Contract formation :
What constitutes a legitimate contract ? Is an oral agreement sufficient, or must there be a legal document ? What documentation is required ?
Intra vires and ultra vires contracts :
Certain contracts are intra vires and others ultra vires. The latter can have serious unintended consequences for the contracting parties in terms of incomplete (in choate) contracts.
Capacity :
Does a counterparty have the capacity to enter into a transaction ? For example, in 1992, the United Kingdom’s House of Lords determined that the London Borough of Hammersmith and Fulham lacked capacity to transact in derivatives linked to interest rates. Not only were contracts dating back to the mid-1980s with that borough declared void, but contracts with over 130 other councils were effectively invalidated. A number of derivatives dealers suffered losses.
Legality of derivatives transactions :
In some jurisdictions there are issues relating to whether certain derivatives could be deemed gambling contracts and thus made unenforceable. This was a significant concern during the early days of OTC derivatives markets.
Perfection of an interest in collateral :
A claim is perfected if it is senior to any existing or future third-party claims in the event of bankruptcy. A perfected interest represents a lien on collateral. Requirements to perfect a claim can be complex and vary by both jurisdiction and the nature of the collateral.
Netting agreements :
Under what circumstances will a close-out netting agreement be enforceable ?
Incomplete contracts, quasi contracts, contract with minors and insane persons also give rise to legal risks.
Contract frustration :
Unforeseen circumstances may invalidate a contract. E.g., if a contract is linked to an index or currency which ceases to exist, the contract could become invalid.
Another dimension of legal risk :
Legal risk is the risk arising out of infraction of the law. If business and organisational activities and operations are tainted by illegality or result in a legal insult or impact that has legal consequences, this risk is attached.
In fact whenever information systems and Internet technology is used, this can attract emerging legislation like cyber laws which can give rise to legal risk for such activities.
Given the nature of legal risks and issues, this is an external high-level risk that is difficult to control. Dealing with legal risk is not an easy task and needs a proactive approach.
Legal risks can affect the functioning of a business and may even result in its closure in extreme circumstances. A procedural or lower level infraction of law can result in disruption and damage to business and reputation. These legal risks range from serious risks at one end of the spectrum to technical and procedural risks at the other. Thus legal issues that arise in serious risks are fundamental in nature, affecting the ownership, organisation, operations and continued existence & functioning of a business.
Technical aspects of legal risks would cover legal risks relating to compliance with regulatory requirements, formalities and business laws like Companies Act, Partnership Act, Taxation Laws, Labour laws and other legal requirements.
Procedural aspects of legal risks would involve legal risks relating to operations and procedures and functioning of the organisation and its day-to-day activities. e.g., when employing or terminating the services of an employee whether due process of law has been followed ?
Techniques for raising awareness of legal risk:
One of the most effective ways of dealing with legal risks is to raise awareness of the employees and staff. Here, we will focus on some practical ways in which the effective management of legal issues and disputes can create greater efficiencies in a company’s continuing business relations with its various stakeholders including customers, suppliers and joint venture partners.
The following are some of the important ‘hard’ and ‘soft’ elements of the legal dimension of risk and techniques of dispute management that are relevant for understanding and appreciating legal risks.
1) General awareness raising:
This involves presentations, workshops and ‘road shows’ to offices in the parent country and around the world, to as many employees, associates and business partners as possible, in order to raise awareness and increase familiarity with aspects of legal risk and the methods the company or organisation uses to minimise and avoid it. This should include clear identification and designation of a contact point (in the legal or compliance department) whom the employee can call, as a demonstration of commitment and back-up behind the communication programme.
2) ‘Legal Audits’ :
These help identify areas of strength and weakness, for example:
- a review of current litigation,arbitration and/ or other conflict resolution techniques used to assess internal and external costs, likelihood of success, settlement options and likely outcomes.
- a review of standard contracts to assess whether the dispute resolution mechanisms are the most appropriate for the type of activity covered by the contract.
- a review of existing contractual relationships with suppliers, distributors, customers and joint venture partners to assess whether there are any ongoing disputes that can be avoided, or potential disputes that are likely to escalate into litigation, to tackle.
