understanding and negotiating key provisions in commercial contracts
Post on 13-Feb-2017
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2014 Susan Hartman and Emily Lowe
Allocation of Risk
Negotiating the substantive provisions in contracts helps the parties manage their risk
Discussion of key provisions
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
Parties to the Contract Buyer Commitment vs. Seller Obligations Indemnification Warranties and Remedies Delivery Intellectual Property Limitations of Liability Confidentiality Price Term and Termination
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
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
Parties to the ContractMiddle Ground
Umbrella agreement with general terms which apply to all orders
Purchase agreements referencing umbrella agreement and including specific terms
Parties to the Contract
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
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:
Ramp up costs
Reservation of resources
No obligation to purchase any guaranteed volume of products
Buyer has broad termination rights
Protecting Sellers 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
Indemnity: guarantee against any loss which another might suffer
Type of indemnification should relate to obligations of parties
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).
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)
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.
Companys 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)
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 partfrom claims for infringement or misappropriation ofintellectual property rights based on the use of theSoftware.
Indemnification Sample Provision(IP Focused Favoring Indemnified Party)
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)
Indemnification Danger Zones
Relying on limitation of liability
Limiting to insurance coverage amounts
Consider state law restrictions
Financial assets of indemnifying party
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
Limited warranty period beginning at time of product shipment
Broad disclaimer of all other warranties
No warranty against infringement
Warranty Danger Zones
Warranty against defects in design
Magnuson-Moss will apply to consumer warranties
Extending warranty to Buyers customers
Failure to include warranties
Remedies for Breach of Warranty
Seller required to repair or replace or provide a refund
Time is of the essence language
Consider lead times
Is there a cap?
What is calculation based on?
Is this the sole and exclusive remedy?
Is this really an issue?
Any intellectual property utilized?
Any intellectual property developed?
What are the expectations of the parties?
Ownership of Intellectual Property
Background Intellectual PropertyDeveloped prior to or outside the scope of contract
Each party retains ownership of Background Intellectual Property
Foreground Intellectual PropertyDeveloped while performing contract
Consider type of contract and contributions of each party
Government contract rights may apply
Limitation of Liability
Biggest risk and most negotiated provision
Three issues to consider
Disclaimer of consequential damages
Cap on direct damages
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
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
Limitation of Liability Exclusions
Standard exceptions to both disclaimer of consequential damages and cap on direct damages: