negotiating american master supply contracts: a guide for european exporters

Anglo-American Contract Principles

Eliot Norman Rick PalmieriWilliams Mullen1666 K St. N.W. Suite 1200Washington, D.C. 20006 001.804.420.6482Eliot Norman enorman@williamsmullen.comrpalmieri@williamsmullen.comwww.williamsmullen.com#24863654

American Contract Challenge

1

3

”

Goal « level playing field »

Fair allocation of the Risks

Wherever you do business

4

• 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 Normanenorman@williamsmullen.comBill Benosbbenos@williamsmullen.com

For the lawyers thisIs a new challenge

Why the Southeast? Answer: The 50 States are not all the Same1.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.

South Carolina

7

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 Charleston.

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

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

Insurance?

•12

The Story of : Global Patrol Boats GmbH and The City of Chicago

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

CHICAGO Winter of 2014

13

• 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

Question? Can Chicago Collect? And what about what the Chief of Police Said?

15

« 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

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

So what about these liquidated damages?

18

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.”

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 expressedUniform 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

Liquidated Damages : Lessons1. 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

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

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

Global Patrol Boats: Final Problem

25

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

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!

Happy ending : More Chicago Business in 2015 and years to come

28

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

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

Table of Contents: Part II I Liquidated Damages: see Part I II Consequential Damages p. 32 III Maximum Cap on Damages p. 40IV Assumption of the Risk p. 44V Express Warranties Only p. 45VI Force Majeure p. 51 VII Termination for Convenience p. 55 VIII American Indemnification p. 62IX Cumulative Remedies p. 72X Dispute Resolution p. 73Conclusion p. 74

32

II Consequential damagesDefinition: « Consequential» means « any

loss » that is « a natural, probable and foreseeable consequence of the breach »

.

32

Consequentials Damages = Modern Pandora’s Box

33

General Litigation Risks : some case examples

• s

More Modern Examples: Hacking of Target: 70 million cards stolen with PIN numbers 34

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

VI FORCE MAJEURE

Hidden Traps in these Familiar Clauses. 51

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

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

Contract Comparison – Force MajeureClause 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

VII Termination for Convenience

56

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

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

Chicago, Global Boats GmbH, and its Subconcontractors:

The Flow-Down Problem

59

SUMMARY: Seller limitations on Liability

Liquidated DamagesConsequential DamagesMax CAP on some damagesAssumption of the Risk?Express Warranties onlyWatch out for Force Majeure and Termation for Convenience ProvisionsFlow-Down Rights?

60

So we are done?

60

One Other Large Problem

61

The Danger

VIII American Indemnification :

Limitations of Liability

The indemnification

62

• 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

• 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!

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

What State Law Applies?

66

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

•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

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. 69

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

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

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

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

74

XI CONCLUSION

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

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

Questions? Questions?

Eliot Norman, Esq.enorman@williamsmullen.com001.804.420.6423

Williams Mullen www.williamsmullen.com

77

Eliot NormanPartner- International Williams Mullen Washington, D.C. T. 001.804.420.6482enorman@williamsmullen.comwww.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