAM EFFORT 18 ©

QUESTIONS 19 ©

THANK YOU 20 ©