What are the 10 traps for European companies selling to U.S. OEM and other buyers using American Supply Contracts? indemnification, liquidated damages, consequential damages, force majeure, termination for convenience, ownership of intellectual property
Negotiating American Master Supply Contracts: A Guide for European Exporters
1. Anglo-American Contract
Principles
Eliot Norman
Rick Palmieri
Williams Mullen
1666 K St. N.W. Suite 1200
Washington, D.C. 20006
001.804.420.6482
Eliot Norman
enorman@williamsmullen.com
rpalmieri@williamsmullen.com
www.williamsmullen.com
#24863654
5. • Mobile, AL (Airbus)
• Savannah, GA (Gulfstream-General Dynamics)
• Charleston, SC (Boeing)
• Greensboro, NC (Hondajet)
• Durham, NC (GE Aviation)
• Richmond/Petersburg, VA (Rolls-Royce)
• Melbourne, Fla (Embraer 5
The New Southeast U.S. Aerospace Cluster
Eliot Norman
enorman@williamsmullen.com
Bill Benos
bbenos@williamsmullen.com
For the lawyers this
Is a new challenge
6. Why the Southeast?
Answer: The 50 States are not all the Same
1.Boeing, Rolls Royce, Airbus, General Dynamics,
GE/Honda all locate in « Right to Work » States
that limit the ability of unions to organize.
2. Southeast States Consistently Voted by Forbes,
CNBC, etc. as « Best States to Do Business » low
taxes & energy costs; pro-business laws and
environment.
3.Immediate Access to U.S. Government & Defense
Department Business.
4.You can establish a HQ for commercial and
government business near Washington D.C.; and
your manufacturing site at another location in the
Southeast Cluster.
5.Worldwide Manufacturing Center for Exports.
Government incentives include IC DISC reductions
of 35% or more on profits from exports.
6.Access to Space and Aerospace markets:
NASA & Intelsat; Commercial and Defense. 5
.
8. 8
American Contract Principles:
The Problem:
Your company provides engineering and manufacturing services to
supply the landing gear doors for Boeing. Long
Boeing specifies the type of
composites to be used for the
doors and which will involve new
technologies reducing air resistance
and weight, never before used in a
commercial jet.
Your company signs a 50-page
supply agreement that applies
South Carolina law and will be
enforced in the federal courts in
9. CAN YOU ANSWER?
What are your
contractual
responsibilities? What
is this Master Supply
Agreeement all about?
How does it play out
under the laws of South
Carolina?
8
10. Let’s Look at your 5 Contract Principles
• Consideration. As Cole Porter wrote in the song, True Love,
"You give to me and I give to you." That sums up consideration.
Each party has to promise or provide something of value to the
other. Without this exchange, there is no contract.
• Offer and acceptance. There must be a clear or definite offer to
contract ("Do you want to buy this?") and an unqualified
acceptance ("Yes!").
• Legal purpose. The purpose of the agreement must not violate
the law
• Capable parties. To be "capable" of making a contract, the
parties must understand what they're doing and have the authority
to sign.
• Mutual assent. This is also sometimes referred to as a "meeting
of the minds." The contracting parties must intend to be bound by
their agreement and must agree on the essential terms.
• What does this all mean?
• (negotiate negotiate negotiate) 10
12. •12
The Story of :
Global Patrol Boats GmbH and The City of Chicago
13. The Contract
• 10 Boats = $1.5 million Contract
• Specifications in contract:, acceleration 0-40
in 60 seconds; all the « bells and whistles » ,
plenty of power, 2 250HP outboards, gun
mounts on the bow
• why Chicago and not Miami?
• Liquidated Damages: $1000 a day for late
deliveries
• Typical supply agreement of 50 pages
• Applies law of Illinois 13
15. • Global Patrol boats delivers 100 days late on March 1, 2014
• In December Schmidt at Global talked to Chief of Police: « not
to worry » says the Chief, « after all, I am your wife’s nephew »
• Lake Michigan is still frozen: and stays frozen through March 15.
