ten common contracting mistakes (or unintended consequences) · ten common contracting mistakes (or...

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Ten Common Contracting Mistakes(or Unintended Consequences)

May 22, 2012 – Association of Corporate Counsel

Presented by:Jim BreitenbucherErin Letey

4818-5253-9151


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Statement of Work

Riddell Williams P.S. 4

Don’t Neglect SOW or Contract Specifications

� Statement of Work / Specifications / Schedules

� Describe in detail the services to be performed and the deliverables to be delivered.

� Include performance metrics (and consequences for missing).

� Use clear, simple and objective language.

� Be consistent with the use of terminology and definitions.

� Incorporate by reference into main agreement.


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Address Potential Conflicts

� Which document controls?

� Make sure legal and business teams are on the same page, and have legal review full document, including SOW.

Conflicts. In the event of any conflict or inconsistency between the terms and conditions of this Agreement and any Statement of Work, the terms of this Agreement shall prevail; provided, however, that if a Statement of Work by its terms expressly provides that certain provisions therein shall control over certain specified provisions in this Agreement, then to the extent such provisions in the Statement of Work conflict with the specified provisions in this Agreement, the provisions in the Statement of Work shall control.

Unilateral Attorney Fee Provisions


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Washington Law Creates Reciprocal Provision

� Washington law rewrites such provision to be reciprocal so that any prevailing party can recover attorney fees (RCW 4.84.330).

� This statutory rule cannot be waived.

Attorney fees. Buyer shall be entitled to reimbursement of reasonable attorney fees and costs incurred to enforce its rights under this Agreement.


Washington Law is Minority Position

� Other states with reciprocity statutes include:• Arizona Rev. Stat. Ann. § 12-341.01• California Civil Code § 1717(a)*• Florida Stat. § 57.105(7)• Montana Code Ann. § 28-3-704• Oregon Rev. Stat. § 20.096• Texas Civ. Prac. & Rem. Code Ann. § 38.001• Utah Code Ann. § 78-27-56.5

*Jefferson Wells v. American Reprographics Co., 2010 WL 190427(Cal. Ct. App. 2010) (unpublished) (permitting defendant to recover attorney fees under Cal. Civil Code � 1717(a) even though the contract specified Wisconsin law).


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Should You Use a Unilateral Attorney Fees Provision?

� In general, you can use unilateral provisions but know the legal consequences.

� Unilateral attorney fee provisions are unenforcable in some states.

� North Carolina passed a law in 2011 that allows attorneys fees to be awarded in a “business contract dispute” but only when the contract contains a reciprocal attorney fees provision (N.C. Gen. Stat. § 6-21.6).

� Unilateral attorney fees provisions may provide negotiation leverage if your counterparty does not know the law.

� But always consider the counterparty’s financial position and which party is more likely to breach.

Indemnification


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Indemnification Clauses

� Indemnify: An indemnity is the obligation of one party to make another whole for a loss that the other party has incurred. (Am. Jur. 2d, Indemnity §1)

� Defend: Obligation to defend the indemnified party against relevant third-party claims

� Hold Harmless: Agreement not to seek recovery

Seller shall indemnify, defend, and hold harmless Buyer, its subsidiaries and affiliates, and each of their respective shareholders, directors, officers, employees, representatives and agents (the “ Indemnified Parties”) from and against any and all claims, costs, losses, liabilities, damages, fines, and expenses of any nature (including, without limitation, reasonable attorneys’ fees and costs) (collectively, “Losses”) that arise out of or relate to, directly or indirectly, [the work of the Contractor.]


Effective Indemnification Clauses

� Effective indemnity clauses address reimbursement for loss and/or shift risk between parties

� Example 1: Contractor on your site providing services, negligently leaves site in unsafe condition. Contractor’s employee injures himself, sues you for damages.

� Example 2: Sub-contractor provides engineering services, which you incorporate into your work for your customer. Engineering is wrong, therefore your work is wrong, and your customer sues you for breach of contract.

� Example 3: Contractor provides a unique software product. Contractor incorporated third party intellectual property in software without license. You are sued by third-party owner of intellectual property.


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Events that Trigger the Right to Indemnify

� Broad clauses: “Any claim arising out of the obligations of Contractor under the agreement”

� Narrow clauses: “Third-party claims only to the extent caused by the gross negligence or willful misconduct of Contractor in its performance of the Agreement”

� Specific clauses:� specific defects in the work provided

� claims of bodily injury or death

� property damage (first or third party)

� infringement or misappropriation of any third-party intellectual property right

� liens asserted by subcontractors


When Drafting Indemnification

� What’s not included counts too:

Broad grant of indemnification + explicit exclusion for losses arising solely from the negligence of Buyer = indemnification by Contractor for Buyer’s negligence

Other Loopholes: “Contractor agrees to indemnify Buyer for damages and losses arising out of Contractor’s obligations but only to the extent such losses or damages are found by a trier of fact to be caused by Contractor’s negligence”