3) Training in ‘alternative’ dispute resolution skills (ADR):
In addition to building an awareness of the strengths and weaknesses of different types of more formal dispute resolution techniques (such as seminars on arbitration options), better awareness can be achieved by introducing a series of workshops on, for example, mediation and how the mediation process works. This will enhance core communication and negotiation skills if well presented.
Warning signs – things to consider avoiding, during negotiations and whilst the contract is being performed:
- an unusual amount of time spent on negotiation of non-commercial terms
- lawyers spending increasing time discussing non-commercial or non-core terms
- business people not in control of the commercial elements of the negotiation
- key commercial terms are not clearly set out, or there is delay in clarifying them
- changes in the pattern of negotiation (e.g., from face to face, to more written exchanges, or vice versa)
- after signature, there is a personnel change which breaks continuity in the relationship be-tween parties, or understanding of the commercial rationale for the contract and its intended implementation
- poor preparation and planning before negotiations start, inadequate follow-up either internally or with the counterpart, so that lack of clarity as to the process exacerbates lack of clarity as to the content, and as to the eventual commercial objectives.
Warning signs – what to look for to avoid disputes developing
- increasingly late payments
- late response or non-response
- move from verbal to written communication
- tone of verbal/written communications – more fractious questioning or legalistic rhetoric
- internal time spent on analysis of legal position
- internal disagreements as to strategy and/ or approach (are there hidden agendas ?)
- loss of product or service quality Ill. change of personnel
- different messages reaching different layers of the organisation from the counterpart company
- in a joint venture: misalignment of interests which are dealt with as minor differences, but which could conceal longer-term strategic differences, arguments over budgets, technical objectives, marketing campaigns, etc.
The impact of legal risks has a far-reaching effect on the constitution, organisation structure, function-ing and performance of organisations.
Normally it is the legal department or the secretarial department that deals with legal risks.
Apart from the classification suggested at the begin-ning of the article, legal risks can also be classified according to their severity, significance, area it affects or even its applicability ani pervasiveness.
Like most other external risks they pose a challenge and threat to business as well as present opportunities for growth in business and destabilise and/ or pose problems for others. They thus result in a shake out that results in changes to the playing field.
The example picked up for this month’s case study is that of a pharmaceutical company that is engaged in development, manufacture and sale of drugs, formulations and medicines.
Quick Care Ltd. is a pharma company operating in India for over twenty years now. It has developed formulations and drugs for skin infections, allergies and asthma. It is manufacturing and marketing these medicines under the name ‘Life Care’ and ‘Total Care’.
The company has registered its products both as brands and trademarks in India.
With the changes in intellectual property rights post-WTO regime the company has become conscious of the stricter legal regime that it faces.
As the risk manager of the company the CEO has asked you to examine the legal risks in the following areas as well as the organisation wide legal issues involved:
i) On a preliminary enquiry you discover that ‘Life Care’ is also a brand registered in Australia by another company, though in the field of healthcare and nursing.
ii) A company in the US named True Care has a logo that has the letters TC in it. The logo of the company ‘Total Care’ which also uses the letters TC look identical and have a close re-semblance to each other.
iii) On enquiries you find that your key employee who led the team that formulated the anti-allergy and asthma drug was earlier employed with an international pharma company and was working on similar research. It is likely that he had signed a non-disclosure/non-complete agreement before he left that company two years back.
iv) In respect of certain drug trials on monkeys and on human beings, a particular NGO has been writing articles about the issues involved and generally against such practices. The name of the company was also mentioned once in a television programme on this issue.
v) The company has recently acquired a small subsidiary making syringes and other medical devices. This company has certain pending labour disputes and tax cases that have not been fully resolved.
vi) The company had recently been awarded a contract to supply drugs to a rural hospital aided by the World Bank. The CEO is concerned whether any unfair means have been used, as this could result in the company being blacklisted.
You are required to make a brief report on the legal risks involved and how the same could be dealt with.