Global Patrol Boats and CHICAGO
14
17. « Show me the Money »
• Chicago’s lawyer: « not so fast. »
Threatens to sue for 100 Days X $1000 =
$100,000. « A contract is a contract. »
• « But the lake is still frozen says
Schmidt. »
17
Choice of Forum, in Miscellaneous 17.19
18. Contract principles:
• Always read the provisions marked:
Miscellaneous at the end of the Contract:
• Lets look at your Table of Contents
• Waiver: Model MSA 17.10
• Amendments and Modifications 17.9
• Applicable law = your contract (17.3)
– Asumption: everything was negotiated,
– Assumption: everything was important or
……… 18
20. Liquidated Damages?
20
MODEL CLAUSE:
• Buyer wants this: “The parties intend that the Liquidated
Damages constitute compensation, and not a penalty. The
parties acknowledge and agree that the Customer's harm
caused by a Seller Breach would be impossible or very
difficult to accurately estimate at the time of contracting, and
that the Liquidated Damages are a reasonable estimate of the
anticipated or actual harm that might arise from a Seller
Breach.
Seller wants this: The Seller's payment of the Liquidated
Damages is the Seller’s sole liability and entire obligation for
and the Customer's exclusive remedy for any Seller Breach
as defined herein.”
21. The American Contract Principles of Liquidated Damages
Most jurisdictions will enforce liquidated damages provisions in this
type of supply contract if :
•Actual damages, at the time of contract, by their nature will likely be
difficult to prove with accuracy
•The liquidated damage amount is determined to be reasonably
related to what the actual damage amount could be and is not
viewed as a “penalty”
•Courts will uphold the intent of the parties as expressed
Uniform Commercial Code:
UCC : § 2-718. Liquidation or Limitation of Damages; (1) Damages
for breach by either party may be liquidated in the agreement but
only at an amount which is reasonable in the light of the anticipated
or actual harm caused by the breach, the difficulties of proof of loss,
and the inconvenience or non-feasibility of otherwise obtaining an
adequate remedy. A term fixing unreasonably large liquidated
damages is void as a penalty. 20
22. 22
Liquidated Damages : Lessons
1. If the parties intend for liquidated damages to be the
exclusive measure of damages, then say it. Avoid vague
and contradictory references to the other remedies—it only
adds uncertainty. Otherwise, liquidated damages will be
viewed as a penalty and will be unenforceable.
2. Include language consistent with UCC 2-718 as a recitation
in the agreement
3. If you are a supplier selling into the American market, you
should insist that liquidated damages be limited to a
specific type of breach (such as damages for delay).
4. American judges will usually strictly enforce the amount of
liquidated damages and will not modify it.
5. Watch out for “Cumulative Remedies” under the
“miscellaneous” provisions, it may be on p. 48 of a 50 page
contract. Try to make Liquidated Damages the exclusive
remedy.
6. Don’t assume you can be insured against these types of
risks.
22
23. Global Patrol Boats: new
problem
• Lake Trials: 250 HP 0-40 in 60 seconds
• now go back and look at the contract
• no « meeting of the minds »
• very expensive to litigate: diesel v.
gasoline outboards
23
24. American Contract Principles
• doctrine of allowing « parol evidence » to
resolve ambiguities; otherwise
• Terms of agreement prevail over course of
dealings, even buyer’s written purchase
order,
• Always avoid famous « battle of the
forms »
• Resolution. Settlement.
24
26. Solution: Perfection of Purchase
Money Security Interest
• Chicago: « slow pay » so you retain title but
the paper title is not enough. See MSA 4.5.
• In the U.S. you need an extra step.
• Fortunately, Your U.S. lawyer has time to
save the situation. Look at MSA 5.8.
• and
• She makes an additional Filing with Illinois
State Corporation Commision, gives Notice to
the World: Global Boat’s first priority security
interest is perfected.
• Global Boats is Protected.
26
27. Global Patrol Boats: Final
Lessons = RTBC ! RTBC !
Law of the « Entire Agreement » 17.3
So be as specific as you can
The Traps:
« miscellaneous » provisions including « cumulative
remedies »
« definitions » 1.0.
« flow-through »
« incorporation by reference »
RTBC! RTBC!
28. Happy ending : More Chicago
Business in 2015 and years to come
28
30. Part II: Your Contract Risks and
Responsibilities
• Requirements Contract: American Style Master Supply
Agreement
• Importance of Setting up a Table of Contents
• Identify your areas of Liability and Try to Limit Them
• Liquidated Damages
• Consequential Damages
• Indemnfication
• Warranties
• Buyer’s Termination for Convenience
• Force Majeure and Non-Excusable Delay
• Buyer Remedies for Product Defects
• Buyer’s right of Set-Off; MFN Provisions etc.
• Start Thinking about Negotiating Strategy
• Trade offs, where are your real risks?
30
31. Our Approach
• Highlight some key issues that will limit your liability when selling
into the USA
• How to limit liability? The Big 5
– No liability for consequential damages
– Watch out for Buyer Termination for Convenience/Force
Majeure
– Maximum CAP on damages
– Agree to Express Warranties
– Make good use of liquidated damages if you can make it the
exclusive remedy
• Talk about what you can and cannot do when up against a large
buyer
• Suggest some alternative negotiating points
• Conclude with some pointers in managing American contractual
relations
31
32. Table of Contents: Part II
I Liquidated Damages: see Part I
II Consequential Damages p. 32
III Maximum Cap on Damages p. 40
IV Assumption of the Risk p. 44
V Express Warranties Only p. 45
VI Force Majeure p. 51
VII Termination for Convenience p. 55
VIII American Indemnification p. 62
IX Cumulative Remedies p. 72
X Dispute Resolution p. 73
Conclusion p. 74
32
33. II Consequential damages
Definition: « Consequential» means « any
loss » that is « a natural, probable and
foreseeable consequence of the breach »
.
32
35. General Litigation Risks : some
case examples
• s
More Modern Examples: Hacking of Target: 70 million cards
stolen with PIN numbers 34
36. Consequential damages
UCC § 2-715. (2) Consequential damages resulting from the
seller’s breach include:
“any loss resulting from general or particular requirements and
needs of which the seller at the time of contracting had reason
to know and which could not reasonably be prevented by cover
or otherwise”
PURPLE: FACT ISSUES THAT CAN GO TO THE JURY
•Restatement (Second) of Contracts:
“The amount of loss that the [buyer] could reasonably have
avoided by making substitute arrangements or otherwise is
simply subtracted from the amount that would have otherwise
have been recoverable as damages”
35
37. Consequential damages :
LITIGATION RISKS: can be enormous, gigantic, totally out of
proportion
• Definition: “Consequential” means “any loss” that is “a
natural probable consequence of the breach” Jury
Question? Or for the Court to Strike?
– Jury Question: Did the loss result from “general or
particular requirements and needs” that the seller “knew
of or had reason to know of at the time of contracting”?
– Defense: Did the buyer comply with its duty to mitigate
damages “by cover or otherwise”? Is the “loss” one
“which could not reasonably have been prevented by
cover or otherwise”? (UCC 2-7215)
– All these issues are fact specific and expensive to
litigate
– Courts will usually let these issues go the jury? 36
38. II Consequential Damages
Solution
Model master Supply Agreement (MSA) 11.1.
•No liability for consequential damages
“IN NO EVENT SHALL SELLER BE LIABLE FOR CONSEQUENTIAL,
INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY, PUNITIVE OR
ENHANCED DAMAGES, LOST PROFITS OR REVENUES OR DIMINUTION
IN VALUE ARISING OUT OF OR RELATING TO ANY BREACH OF THIS
AGREEMENT, REGARDLESS OF:
• WHETHER SUCH DAMAGES WERE FORESEEABLE,
• WHETHER OR NOT SELLER WAS ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES
• THE LEGAL OR EQUITABLE THEORY (CONTRACT, TORT OR
OTHERWISE) UPON WHICH THE CLAIM IS BASED, AND
NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER
REMEDY OF ITS ESSENTIAL PURPOSE.
37
39. Contract Comparison – Exclusion of Consequential Damages
• Model Agreement Section 11.1 – No Liability for
Consequential or Indirect Damages
– This Model provision protects one or both parties from
any damages other than direct damages, which is what
the parties are really bargaining for
• When negotiating, ask who is more likely to get
sued for lost profits or damages to business
reputation
– Common exclusions from the limitation on
consequential damages, damages for
» Breach of confidentiality
» Infringement or misappropriation of IP
• Principle of mutuality 38
40. Limitation of Consequentials:
Conclusion
1. For a buyer to recover consequential damages,
the buyer’s special circumstances must be
discussed at the time the parties negotiated the
contract and the loss must be caused by the
seller’s breach
2. Most commercial contracts exclude
“consequential damages” claims: because
even when unsuccessful, they are very
expensive to litigate. However, the exclusion
must strictly conform to the law of the state
that applies to be enforced.
3. If Buyer refuses, offer a Max CAP 40
41. III Maximum Cap on Damages
Model MSA 11.2 MAXIMUM LIABILITY FOR DAMAGES. IN NO
EVENT SHALL SELLER'S LIABILITY ARISING OUT OF OR
RELATED TO THIS AGREEMENT,…. EXCEED THE TOTAL OF
THE AMOUNTS PAID TO SELLER PURSUANT TO THIS
AGREEMENT IN THE 12 MONTHS PRECEDING THE EVENT
GIVING RISE TO THE CLAIM .
40
42. III Contract Comparison – Maximum
Cap on Damages
• ATTENTION: BUYERS USE MAX CAP MORE THAN SELLERS.
USUALLY WHEN THE BUYER TERMINATES FOR CONVENIENCE.
• CHICAGO: Takes delivery of 8 boats, cancels
order for last 2: What are your remedies?
•
• Supplier’s Claim
– “If BUYER terminates a Purchase Order for convenience, Supplier
will have the right to submit a written termination claim to Buyer,
But . . . . In no event will Supplier be entitled to any amount which,
taken together with monies paid or owing under this Purchase Order,
exceeds the value of the terminated Purchase Order.”
• Section 20.3 – Buyer’s Termination
– “If BUYER terminates this Purchase Order [for convenience or for
breach], BUYER’S sole liability to Supplier, and Supplier’s sole and
exclusive remedy, is payment for Goods received and accepted by
BUYER before the termination.”
• Buyer’s Termination for Convenience
– “In no event shall Buyer be liable for lost or anticipated profits,
unabsorbed indirect costs or overhead, or any amount in excess of the
total order price.” 42
43. MAX CAP: Negotiating Points
• Goal: eliminate damages that are
disproportionate in relation to economics of
transaction
• Must consider whether consistent with or
contrary to liquidated damages clause
• Flat $ dollar amount or % of prices paid
• Multiple of prices paid under contract
• Go for mutuality 42
44. Exceptions to MAX CAP
• May accept maximum liability for some
types of breaches
• Seller accepts exceptions to Cap for
– Breach of obligations relating to intellectual
property, indemnification, confidentiality
– Gross negligence willful misconduct, intentional
acts
– Any personal injuries resulting from seller’s
negligence
• Seller must be vigilant : Maximum Caps on liability
inserted in contract by Buyer to limit its payments
43
45. IV Assumption of the Risk
• Good luck !
• « Buyer assumes all risk and liability for
the results obtained by use of Seller’s
goods… whether in terms of operating
costs,general effectiveness, success or
failure »
45
46. V Much Easier: Limit your
Risks by Limiting your your
Warranties– “THE WARRANTIES SET FORTH IN THIS AGREEMENT ARE
EXCLUSIVE AND NO OTHER WARRANTIES OF ANY KIND,
WHETHER EXPRESS OR IMPLIED OR STATUTORY, INCLUDING
ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, AND ALL WARRANTIES ARISING
FROM THE COURSE OF DEALING OR USAGE OF TRADE, WILL
APPLY. THE REMEDIES SET FORTH IN THIS AGREEMENT ARE
THE SOLE AND EXCLUSIVE REMEDIES OF BUYER AND FOR
ANY CLAIMS, EXPENSES, OR DAMAGE ARISING OUT OF OR
RELATED TO PRODUCT(S) DELIVERED UNDER THIS
AGREEMENT.”
• This is what you want to see; negotiate over the warranties
expressly set out in the agreement
– Attach a Schedule of Warranties
– CHICAGO:
– Boeing:
45
47. V Implied/Express Product
Warranties
• This is an exception: it is an area where product warranties are
created by law and not by contract unless you put a limitation
in the contract
• Uniform Commercial Code (UCC) Articles 2 and 2A apply:
• Warranty: Seller can create it by affirming facts about the
goods, making a promise about the goods , describing the
goods and providing a sample.
• If you tell CHICAGO: “zero to fifty in 60 seconds with full crew,”
you are creating implied warranty:
• To limit this area of liability, sellers specify in a MSA:
– the duration of each express warranty,
– conditions that invalidate it and
– exclusive remedies for breach of the warranty.
46
48. Problem of Implied Warranties
• UCC Articles 2 and 2A read into supply agreements implied
warranties of merchantability and fitness for a particular
purpose.
• Parties should always disclaim these implied warranties, which
can contradict the express warranties and specifications in the
contract
• The UCC requires this type of clause for the disclaimer to be
effective , disclaiming any express warranties not expressly
stated in the contract and all implied warranties
• 47
49. Contract Comparison – Limited/Express Warranties
• Model MSA Agreement Section 9.6 – Disclaimer of
Other Representation and Warranties; Non-Reliance
– “ (B) BUYER ACKNOWLEDGES THAT IT HAS NOT
RELIED UPON ANY REPRESENTATION OR
WARRANTY MADE BY SELLER, OR ANY OTHER
PERSON ON SELLER'S BEHALF, EXCEPT AS
SPECIFICALLY PROVIDED IN SECTIONS 9.2 AND 9.3
OF THIS AGREEMENT.”
• The parties should negotiate for and commit in the
agreement to exactly the warranties they desire;
• disclaim or eliminate any express warranties not
included in the agreement,
• disclaim all implied warranties,
• and put all this in writing.
49
50. Contract Comparison – Limited/Express Implied
Warranties
Warranty: DANGEROUS CLAUSE !!
– “Supplier warrants to Buyer that all Goods provided under the Order
shall be and continue to be: (i) merchantable and fit for the purpose
intended; (ii) new; (iii) free from defects in material and workmanship;
(iv) free from defects in design if the design is not provided by Buyer;
(v) manufactured in strict accordance with the Specifications; and (vi)
free from liens or encumbrances on title (collectively, for this Section 6,
“Warranty”).”
• Rather than disclaim implied warranties of merchantability and
fitness for a particular purpose, this agreement makes those
warranties explicit !!
• In addition, there is no exclusion of other express warranties
50
51. Insurance?
You will not always be covered without an expensive
supplement to your contractual liability insurance.
You may find that excluded from insurance coverage
will be: claims for
• Defective performance
• Product defects or damages
• Damages due to breach of warranties
• Specific obligations agreed to by the seller in the
contract, such as payment of liquidated damages for
late deliveries
• See terms of a U.S. Contractual Liability Insurance
Policy 51
53. VI Contract Comparison –
Force Majeure
• Model MSA Section 17.21 – Force Majeure
• “Seller shall not be liable or responsible to Buyer, nor be deemed
to have defaulted under or breached this Agreement, for any
failure or delay in fulfilling or performing any term of this
Agreement, if such failure or delay is caused by or results from
acts beyond Seller's control, including: (a) acts of nature; (b)
flood, fire, earthquake or explosion; (c) war, invasion, hostilities
(whether war is declared or not), terrorist threats or acts, riot or
other civil unrest; (d) requirements of Law; (e) actions,
embargoes or blockades in effect on or after the date of this
Agreement; (f) action by any Governmental Authority (whether or
not having the effect of Law); (g) national or regional emergency;
(h) strikes, labor stoppages or slowdowns or other industrial
disturbances; (i) shortages of or delays in receiving raw
materials; or (j) shortage of adequate power or transportation
facilities.”
– This provision broadly protects sellers for events beyond
the seller’s control, and broadly favors sellers in that is
only limited by a lack of control over the event. Contrast
with the following.
53
54. Contract Comparison – Force
Majeure
• Force Majeure – Excusable Delay
– 1. “Neither Party will be in default under this Agreement, if such default is
caused by an unforeseeable and irresistible event ("Force Majeure"), excluding
either Party's fault or negligence. Such events may include, depending on the
circumstances, events such as, but not limited to:
• acts of God,
• war,
• terrorist acts, riots,
• acts of government,
• fires, floods, epidemics,
• quarantine restrictions,
• freight embargoes,
• strikes, or
• unusually severe weather;
– 2. If delivery of any Product is delayed by unforeseeable circumstances beyond
the control and without the fault or negligence of Supplier or of its
subcontractors (any such delay being hereinafter referred to as "excusable
delay"), the delivery of such Product will be extended for a period to be
determined by Buyer after an assessment by Buyer of alternatives.
– DANGER: no minimum period of delay to protect Seller. Insist on at least 30
days etc.
54
55. Contract Comparison – Force Majeure
Clause 8 – Excusable Delay
– “The following will not be considered as
events beyond the reasonable control of the
Seller:
(i) lack of financial resource of the Seller or
its subcontractors;
(ii) any labor disturbances including
strikes/lock-outs experience by the Seller or
its subcontractors”
• Exclusion of labor disturbances or “money
problems” from excusable delay can be risky for
Seller, particularly as it relates to Seller’s
subcontractors
• Chicago: suppose Global is buying from China. 55
57. VII Termination for Convenience
• Generally:
– Most supply agreements have these provisions,
particularly if there is a government end user
– Most will limit any supplier remedy to no more
than the price of the order, but will exclude
certain damages from recovery
– Main negotiating points are
• Who gets IP rights in a designed product if order
canceled
• What types of damages can be recovered
• Limit right to terminate within time needed to recover
costs of tooling and design. Chicago: after delivery of
5 boats? Negotiate reimbursement for tooling.
57
58. Contract Comparison – Termination for Convenience
Termination for Convenience – Seller’s Claims: Flow-Down
Clauses
– “If Buyer terminates an Order in whole or in part under this Agreement,
Seller shall have the right to submit a written termination claim to
Buyer. Such claim must contain sufficient detail describing the amount
claimed, including detailed inventory schedules, a detailed breakdown
of all costs claimed separated into categories (e.g., materials,
purchased parts, finished components, labor, burden, general and
administrative), and documentation supporting the claim reasonably
requested by Buyer…With regard to the amount compensatable to
Seller under a termination of all or part of an Order under this
Agreement, Seller shall be entitled to compensation in accordance with
and to the extent allowed under the terms of FAR 52-249-2 (May 2004)
paragraphs (e)-(h), (as published in 48 CFR § 52.249-2 approval 2004; . .
. .
•Important provisions here include:
– If Buyer’s customer is a governmental entity, Buyer may simply be flowing
provisions of its agreement with customer down to you; in that event
negotiation on those provisions may be fruitless and futile.
• Familiarity with the Federal Acquisition Provisions will allow Seller to tailor
its negotiation strategy
– Seller must make sure it can terminate agreements with its subcontractors or
suppliers for convenience. FLOW DOWN RIGHTS.
– DO NOT GET SQUEEZED .
– CHICAGO: will certainly incorporate its procurement code in its contract.
58
60. SUMMARY: Seller limitations on
Liability
Liquidated Damages
Consequential Damages
Max CAP on some damages
Assumption of the Risk?
Express Warranties only
Watch out for Force Majeure and Termation
for Convenience Provisions
Flow-Down Rights?
60
64. • At very last minute, the Police Chief sends Schmidt at Global the
standard indemnification . Global doesn’t read it and signs.
• WATCH OUT!
• “ Global Boats agrees to release, indemnify, defend and hold
harmless, CHICAGO its officers, agents and employees, from all
liability, damages, claims, suits or other consequences (including
but not limited to personal injury or death) caused by or arising
out of this Supply Agreement.”
Contract comparison- Indemnification
63
65. • Supplier will indemnify, defend, and hold harmless XYZ USA , its
divisions, subsidiaries and affiliates, the assignees of each, and their
directors, officers, agents and employees from and against all liabilities,
claims, losses, and damage of any nature, including without limitation,
all expenses (including attorneys' fees), costs, and judgments incident
thereto, or incident to successfully establishing the right to
indemnification, for (i) injury to or death of any person or persons,
including, without limitation, officers, agents and employees of Supplier,
but not employees of XYZ USA , (ii) loss or damage to any property,
including, without limitation, any Aircraft or part thereof, (iii) loss of use,
revenue or profit with respect to any Aircraft, part thereof or other thing,
and (iv) any other direct, indirect, incidental, consequential, economic or
statutory civil damages, any of which arise out of or are in any way
related to the performance of Services, use by XYZ USA of Supplier's
technical instructions, the provision of any XYZ Data or use thereof, or
any other item provided under this Contract, whether or not arising in
tort or occasioned in whole or in part by the negligence of XYZ , whether
active, passive or imputed. Supplier's obligations under this indemnity
will survive the expiration, termination, completion or cancellation of
this Contract. 64
SUPER PROBLEMATIC!
