Disclaimer The information provided in this presentation has been - - PDF document

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2018 Fall Corporate Counsel Seminar

KEY ISSUES IN COMMERCIAL CONTRACTS

Presented by Douglas C. Waddoups

Disclaimer

The information provided in this presentation has been prepared on a summary basis. This presentation is not intended to be, nor should it be, relied upon as legal advise nor does it address all of the factors or considerations that may be applicable.

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Table of Contents

• What is the Contract
• Allocating Risk
• Dispute Escalation
• Insurance Considerations
• Practical Approach

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What is the Contract

Scenario One

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What is the Contract—Battle of the Forms

• What were the terms of the contract?

– A contract is formed when there is an offer and acceptance

• Common law…any different or additional terms in the acceptance = rejection
• UCC (governing goods)…acceptance with different term is acceptable

unless the offer made conditional on the stated offered terms

• Some missing terms will not negate a contract

– Will missing term of price negate a contract? – Will missing term of delivery date negate a contract? – Will missing term of quantity negate a contract?

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What is the Contract— Incorporation by Reference

• Contracts may incorporate quotes, schedules, plans and

specifications into the contract by reference if the intent to do so is clearly stated.

– This can be a very useful tool

• Even terms and documents contained on websites

referenced in the contract may be incorporated by reference.

• Care must be given to avoid incorporating into the

contract unwanted or contradictory terms.

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What is the Contract— Incorporation by Reference

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What is the Contract— Incorporation by Reference

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What is the Contract—Parol Evidence

• The word parol derives from “oral” or “word of mouth” in

Anglo-Norman French

• The parol evidence rule prevents the introduction of

evidence of prior or contemporaneous negotiations and agreements that contradict, modify, or vary the contractual terms of a written contract when the written contract is intended to be a complete and final expression of the parties’ agreement.

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What is the Contract—Parol Evidence

• Some exceptions to parol evidence:

− Terms not addressed − Terms that are ambiguous

• Everything that is important needs to get into the

contract (including by cross reference)

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Allocating Risk

Scenario Two

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Allocating Risk—Warranties (standard exceptions)

Seller shall not be liable for a breach of warranty if: (i) Buyer makes any further use of such Products after giving such notice of defect; (ii) the defect arises because Buyer failed to follow Seller's written instructions as to the storage, installation, commissioning, use or maintenance of the Products; or (iii) Buyer alters or repairs such Products without the prior written consent of Seller. Seller’s warranties are further conditioned on: (a) Buyer keeping proper records of operation and maintenance during the applicable Warranty Period and providing Seller upon written request, access to those records; and (b) modification or repair of the Products only as authorized by Seller in writing. Seller does not warrant products or any repaired or replacement parts against normal wear and tear or damage caused by misuse, accident or use against the advice of Seller. Any modification or repair of Products not authorized by Seller shall render the warranty null and void.

• Another standard exception from the warranty is for the cost of field work

and/or the cost of disassembly or removal of equipment to get to the warrantied good. 16

Allocating Risk—Warranties (IP standard exceptions)

No Products will be considered infringing under this Section 5 or elsewhere in this Purchaser Order to the extent that the claim of infringement is based, in whole or in part, on (i) Buyer's marketing, advertising, promotion or sale or any product containing the Products; (ii) use of the Products in combination with any products, materials or equipment supplied to Buyer by a person other than Seller or its authorized representatives, if the infringement would have been avoided by the use of the Products not so combined; (iii) any modifications or changes made to the Products by or on behalf of any person other than Seller or its representatives, if the infringement would have been avoided without such modification or change; or (iv) Seller’s adherence to Buyer’s specifications.

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Allocating Risk—Warranties (disclaimer)

EXCEPT FOR THE WARRANTIES SET FORTH IN THE CONTRACT DOCUMENTS, SELLER MAKES NO WARRANTY WHATSOEVER WITH RESPECT TO THE PRODUCTS OR SERVICES, INCLUDING ANY (a) WARRANTY OF MERCHANTABILITY; (b) WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE; OR (c) WARRANTY AGAINST INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY, WHETHER EXPRESS OR IMPLIED BY LAW, COURSE OF DEALING, COURSE OF PERFORMANCE, USAGE OF TRADE OR OTHERWISE.

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Allocating Risk—Damages

• Types of Damages:

– Direct Damages

• What a reasonable, ordinary person would expect the non-breaching party to

suffer from a breach

– Consequential Damages

• What a reasonable, ordinary person would NOT expect the non-breaching

party to suffer from a breach because to expect such damage would requires an intimate knowledge of what the non-breaching party has at stake

– Punitive Damages

• Awarded by a court to punish a party

– Liquidated Damages

• A reasonable forecast by the parties of damages (not a penalty)

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Allocating Risk—Waiver of Consequential Damages

Consequential Damages. NOTWITHSTANDING ANYTHING IN THE CONTRACT DOCUMENTS TO THE CONTRARY, AND CLAIMS RESULTING FROM GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE LOSSES OR DAMAGES OR ANY LOSS OF PROFITS OR LOSS OF OPPORTUNITY. 20

Allocating Risk—Liquidated Damages

• Damages designated by the parties during the formation
• f the contract.
• Must be a reasonable estimate of what the parties

reasonably believe the damages will be.

• Must not be a “penalty”…in other words, a contract could

include a penalty for a breach and the breaching party could, in addition, be liable for damages.

