understanding and negotiating key provisions in commercial contracts

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  • Presented By:

    Susan Hartman

    Emily Lowe

    2014 Susan Hartman and Emily Lowe

    COMMERCIAL CONTRACTS

  • 2

    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

  • 3

    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

  • 4

    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

  • 5

    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

  • 6

    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

  • 7

    Parties to the ContractMiddle Ground

    Umbrella agreement with general terms which apply to all orders

    Purchase agreements referencing umbrella agreement and including specific terms

  • 8

    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

  • 9

    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

  • 10

    Buyer Commitmentvs.

    Seller Obligations

    Reality:

    No obligation to purchase any guaranteed volume of products

    Buyer has broad termination rights

  • 11

    Buyer Commitmentvs.

    Seller Obligations

    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

  • 12

    Indemnification

    Indemnity: guarantee against any loss which another might suffer

    Type of indemnification should relate to obligations of parties

  • 13

    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).

  • 14

    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)

  • 15

    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)

  • 16

    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)

  • 17

    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)

  • 18

    Indemnification Danger Zones

    Mutuality

    Relying on limitation of liability

    Limiting to insurance coverage amounts

    Consider state law restrictions

    Financial assets of indemnifying party

  • 19

    WarrantiesBuyers 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

  • 20

    WarrantySellers Position

    Seller wants:

    Narrow (specifications)

    Limited warranty period beginning at time of product shipment

    Broad disclaimer of all other warranties

    No warranty against infringement

  • 21

    Warranty Danger Zones

    Warranty against defects in design

    Magnuson-Moss will apply to consumer warranties

    Extending warranty to Buyers customers

    Failure to include warranties

  • 22

    Remedies for Breach of Warranty

    Standard

    Seller required to repair or replace or provide a refund

    Additional remedies/damages

  • 23

    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?

  • 24

    Intellectual Property

    Is this really an issue?

    Any intellectual property utilized?

    Any intellectual property developed?

    What are the expectations of the parties?

  • 25

    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

  • 26

    Limitation of Liability

    Biggest risk and most negotiated provision

    Three issues to consider

    Disclaimer of consequential damages

    Cap on direct damages

    Exclusions

  • 27

    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

  • 28

    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

  • 29

    Limitation of Liability Exclusions

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

    Indemnification

    Confidentiality

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