66. American Indemnification is
Contractual
• Thus, a necessity to include it or disclaim it
• Any disclaimer must be explicit and specifically refer to
obligation of indemnification.
• Next Fundamental Question: What Type of Indemnification?
– Third Party—indemnify against
• Liability, loss or claims
• Example, the groundings worldwide of the airlines
– First Party- Indemnify against
• any loss arising out of the Seller’s breach of contract
• Example, claims from buyer, lost profits arising out of
defects in “lithium-ion batteries ” which caused buyer to
spend money finding the defect and fixing it 65
68. How to Protect Global Boats
• You should push for language that says:
– « Seller indemnifies Buyer solely for losses
arising out of a Third Party Claim directly
caused by a [material] breach of the contract
by Seller, subject to certain exceptions, etc. »
67
69. •GLOBAL agrees to indemnify Chicago solely for
losses arising out of a Third Party Claim directly
caused by a material breach of the Supply Contract,
and there is no duty to indemnify if the losses arise
out of Chicago’s negligence, bad faith or failure to
comply with the Supply Contract.”
•“GLOBAL shall have no duty to indemnify Chicago
for any Claim (whether direct or indirect) for which a
sole or exclusive remedy is provided for [or barred]
under another section of this Supply Contract”
•“ GLOBAL shall indemnify Chicago solely for
losses arising out of Third Party Claims not covered
by insurance proceeds received by Chicago ” 68
Indemnification : 3 Alternatives
70. Indemnification: Negotiation Points
Indemnification can be the most important risk allocation tool, will
usually be heavily negotiated.
Some pointers for your checklist:
•Avoid mutuality, use separate provisions to reflect different levels of
risk between buyer and seller. Too confusing.
•Consider role of insurance: limit indemnity obligation to losses not
covered by insurance proceeds received by indemnified party;
•Buyer will want to be indemnified for all losses “relating to”. Seller
will want to limit to those “solely resulting from” or “caused by”
•Seller will want “loss” to include only judicial awards, buyer will
want broadest possible definition of “loss”
•Buyer will resist limiting indemnification to losses arising out of
“material” breach of seller’s representations, will want
indemnification for all claims relating to the contract.
•Seller will want to negotiate a CAP or Maximum on payment of
third-party claim liabilities.
71. USA Indemnification: Definitions and Their
Practical Consequences
• Seller shall “indemnify, defend and [hold harmless] ” : means act of
making good the loss of the other party and defending the party, including
hiring and paying the party’s attorneys.
• Hold Harmless can mean the additional requirement of making advance
payment for covered unpaid expenses as they incurred. It is bracketed in
MSA 10.1 and should be avoided if possible.
• Where possible Write EXCLUSIONS into your Indemnification Provisions!
!!
• Whether claim is valid or not , seller pays reasonable costs of defending.
• Loss: you must define it (example 10.1.) in a way that makes economic
sense in your deal. Do not leave undefined. Generally means “Buyer
actually spending money”
• Damages, leave undefined or clarify? Be consistent. Do damages exclude
consequential damages in 11.1 and then agree to indemnify buyer for
consequential damages in 10.1.?
• “relating to is broader than “arising out of “ or “resulting from”: be
careful not to open the door to claims not directly related to the sale of
your products. 70
72. 1. Be careful that indemnification obligations are narrowly drafted and
that they do not undermine the limitations and protections you so
carefully negotiated in other provisions in the contract.
2. Indemnification “ american style” has many traps and we have to pay
close attention to the terms used in any provisions. Indemnification is
one of the most important risk allocation tools to negotiate in the
contract. U.S. counsel can best advise here.
3. Choice of state law can also impact. New York v. Ohio. v. Illinois
4. It may merit a separate conference to discuss choice of law; control of
defense counsel that you have to hire to defend your buyer and their
legal fees: and key negotiating points using case examples.