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Allocating Risk—Liquidated Damages

(i) The parties also recognize the delays, expense and difficulties involved in pursuing legal proceedings to prove the actual loss sustained by Owner if the Work is not completed on time…Contractor agrees to pay to Owner on request the sum of ten thousand dollars ($10,000) per day for every day beyond the Completion Date that the Contractor fails to achieve Completion

• f the Project… parties agree these are liquidated damages and not a penalty, and represent

reasonable and good faith attempts by Owner and Contractor to ascertain the minimum damages that would be suffered by Owner in the event Completion is not timely achieved.

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Allocating Risk—Limitation of Liability

1. Limitation of Liability. NOTWITHSTANDING ANY OTHER TERM OF THIS AGREEMENT TO THE CONTRARY, AND EXCLUDING ANY CLAIMS RESULTING FROM SELLER’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR SELLER’S INDEMNIFICATION OBLIGATIONS FOR THIRD-PARTY CLAIMS FOR WHICH SELLER HAS INSURANCE, SELLER’S MAXIMUM AGGREGATE LIABILITY, ON A PER OCCURRENCE BASIS, SHALL NOT EXCEED THE GREATER OF (I) $750,000.00 USD OR (II) 150% OF THE COMPENSATION PAID AND/OR PAYABLE UNDER THE PURCHASE ORDER GIVING RISE TO THE CLAIM.

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Allocating Risk—Indemnification

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Allocating Risk—Indemnification

• Key elements of an indemnification clause

– Statement of what parties are obligated to indemnify – Indemnification from and against what claims – Claims arising out of or resulting from what

• ccurrences/acts

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Allocating Risk—Indemnification

1. Indemnity. (a) For purposes of this Section 9, references to (i) “Indemnitees” shall mean Buyer and its Affiliates and their respective directors, officers, employees, agents and contractors, (ii) “Seller Party” shall mean Seller and/or its Affiliates and their respective directors, officers, employees, agents, representatives, contractors, subcontractors, licensees and Invitees, (iii) “Affiliates” shall mean any person or entity controlling, controlled by, or under common control with Buyer or Seller, as applicable, with “control” meaning the power to direct the management or policies of such entity, whether through the ownership of fifty percent (50%) or more of the voting securities or equity interests, by contract, or otherwise, and (iv) “Invitees” shall mean any person whom Seller invites on or otherwise causes to be

• n the site.

(b) Seller, on behalf of itself and all Seller Parties, agrees to protect, defend, indemnify and hold the Indemnitees harmless from and against any and all suits, actions, legal or administrative proceedings, claims, demands, damages, punitive or exemplary damages, liabilities, fines, penalties, losses, costs and expenses including, without limitation, costs of defense and attorneys’ fees (each a “Claim,” or collectively “Claims”) arising out of or resulting from any breach of this Agreement, any acts or omissions of Seller or a Seller Party, or in any way related to the performance of this Agreement including, without limitation, acts or omissions or Product defects resulting in any personal injury, death, or damage to property; provided, however, that Seller’s indemnification obligations under this Section 9 shall not extend to the proportionate amount of any such Claim caused by the negligence or willful misconduct of an Indemnitee.

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Allocating Risk—Indemnification

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Allocating Risk—Indemnification (proportionate fault)

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Disputes—Dispute Escalation

17.1 Resolution by Parties. (a) First Attempt. If a dispute arises under the Contract Documents between the Parties, the Parties shall attempt in good faith to settle such dispute by mutual discussions within thirty (30) days after the date that a Party gives written notice of the dispute to the other Party in sufficient detail for the recipient to understand the provider’s position; provided, however, that if the dispute involves the amount of an invoice and after ten (10) days

• f mutual discussion either Party believes in good faith that further discussion will fail to resolve the dispute to its

satisfaction, such Party may immediately refer the matter to executive officers of the Parties for consideration pursuant to Section 17.1(b). (b) Executive Officers. If the dispute is not resolved in accordance with Section 17.1(a), either Party may refer the dispute to executive officers of the respective Parties for further consideration. If such individuals are unable to reach agreement within fifteen (15) days, or such longer period as they may agree, then either Party may pursue such further action as it deems necessary, subject to the provisions of Section 9.2 of the Master EPC Agreement. (c)

• Confidentiality. All discussions conducted pursuant to this Section 17.1 are confidential

and shall be treated as compromise and settlement negotiations under the United States Federal Rules of Evidence and

• ther applicable rules of evidence.

17.2 Continuation of Services. Pending final resolution of any dispute, Owner and Contractor shall continue to fulfill their respective obligations under the Contract Documents.

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Insurance Consideration

• Types of coverage
• Limits

– Most aggregate requirements may be met by excess coverage (umbrella) policy

• Waiver of subrogation
• What is insurable under your policy

– Many policies exclude coverage of “warranties”

• Involve your broker

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Practical Approach

• Not every contract deserves the same

scrutiny

• How much money involved?

– What are the risks? – What could go wrong and how bad could it be? – Who is the counter-party?

• Big counter-party

– Build transaction cost (contract review costs) into the profit margin – Build liability risk into the profit margin

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Practical Approach

• Have a process for reviewing and commenting
• n contracts

– Same person(s) review so internal experience is built – Establish policies for what provisions must be escalated for management approval

• Rarely does a deal die over contract

negotiations

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Practical Approach

• Use standard forms (if you present the

initial drafts of contracts)

• Use standard responses (if you comment
• n the contracts)

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Practical Approach—It doesn’t have to be complicated

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Practical Approach

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• Build a relationship with an attorney

– Where risk justifies—it can be reasonably efficient

• Two keys:

– Reasonable attorney – Attorney learns what you need and care about

40 Presentation prepared by: Douglas C. Waddoups dwaddoups@parrbrown.com Parr Brown Gee & Loveless