*Snohomish County Public Transp. Benefit Area Corp. v. FirstGroup America, Inc., 173 Wn.2d 829 (Feb. 23, 2012)

Contractor shall indemnify, defend, and hold harmless Buyer….from any and every claim and risk…and all losses…of any kind…in connection with the work performed under this contract, or caused or occasioned in whole or in party by Contractor…except only for those losses resulting solely from the negligence of Buyer, its officers, employees and agents.*


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What Indemnification is Not

� Not practical to use indemnification clauses to ensure timely performance or obtain damages for compliance issues

� Remember:

� Can’t squeeze water from a stone

� Even best indemnification clauses can’t guaranty coverage

� Don’t neglect insurance requirements

Limitation of Liability / Remedies


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Limitation of Liability

� Two types: Limitations on the type of damages, and limitations on the amount of damages

Type:

Amount:

In no event shall either party be liable to the other for incidental, consequential, special, indirect or punitive damages suffered or incurred by the other hereunder or in connection herewith.

In no event, whether as a result of breach of contract, indemnity, warranty, tort (including Seller’s negligence), strict liability or otherwise, shall Seller's liability under this Agreement exceed [the Purchase Price].


Limitation of Liability

� Don’t be shocked: All sophisticated contracting parties are going to ask for this clause

� Typical limitation on amount: one to three times contract value

� Potential loopholes: � Limited to value of a “purchase order”

� Failure to carve out intentional acts, or obligations under indemnification provisions

� Unintended consequences: Too much focus on limitation clause, and neglect of performance metrics and direct remedies


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Force Majeure Clauses


Force Majeure: Common Law

• French for “superior force”

• At common law, force majeure is subsumed within “impossibility”and “impracticability” defenses.

• Common law: “Difficulties that are assumed by a party, at the time of contracting, cannot form the basis of an impracticability defense.”

• Severe weather and hunting season were no defenses for company that failed to clear timber from the plaintiff’s property in a timely manner.*

*Syrovy v. Alpine Resources, 68 Wn. App. 35 (1992).


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Force Majeure: Contract Language

� Broad Contract Clause (i.e., Loophole):

If performance of Services is affected by causes beyond Contractor ’s reasonable control, project schedule and compensation shall be equitably adjusted.

� Narrow Contract Clause:

Neither party is liable to the other for any delay or failure to perform if such delay or failure to perform is caused by acts of civil or military authority, national emergencies, fire, flood, catastrophe, acts of God, insurrection, war or riots.

� Other commonly covered “Force Majeure” events include strikes and other labor issues, terrorism, sabotage, epidemics, failure of electrical supply or telecommunication networks, etc.


Force Majeure: Early Termination Provision

� Consider an Early Termination Provision:

If either party is unable to perform any of its obligations under this Agreement due to a Force Majeure Event, such party’s performance shall be excused and the time for performance shall be extended accordingly, provided that the party immediately takes all reasonably necessary steps to resume full performance. If a party’s performance is prevented or delayed for more than thirty (30) days due to a Force Majeure Event, then the other party may terminate this Agreement upon five (5) days’ written notice to the non-performing party.


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Termination Clauses


Effective “Out” Clauses

� Temptation is to sign up long-term contract,to avoid the pain of contract negotiationsfor as long as possible.

� Make sure there is a way to get out of the relationship. � Termination for convenience and termination for breach

� Convenience: Provide notice� Breach: Provide reasonable opportunity to cure

� Address what happens after contract is terminated.� Be careful with auto-renewal provisions.


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Forum Selection Clauses


Effective Forum Selection Clauses

� Purposes for Forum Selection Clause Vary:

� Give “home field” advantage to one side—especially for international contracts

� Have local court decide local law

� Select neutral jurisdiction

� Ability to subpoena witnesses for trial

� Forum Selection Clause Checklist:

� Prevents a race to the courthouse?

� Expressly consents to jurisdiction?

� Expressly consents to venue?


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Forum Selection Clauses: Example #1

� Prevents a race to the courthouse steps?

� Expressly consents to jurisdiction?

� May not be necessary under U.S. law.*

� Many foreign courts, however, will not enforce a U.S. judgment unless the U.S. court had jurisdiction under the foreign court’s law.

� Expressly consents to venue? State and/or federal?

*St. Paul Fire v. Courtney, 270 F.3d 621 (8th Cir. 2001).

Any dispute arising out of this Agreement may be filed in the courts of King County, Washington.



� Prevents a race to the courthouse steps? ��

� Expressly consents to jurisdiction? ��

� Expressly consents to venue?

Yes, but this provision has been interpreted as waiving the right to remove case to federal court.*

*New Jersey v. Merrill Lynch, 640 F.3d 545 (3d Cir. 2011).

“ In connection with any dispute … arising out of ... [this Agreement], each of the parties hereto agrees ... that exclusive jur isdiction and venue shall lie in the appropriate courts of the State [of] New Jersey.”


