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1CONTRACT RISK MANAGEMENT: Strategies and TacticsJ. Scott Hommer, IIIVenable LLP8010 Towers Crescent Drive, Suite 300 Vienna, Virginia 22182 (703) 760-1658 jshommer@venable.com2Proper Contract ConstructionGoals: Allocate risk Provide certainty Minimize the exposure of the insured and the insurer Others?3Proper Contract ConstructionOverview of Discussion Topics:1. Limitation of Liability Provisions 2. Indemnification Provisions 3. Warranties and Disclaimers 4. Dispute Resolution Provisions 5. Other Provisions41. Limitation of Liability ProvisionsAbsent limitation of liability language, the parties to the contract are free to seek damages to compensate all legally recognizable harms caused by a breach of contract, and/or injury caused by a negligent or other wrongful act committed in the performance of the contract.51. Limitation of Liability ProvisionsA. Exclusive Remedies B. Exclusions or Ceilings on Damages C. Force Majeure D. Liquidated Damages E. Exculpatory Terms61. Limitation of Liability ProvisionsA. Exclusive RemediesExamples: Liability shall be limited to the cost of repair to any defect in the system. Remedies excluded hereunder are injunctive relief and specific performance.71. Limitation of Liability ProvisionsB. Exclusions or Ceilings on Damages * Damage Caps or CeilingsFor example: Sellers liability is limited to the amounts actually paid under the contract. For example: The maximum amount that one party to this Agreement may be liable for to the other party to this Agreement is $1,000,000.00.81. Limitation of Liability ProvisionsB. Exclusions or Ceilings on Damages * Consequential DamagesConsequential damages are indirect damages that typically are subjective and speculative (e.g., future lost profits) Therefore, consequential damages are frequently excluded because they may result in liability that far exceeds the value of the underlying contract91. Limitation of Liability ProvisionsC. Force MajeureTypically limits liability for breach or loss resulting from external forces beyond the control of the seller Examples: Acts of God, acts of terrorism or war, labor strikes, floods, earthquakes, tornadoes, storms and other natural events101. Limitation of Liability ProvisionsD. Liquidated DamagesFor non-UCC contracts, are unenforceable if too high and therefore deemed to be a penalty For contracts governed by the UCC (i.e., sale of goods) if deemed to be too low compared with the actual damages caused by the breach. This is because the terms would improperly encourage intentional breaches and therefore the terms would fail their essential purpose.111. Limitation of Liability ProvisionsE. Exculpatory TermsCourts in many states disfavor exculpatory terms that relieve a party of liability for its own wrongful acts -- Examples: contracts for construction, public services and employment Courts will usually enforce exculpatory terms that prohibit the recovery of damages to property or commerce caused by merely negligent conduct arising under the contract Courts will strictly construe Another limit: Unconscionability (i.e., large disparity of bargaining power)121. Limitation of Liability Provisions Concluding Thoughts . . . Courts strictly construe limitation of liability provisions because they limit and/or deny a partys right to obtain otherwise lawfully permitted damages. Consequently, to be enforceable limitation of liability terms must not be ambiguous or otherwise unclear.132. Indemnification ProvisionsIndemnification provisions allow the parties to shift certain risks from one party to the other party by having the indemnitor assume from the indemnitee certain liability for current or future loss or injury incurred by the other party due to the conduct of that party or a third party142. Indemnification ProvisionsTwo general types: Indemnity against liability triggers the indemnitors obligation when the indemnitee becomes liable even if the indemnitee has not had loss or damage Indemnity against loss triggers the indemnitors obligation only when the indemnitee actually experiences loss or damage152. Indemnification ProvisionsNegotiating: a partys ability to absorb financial loss a partys relative lack of foreseeability or certainty about indemnifiable risks inability to manage contract risk due to lack of control of the subject matter of the indemnitee * copyright infringement * patent infringement162. Indemnification ProvisionsDrafting Considerations: Explicitly use the terms indemnity, indemnify, indemnification, defend, and hold harmless Specify the scope, and any limitations on scope (e.g., personal injury) Consider including a Notice of Claim requirement172. Indemnification ProvisionsDrafting Considerations (contd): Consider including expenses of defense, such as attorneys fees Require that the indemnitee cooperate in the defense of the claim Consider including settlement approval rights Require that the indemnitee mitigate damages and act reasonably183. Warranties and DisclaimersWarranty defined: an assurance or guarantee by a seller promising to indemnify the buyer if the warranted fact proves to be untrue Disclaimer defined: contract language limiting or eliminating the sellers warranty liability to the buyer193. Warranties and DisclaimersExpress vs. Implied Distinction Express warranties arise: * under the UCC * at common law where ** the seller has provided a description of the goods or services ** made a promise or affirmation of fact about the goods or services203. Warranties and DisclaimersExpress vs. Implied Distinction Implied warranties arise by operation of law: * under the common law * under the UCC ** merchantability ** fitness for a particular purpose ** title ** infringements213. Warranties and DisclaimersDisclaiming Warranties: Specify the express warranties, if any, that are being provided Identify the remedies available in the event the product or service does not comply Conspicuously specify by name the express and implied warranties that the seller is not providing224. Dispute Resolution ProvisionsA. B. C. D. Choice of Governing Law Choice of Forum ADR Shifting of Attorneys Fees and Other Litigation Pursuit Costs Limitation on Time to Sue for BreachE.235. Other ProvisionsA. Integration and merger provisions B. Waiver provision C. Severability provision24CONCLUSION COMMENTS?QUESTIONS?THANK YOU!