presented by - association of corporate · pdf file2 commercial contracts allocation of risk...

Presented By:

Susan Hartman

Emily Lowe

© 2014 Susan Hartman and Emily Lowe

COMMERCIAL CONTRACTS

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Commercial Contracts

� Allocation of Risk

� Negotiating the substantive provisions in contracts helps the parties manage their risk

� Presentation

�General trends

�Discussion of key provisions

�Questions

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General Trends

� Any significant relationship now requires a signed agreement

� Supply Agreements from Buyers are increasing in length and scope

� Industry specific standards

� Frequently include provisions on privacy and data security

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Key Provisions

� Parties to the Contract � Buyer Commitment vs. Seller Obligations� Indemnification� Warranties and Remedies� Delivery� Intellectual Property� Limitations of Liability� Confidentiality� Price� Term and Termination

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Parties to the ContractGlobal

� Advantages to Global Agreement

�Only negotiate one time

�Centralized business and legal review

�Easier to amend

�Standard provisions apply across organization

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Parties to the ContractSite/Facility Specific

� Advantages to Site/Facility specific agreement

�Business team understands the specific transaction

�Difficult to engage other divisions/affiliates

�Provisions will not be the same for all products/services

�Flexibility to negotiate more preferable terms

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Parties to the ContractMiddle Ground

� Umbrella agreement with general terms which apply to all orders

� Purchase agreements referencing umbrella agreement and including specific terms

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Parties to the Contract –

Danger Zones

� Spot purchase orders which refer to inadequate General Terms

� Clarify whether signing parties are responsible for actions of their affiliates

� Pay attention to order of precedence

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Buyer Commitmentvs.

Seller Obligations

� “Company x has agreed to purchase $100 Million of products over the next ten years”

� Based on “commitment” by Buyer, Seller may be committing to:

�Certain pricing

�Exclusivity

�Ramp up costs

�Development costs

�Reservation of resources

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Buyer Commitmentvs.

Seller Obligations

� Reality:

�No obligation to purchase any guaranteed volume of products

�Buyer has broad termination rights

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Buyer Commitmentvs.

Seller Obligations

� Protecting Seller’s Investment

�Take or pay

�Seller has right to terminate contract if a certain volume is not met

�Seller has right to convert contract to nonexclusive

�Seller has right to renegotiate price based on volumes purchased

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Indemnification

� Indemnity: guarantee against any loss which another might suffer

� Type of indemnification should relate to obligations of parties

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Indemnification Sample Provision(Favoring Indemnified Party)

� Company agrees to hold harmless and indemnify Customer, its directors, officers, employees, shareholders, attorneys, agents and their respective heirs, legal representatives, affiliates, subsidiaries, successors, and assigns (“Indemnitees”) from and against any and all costs, expenses, and reasonable attorney fees, which are threatened, brought against or incurred by Customer, arising in whole or in part from acts or omissions of the Company (hereinafter collectively “Claims”).

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� Customer may, at its option, defend the Claim and seekindemnification from Company for fees, defense costs andadverse judgment, if any, incurred in the defense of the Claim.Should Customer request that Company defend theIndemnitees, counsel selected by Company to defend theClaim must be approved in advance by Customer; saidapproval will not be unreasonably withheld, and Company willprovide monthly status reports to Customer. In additionCustomer, at its own expense, may engage its own counsel toparticipate in the defense conducted by Company. Companyshall not enter into any settlement involving any Claim directedto the Products at issue without prior written approval fromCustomer; such approval will not be unreasonably withheld.

Indemnification Sample Provision(Favoring Indemnified Party) (continued)

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� Company agrees to hold harmless, defend, and indemnifyCustomer, its directors, officers, employees, shareholders,attorneys, agents and their respective heirs, legalrepresentatives, affiliates, subsidiaries, successors, and assigns(“Indemnitees”) from and against any and all costs, expenses,and reasonable attorney fees, which are threatened, broughtagainst or incurred by Customer, from third party claims fordeath, personal injury or property damage to the extentcaused by the gross negligence or willful misconduct ofCompany.

Company’s indemnity obligations are conditioned on: (i) theIndemnitee providing prompt written notice of theindemnifiable claim to Company; (ii) the Indemniteeproviding reasonable cooperation and assistance toCompany in connection with the defense or settlement ofthe claim; and (iii) the Company having the sole right tocontrol the defense or settlement of the claim.

Indemnification Sample Provision(Favoring Indemnifying Party)

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� Company agrees to hold harmless, defend, andindemnify Customer, its directors, officers, employees,shareholders, attorneys, agents and their respectiveheirs, legal representatives, affiliates, subsidiaries,successors, and assigns (“Indemnitees”) from andagainst any and all costs, expenses, and reasonableattorney fees, which are threatened, brought againstor incurred by Customer, arising in whole or in part

from claims for infringement or misappropriation of

intellectual property rights based on the use of theSoftware.

Indemnification Sample Provision(IP Focused Favoring Indemnified Party)

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� Company agrees to hold harmless, defend, and indemnifyCustomer, its directors, officers, employees, shareholders,attorneys, agents and their respective heirs, legal representatives,affiliates, subsidiaries, successors, and assigns (“Indemnitees”)from and against any and all costs, expenses, and reasonableattorney fees, which are threatened, brought against or incurredby Customer, from thirty party claims for infringement of a UnitedStates patent based on the use of the Software in accordancewith the provisions of this Agreement; provided, however,that such indemnity obligation shall not apply: (i) to theextent that a claim is based on use of the Software incombination with other software which was not developed byCompany: or (ii) in the event the Software was developed byCompany based on specifications provided by Customer.

Indemnification Sample Provision(IP Focused Favoring Indemnifying Party)

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Indemnification – Danger Zones

� Mutuality

� Relying on limitation of liability

� Limiting to insurance coverage amounts

� Consider state law restrictions

� Financial assets of indemnifying party

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WarrantiesBuyer’s Position

� Buyer wants:

�Broad (defects in material, workmanship, and design, no liens or encumbrances)

�No specified term or long term

�Warranty against infringement

�Broad remedies which are not exclusive

�Express and implied warranties

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WarrantySeller’s Position

� Seller wants:

�Narrow (specifications)

�Limited warranty period beginning at time of product shipment

�Broad disclaimer of all other warranties

�No warranty against infringement

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Warranty – Danger Zones

� Warranty against defects in design

� Magnuson-Moss will apply to consumer warranties

� Extending warranty to Buyer’s customers

� Failure to include warranties

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Remedies for Breach of Warranty

� Standard

�Seller required to repair or replace or provide a refund

� Additional remedies/damages

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Delivery

� Time is of the essence language

� Consider lead times

� Liquidated Damages

�Is there a cap?

�What is calculation based on?

�Is this the sole and exclusive remedy?

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Intellectual Property

� Is this really an issue?

�Any intellectual property utilized?

�Any intellectual property developed?

�What are the expectations of the parties?

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Ownership of Intellectual Property

� Background Intellectual Property�Developed prior to or outside the scope of contract

�Each party retains ownership of Background Intellectual Property

� Foreground Intellectual Property�Developed while performing contract

�Consider type of contract and contributions of each party

�Government contract rights may apply

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Limitation of Liability

� Biggest risk and most negotiated provision

� Three issues to consider

�Disclaimer of consequential damages

�Cap on direct damages

�Exclusions

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Limitation of Liability Consequential Damages

� Consequential damages are damages that indirectly result from breach of a contract

� Generally both parties willing to exclude subject to certain exceptions

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Limitation of LiabilityDirect Damages

� Limit liability to a certain amount

�Purchase price of individual product which gave rise to the liability

�Value of contract over time

�Multiple of value of contract over time

�Other

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Limitation of Liability Exclusions

� Standard exceptions to both disclaimer of consequential damages and cap on direct damages:

�Indemnification

�Confidentiality

�Gross negligence

�Willful misconduct

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Limitation of Liability - Danger Zones

� Too many exceptions

� Missing completely

� Failure to consider scope of agreement

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Confidentiality

� Is there an existing NDA?� Should language be mutual?� Term� Standard Exclusions:

�Already known to Receiving Party at time of disclosure�Publicly available or becomes publicly available without

breach of Agreement by Receiving Party �Received from a third party who has the right to disclose

the information without confidentiality requirements� Independently developed without use of or reference to

Confidential Information�Disclosing Party consents to disclosure by Receiving Party

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Confidentiality - Danger ZonesResiduals Clause

� Person may continue to use information retained in their memory

� “The Recipient may use in its business activities the ideas, concepts, and know-how contained in the Discloser’s Information which are retained in the memories of Recipient’s employees who have had access to the Information under this Agreement.”

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Confidentiality -Other Danger Zones

� Not including prior disclosures

� Requirement to label

� Disclaimer of consequential damages

� Enforceability

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PriceMost Favored Nations Clause

� Guaranty same or better pricing

� Are products unique?

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PricePricing over Term of Contract

� Fixed Price

� Renegotiation prior to end of term

� What happens if parties cannot agree?

�Existing price stays in effect

�Right to terminate

�Mechanism for agreement

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Term and Termination

� Term of Agreement

�Is it specified?

�Autorenewal provisions

� Termination Provisions

�Termination for uncured breach

�Bankruptcy

�Termination for convenience

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Term and Termination

� Provisions that survive termination or expiration

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Term and Termination –

Danger Zones

� Country specific requirements for termination

� Consider Consequences of Termination

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Wrap Up

Questions