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� Prevents a race to the courthouse steps? ��

� Expressly consents to venue? ��

� Expressly consents to jurisdiction? ��

For all controversies or disputes arising under or in connection with this Agreement, the parties consent to the exclusivejur isdiction and venue of the state and federal cour ts located in King County, Washington.

U.N. Convention on Contracts forthe International Sale of Goods

(CISG)


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CISG: Broad Application to International Sales

� The CISG addresses contract formation issues involving the international sale of goods.

� CISG has been ratified by the U.S. and 75 other member states (2011).

� As a result, CISG potentially covers about 80% of world trade.

� Significant exceptions include the United Kingdom, India, Brazil and South Africa.


CISG: Key Differences From the U.C.C.

� Statute of Frauds

� U.C.C. requires writing (for contracts over $500) to comply with statute of frauds.

� C.I.S.G. permits oral contracts.*

� Parol Evidence Rule

� U.C.C. generally applies some form of parol evidence rule that prevent parties from contradicting unambiguous contract terms.

� C.I.S.G. “includes no parol-evidence rule, and ‘allows all relevant information into evidence even if it contradicts the written documentation.’”*

*TeeVee Toons, Inc. v. Gerhard Schubert GmbH, 2006 WL 2463537 (S.D.N.Y. 2006).


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CISG: Very Limited U.S. Case law

� “Although there are scholarly works that discuss the CISG, there is a paucity of case law in the United States courts. Consequently resort must be had primarily to the language of the CISG itself.” Valero Marketing v. Greeni Oy, 2006 WL 891196 (D.N.J. 2006).

� “Because there is little case law under the CISG, we interpret its provisions by looking to its language and to ‘the general principles’ upon which it is based.” Chicago Prime Packers v. Northam Food Trading, 408 F.3d 894 (7th Cir. 2005).

� “U.S. federal caselaw interpreting and applying the CISG is scant.” Usinor Industeel v. Leeco Steel Products, 209 F. Supp. 2d 880 (N.D. Ill. 2002).


CISG: Opting Out Effectively

� The C.I.S.G. is a federal treaty that displaces state law under the Supremacy Clause.

� Accordingly, the majority rule is “that a reference to a particular state’s law does not constitute an opt out of the CISG; instead, the parties must expressly state that the CISG does not apply.”*

*Travelers v. Saint-Gobain, 474 F. Supp. 2d 1075 (D. Minn. 2007).

This Agreement shall be interpreted and enforced in accordance with the laws of the State of Washington without reference to any choice of law principles to the contrary.

The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement.


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CISG: Battle of the Forms “Opt Out” Exception

� CISG operates like “Last Shot Rule” because…• Acceptance with different material terms = counteroffer

• Virtually all terms are material

� As a result, CISG generally favors seller that sends order acknowledgment because…• Buyer must object after receiving counteroffer

• Otherwise, buyer accepts by performance

� Opting out?• Buyer’s form should “opt out”

• Seller’s form should not “opt out”**Hanwha Corp. v. Cedar Petrochemicals, 760 F. Supp. 2d 426 (S.D.N.Y. 2011) (holding that CISG governed contract formation even though each party’s form opted out of CISG, because parties’ forms did not agree upon substantive law that would apply in place of CISG).

No Oral Modifications


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Oral Modifications Can and Will Happen!

This Agreement may be amended or modified only by a written instrument duly executed by the parties hereto.

� Most contracts contain no oral modification clauses, which clearly provide that modifications of the contract will not be effective absent a writing between the parties.

� Long standing rule in Washington* (and many other jurisdictions) is that these clauses are unenforceable, because the “no oral modification” clause itself is subject to oral modification or waiver.

* Pacific Northwest Group v. Pizza Blends, 90 Wn. App. 273 (1998) (allowing parties to orally modify lease despite no oral modification clause).

Alternative Dispute Resolution


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Alternative Dispute Resolution: Arbitration Provisions

� Should you include an Arbitration Clause?

• Potential cost savings

• Consider yourcontract terms!

• Parties can alwaysagree to arbitrate oncedispute arises

• Alternative: Waive Jury Trial (note: some states do not permit pre-dispute waivers)*

*Most courts have found no bar to pre-dispute jury waivers. But see Grafton Partners v. Superior Court, 116 P.3d 479 (Cal. 2005).


Alternative Dispute Resolution: Arbitration Provisions

� Should you include a Mediation Clause?

• Often linked to arbitration clauses

• Compulsion to settle is probably not a concern, but mandatory mediation could waste time/money or occur too early in the process.

• Some studies show that mandatory mediation is less likely to work.

• Parties can always agree to mediate any dispute when the timing is right—an early failure could make a later success more difficult.

“ Drop dead. Well that’s a good start to our negotiations.”


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Questions?

Please contact us at any time with additional questions.

Jim [email protected]

Erin Joyce [email protected]

ten common contracting mistakes (or unintended consequences) · ten common contracting mistakes (or...

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