Solution to the case study:
1. In case of the Australian brand name, it poses a greater legal risk for the ‘Life Care’ brand registered in India if the Co. in Australia has signed the World Intellectual Property Organisation (WIPO) convention. The WIPO in Geneva administers these conventions. WIPO now has a ‘new’ convention, the Madrid Protocol (1989). Lifecare brand in India may be liable for trademark infringement or dilution – with potential risks of an injunction, disgorgement of profits, payment of damages, and more – for use of the name. H it hasn’t, Indian company should not delay in signing WIPO conventions. The company should also do trade-off analysis in justifying the fees to be paid for signing up or to change the brand name itself.
The company ‘Life Care’ may change its name to a similar name which will be more attractive and will gain customers’ attention. It may propagate or spread awareness among its customers about the change assuring them about the quality of the product. But before that they must also check whether there is any other company existing with the same name to avoid facing same circumstances again.
2. ‘True Care’ company in the US may sue the company in India for infringement of trademark by using identical and similar logo, though it may not have the same business and there is no competitive overlap. TRUE CARE company in the US may also be liable for trademark dilution by using the famous mark of another company in case the company is famous in the US and can claim huge compensation or a huge share in the profits of the company. Other way to tackle this issue is to make an attempt in resolving the dispute internally, whereby either of the companies will sign mutual agreement to not to interfere in each others’ business operations.
3. If the keyman has Signed a non-disclosure agreement with the company where he was previously employed, then the international pharma company may sue him as well as the company in which he is presently employed, as there is chance of using the same or similar formulae or strategy by him which would have been used in the previous company. The international pharma company may ask for certain percentage of their turnover or profit as compensation due to which the company may incur heavy loss or they may bring a stay on the experiment which formulated the anti-allergy and asthma drugs because of which the company may incur heavy losses.
4. In the event of the issue raised by an NGO for conducting tests on monkeys, the company must find another alternative for drug trials such as rats, guinea pigs, etc., as there is a risk that the name or goodwill of the company may go down as there will be more and more awareness, and more and more people may agitate for the same.
5. The company should resolve all the labour disputes as it may cause strikes in the company, the production may be at a stand still and hence there will be a shortage of goods in the company, the company should also resolve the tax cases as it may cause a heavy burden to the company.
6. For the World Bank developmental project, the CEO of the company must make sure that there is no unfair practice in obtaining the contract or in the actual execution of the contract, such as insufficient drugs supplied to the hospital or any adulteration in the drugs has taken place. As this would result in the company being blacklisted by the World Bank due to which none of the financial institutions in India as well as in foreign countries will grant loan to the company in case of financial crunch or will trade with the company as it is being blacklisted.
Other pre-emptive and protective solutions:
Risk management strategies not only serve their primary purpose, which is to layoff potential risks, but may also act as a vital business development tool.
1. When planning for a drug discovery, the following issues should be addressed:
The type of disease to be treated and the patient population;
How it should be delivered to the patient (delivery system);
In what form it should be made (capsule, pill, ointment, or liquid);
The route of administration (injection, oral, inhalation, or skin absorption);
How and where to do the research and formulation; and
Whether it is going to be outsourced or will be manufactured in-house.
Not only legal managers but also corporate counsels have an opportunity to contribute their ideas to issues pertaining to IP Rights, dispute management, identifying the business by plugging loop-holes and adding to operational and client assurance.
Rather than assigning a separate in-house legal team or appointing an external consultant, the CEO can create a mix team of both of them. Internal employees will give the consultants the correct picture at micro level, whereas consultants with their expertise and experience provide solutions at macro level.
Explain the drug development process to their patients in a subtle way;
The drug company or sponsor performs these tests to discover how the drug works and whether it is likely to be safe and works well in humans. Next, a series of tests is conducted among patients to determine whether the drug is safe when used to treat a disease and whether it provides a real health benefit. This will help address and neutralise adverse public opinion that may have been generated.
Apart from this the company will do well to identify and implement some of the strategies outlined below:
Identify essential development and pre-clinical requirements;
Identify requirements for characterisation of pharmaceutical products;
Assess and implement good manufacturing (GMP) and good laboratory (GLP) practices; and
Describe and formulate a regulatory submission.
The marketing authorisation application (NDA) can be submitted in two different formats: the traditional format, or the Common Technical Document (CTD) format.
These together will help the company to keep legal risks in control.