71
Final Lessons: American Indemnification
73. IX Cumulative Remedies
• Miscellaneous. Paragraph 42.4 page 65:
– “All remedies of CHICAGO hereunder are cumulative and are not exclusive and
CHICAGO can exercise any other rights and remedies available at law or by
statute.”
• This is buried in a clause near the end of the agreement surrounded by
other “miscellaneous” provisions; easy to miss!
• No carveouts for situations where limitations on damages apply
• Model Agreement Section 17.11 – Cumulative Remedies
– “All rights and remedies provided in this Agreement are cumulative and not
exclusive, and the exercise by either Party of any right or remedy does not
preclude the exercise of any other rights or remedies that may now or
subsequently be available at law, in equity, by statute, in any other agreement
between the Parties or otherwise. Notwithstanding the previous sentence, the
Parties intend that Buyer's rights under Section 7.19 Liquidated Damages for
Late Delivery, Section 4.6 [Inspection], Section 9.5 [Buyer’s Exclusive Remedy
for Defective Goods] and [each of the Parties' rights under] Section 10
[Indemnification] are [Buyer's/such Party's] exclusive remedies for the events
specified therein.”
• Many contracts will contain cumulative remedies provisions, which, if not
negotiated carefully, will swallow up the framework of remedies otherwise
created by the parties (much like indemnification provisions)
• Notice, for example, this clause provides that the remedies provided for
various sections, where the parties have already negotiated a proper
remedy for noncompliance, are exclusive notwithstanding the cumulative
remedies clause
73
74. X Protections of Well-Drafted
Dispute Resolution Provisions
• Choice of law. Remember we have 50 states
• UCC will apply. Buyers exclude U.N. Convention on
Contracts for International Sale of Goods.
• Choice of forum (venue). New York long-arm
jurisidiction. Stay competitive with U.S. Rivals.
• Impact of dispute resolution on claims for
product liability
– These are not contract-based but in tort
– Manage with common sense and help of experienced attorney
and insurer
– Courts will impose sanctions on frivolous claims, allow
defenses of contributory negligence
• Waiver of jury?Arbitration? Mediation? Model MSA 17.19
• Federal Courts: an excellent dispute resolution forum.73
76. Our Approach to Contract Analysis &
Management For European Exporters
and European-owned U.S. Subsidiaries
• Contract Comparison Book
• Meet with Commercial Team and in-House
Counsel and German attorneys
•Help draft model MSA from Seller’s point of
view to bring to negotiating table
•Example of in-house seminar
•Goal: avoid litigation, avoid uncertainties,
establish level playing field 76
77. Final Thoughts
• The USA is a country where we
can reasonably manage contract
and other risks once we identify
them. First Step: a TOC
• We can even convert contract
provisions to our advantage
• Refer to 10 FAQ Guide: talks about
setting up separate U.S. subsidiary
and/or holding company, using
multinational corporate structure
to your advantage; another
protection.
• The key: planning in advance with
help of attorney and insurer with
experience in advising on exports
to or manufacturing products in
the USA market; and in protecting
your company against liability
risks
• Partnering with your German
Counsel:
• Our Goal: A Soft Landing 75
79. Eliot Norman
Partner- International
Williams Mullen
Washington, D.C.
T. 001.804.420.6482
enorman@williamsmullen.com
www.williamsmullen.com
Eliot Norman has worked for many years helping Foreign Multinationals enter the USA from
Asia and Europe and to expand their businesses in key high technology and advanced
manufacturing markets. He advises on contracts, immigration and other issues while acting
as outside general counsel to foreign companies to help them choose the legal strategies
that can maximize their return on investment (ROI) and accelerate market growth.
Mr. Norman is an International Practice Partner with Williams Mullen, a 250 lawyer national
and international commercial law firm, with offices in Washington, D.C., Virginia and North
Carolina. Eliot graduated from Yale College and Boston College Law School and served
with the U.S. Department of Justice before entering private practice. He is listed in Best
Lawyers in America for Immigration. He speaks French fluently and obtained a Certificate
from the Institut d’etudes politiques, Paris, France. Mr. Norman regularly travels to Europe to
meet with clients concerning investment projects and operations in the United States and to
speak to industry trade groups and chambers of commerce.
77