Ten Common Contracting Mistakes
(or Unintended Consequences)
May 22, 2012 – Association of Corporate Counsel
Presented by:
Jim Breitenbucher
Erin Letey
4818-5253-9151
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Statement of Work
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?
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.
Make sure legal and business teams are on the
same page, and have legal review full document,
including SOW.
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Unilateral Attorney Fee Provisions
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Washington Law Creates Reciprocal Provision
Attorney fees. Buyer shall be entitled to reimbursement of
reasonable attorney fees and costs incurred to enforce its rights
under this Agreement.
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.
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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 App. 2010) (unpublished) (permitting defendant to recover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.
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Indemnification
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Indemnification Clauses
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.]
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
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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
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When Drafting Indemnification
What’s not included counts too:
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.*
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)
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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
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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:
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.
Amount:
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].
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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.
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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 negotiations
for 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
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?
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).
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Forum Selection Clauses: Example #2
“In connection with any dispute … arising out of ...
[this Agreement], each of the parties hereto agrees ... that
exclusive jurisdiction and venue shall lie in the appropriate
courts of the State [of] New Jersey.”
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).
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Forum Selection Clauses: Example #3
For all controversies or disputes arising under or in connection
with this Agreement, the parties consent to the exclusive
jurisdiction and venue of the state and federal courts located
in King County, Washington.
Prevents a race to the courthouse steps?
Expressly consents to venue?
Expressly consents to jurisdiction?
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U.N. Convention on Contracts for
the 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.
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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).
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CISG: Opting Out Effectively
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 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.”*
The United Nations Convention on Contracts for the
International Sale of Goods shall not apply to this Agreement.
*Travelers v. Saint-Gobain, 474 F. Supp. 2d 1075 (D. Minn. 2007).
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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).
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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).
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Alternative Dispute Resolution
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Alternative Dispute Resolution: Arbitration Provisions
Should you include an Arbitration Clause?
•
Potential cost savings
•
Consider your
contract terms!
•
Parties can always
agree to arbitrate once
dispute 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).
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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.
•
“Drop dead. Well that’s a good start
to our negotiations.”
Parties can always agree to mediate any
dispute when the timing is right—an early
failure could make a later success more difficult.
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Questions?
Please contact us at any time with additional questions.
Jim Breitenbucher
206.389.1775
[email protected]
Erin Joyce Letey
206.389.1585
[email protected]
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