Saturday, December 29, 2012

Legal risk management: Minimising the risk of litigation: checklist


Contract terms

  • Liquidated damages. Liquidated damages can prevent future litigation by fixing the amount of damages payable for a breach of contract. The decision on whether to include liquidated damages in an agreement depends on the type of transaction involved. This provision can be useful in project development arrangements or other transactions where determining the value of services performed may be difficult. However, it can provide an incentive to litigate on the basis that the liquidated damages provision is an unenforceable penalty clause if the fixed amount is significantly higher than what is actually owed or is otherwise recoverable. 
  • Limitation of liability. This provision limits the types of claims that can be recoverable under a contract. It may also limit a party's liability to a fixed monetary amount or specific percentage of the agreement's defined monetary value.
  • Indemnification. An explicit indemnification clause can help ensure that a party is not liable for damages to third parties. When negotiating:
    • the indemnifying party should:
      • consider a control of defense clause (to manage third-party indemnity claims);
      • consider an indemnified party's assistance requirement, so that an indemnified party's obligations do not stop once its claim is made;
      • cross-reference general caps on liability specified elsewhere in the agreement; and
      • carve out the negligence or misconduct of the indemnified party, precisely defining the fault standard (for example, negligence versus gross negligence versus wilful misconduct).
    • the indemnified party should:
      • negotiate against caps on liability;
      • define the scope of liability broadly so as to not foreclose any possible claims;
      • ensure that the indemnity applies to settled claims as well as claims where liability is proven, and avoid having to prove that settled claims would have resulted in liability;
      • carve out liability solely to the extent that the indemnified party is involved; and
      • try to set the fault standard as low as possible.
    The parties may want to consider a mutual indemnity clause if appropriate for their particular circumstances.
  • Exclusive jurisdiction, choice of law and notice (including service of process or suit) clauses. These clauses can lower the cost of litigation by mandating the use of legal fora and systems already familiar to the parties and reducing the expenses of serving proceedings. 
  • Arbitration clause. Arbitration allows for more flexibility in managing risk after a dispute.  The rights of appeal against an arbitral award are typically very limited. Parties should consider including a provision for amicable discussions, or in some cases a more formal mediation process, as a required pre-arbitration or pre-litigation step for resolving any disputes.
  • Time limits. Consider a provision under which either party forfeits its right to file a claim if it fails to notify the other party of a breach within a defined period of time.
  • Exclusion clause. Although courts have limited the operation of exclusion clauses, a valid one can exclude liability for certain breaches of contract. . If applicable, identify the actions that could limit or eliminate liability.
  • Insurance requirements. Consider adding the counterparty to your commercial insurance policies.
  • Merger clause. A merger or integration clause (also known as an 'entire agreement' clause in contracts governed by English law) states that the contract as written forms the entirety of the agreement, and that prior and subsequent agreements will not have effect unless formed in accordance with that clause. This type of clause can ensure that the other communications that occur throughout and between organizations do not inadvertently change the terms of the contract.
  • Non-waiver clause.If at anytime during the lifetime of a contract one of the parties breaches it, the other party, by continuing to perform, may unintentionally waive its right to sue or terminate due to that breach. A non-waiver clause notifies the breaching party in advance that any continued performance does not signal waiver.

Transaction risk

  • Verify whether all transactions are properly documented and key contractual terms are incorporated. Consider whether any terms may be implied into the contract by statute, custom or industry practice. Determine whether there is any ambiguity in the terms or room for subjectivity and whether recitals should be used to clarify the parties' intentions. Confirm whether the terms accurately set out the scope of services.
  • Quantify residual risks and obtain commercial insurance coverage if applicable.
  • Check contractual procedures (for example, use of legal department, battle of the forms, post-acquisition reviews and document retention policies).
  • Create a document retention policy and appoint a document retention officer. Pay special attention to electronically stored information, including creating and storing back-up tapes.
  • Conduct periodic contract audits.
  • Identify any potential limitations and risks regarding product performance.

Counterparty risk

  • Consider industry and financial references. Provide for guarantees from third parties where necessary. Adjust payment terms accordingly, and consider whether an upfront deposit is required.
  • Carry out credit searches.
  • Conduct company research and review creditworthiness on an ongoing basis.
  • Inspect accounts.
 

Country risk

  • Consider operating through a subsidiary or third party. Consider the domestic litigation environment and assess the likelihood of national courts 'piercing the corporate veil' 
  • Review and maintain independence of subsidiaries if possible.
  • Create a country profile, through Transparency International for example, as part of a due diligence regimen as required by any applicable legislation (for example, the Foreign Corrupt Practices Act in the US).
 

Product risk

  • Implement quality control systems.
  • Prepare product recall and crisis management plans.
  • Ensure clear product labeling, instructions and warnings appear on products.
  • Draft conditions of sale.
  • Contemplate foreseeable uses of products and whether the product is safe enough for those uses.
  • Insurers may insist on some implementation of risk management measures as a precondition to coverage or may consider them when setting premiums.
  • Seller should ensure its company's marketing and advertising are consistent with the product's intended use (no false or outrageous claims) and create a review process so that internal parties communicate with the counterparty with a single voice.
 

Process risk

  • Check regulatory compliance, including:
    • environmental;
    • health and safety;
    • antitrust and competition; and
    • specific regulated industries.
  • Review employment contracts and procedures.
  • Carry out intellectual property audits.
  • Ensure intellectual property is protected, including where possible and appropriate, by registering it with the relevant government agencies both domestically and in each foreign jurisdiction in which your company does or plans to do business.
  • Identify and profile potential mediators and arbitrators before trouble strikes.
 

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