1 CONTRACT RISK MANAGEMENT: Strategies and Tactics J. Scott Hommer, III Venable LLP 8010 Towers Crescent Drive, Suite 300 Vienna, Virginia (703)

2 Proper Contract Construction Goals: Allocate risk Provide certainty Minimize the exposure of the insured and the insurer Others?

3 Proper Contract Construction Overview of Discussion Topics: 1.Limitation of Liability Provisions 2.Indemnification Provisions 3.Warranties and Disclaimers 4.Dispute Resolution Provisions 5.Other Provisions

4 1. Limitation of Liability Provisions Absent limitation of liability language, the parties to the contract are free to seek damages to compensate all legally recognizable harms caused by a breach of contract, and/or injury caused by a negligent or other wrongful act committed in the performance of the contract.

5 1. Limitation of Liability Provisions A.Exclusive Remedies B.Exclusions or Ceilings on Damages C.Force Majeure D.Liquidated Damages E.Exculpatory Terms

6 1. Limitation of Liability Provisions A. Exclusive Remedies Examples: Liability shall be limited to the cost of repair to any defect in the system. Remedies excluded hereunder are injunctive relief and specific performance.

7 1. Limitation of Liability Provisions B. Exclusions or Ceilings on Damages * Damage Caps or Ceilings For example: Sellers liability is limited to the amounts actually paid under the contract. For example: The maximum amount that one party to this Agreement may be liable for to the other party to this Agreement is $1,000,

8 1. Limitation of Liability Provisions B. Exclusions or Ceilings on Damages * Consequential Damages Consequential damages are indirect damages that typically are subjective and speculative (e.g., future lost profits) Therefore, consequential damages are frequently excluded because they may result in liability that far exceeds the value of the underlying contract

9 1. Limitation of Liability Provisions C. Force Majeure Typically limits liability for breach or loss resulting from external forces beyond the control of the seller Examples: Acts of God, acts of terrorism or war, labor strikes, floods, earthquakes, tornadoes, storms and other natural events

10 1. Limitation of Liability Provisions D. Liquidated Damages For non-UCC contracts, are unenforceable if too high and therefore deemed to be a penalty For contracts governed by the UCC (i.e., sale of goods) if deemed to be too low compared with the actual damages caused by the breach. This is because the terms would improperly encourage intentional breaches and therefore the terms would fail their essential purpose.

11 1. Limitation of Liability Provisions E. Exculpatory Terms Courts in many states disfavor exculpatory terms that relieve a party of liability for its own wrongful acts -- Examples: contracts for construction, public services and employment Courts will usually enforce exculpatory terms that prohibit the recovery of damages to property or commerce caused by merely negligent conduct arising under the contract Courts will strictly construe Another limit: Unconscionability (i.e., large disparity of bargaining power)

12 1. Limitation of Liability Provisions Concluding Thoughts... Courts strictly construe limitation of liability provisions because they limit and/or deny a partys right to obtain otherwise lawfully permitted damages. Consequently, to be enforceable limitation of liability terms must not be ambiguous or otherwise unclear.

13 2. Indemnification Provisions Indemnification provisions allow the parties to shift certain risks from one party to the other party by having the indemnitor assume from the indemnitee certain liability for current or future loss or injury incurred by the other party due to the conduct of that party or a third party

14 2. Indemnification Provisions Two general types: Indemnity against liability triggers the indemnitors obligation when the indemnitee becomes liable even if the indemnitee has not had loss or damage Indemnity against loss triggers the indemnitors obligation only when the indemnitee actually experiences loss or damage

15 2. Indemnification Provisions Negotiating: a partys ability to absorb financial loss a partys relative lack of foreseeability or certainty about indemnifiable risks inability to manage contract risk due to lack of control of the subject matter of the indemnitee *copyright infringement *patent infringement

16 2. Indemnification Provisions Drafting Considerations: Explicitly use the terms indemnity, indemnify, indemnification, defend, and hold harmless Specify the scope, and any limitations on scope (e.g., personal injury) Consider including a Notice of Claim requirement

17 2. Indemnification Provisions Drafting Considerations (contd): Consider including expenses of defense, such as attorneys fees Require that the indemnitee cooperate in the defense of the claim Consider including settlement approval rights Require that the indemnitee mitigate damages and act reasonably

18 3. Warranties and Disclaimers Warranty defined: an assurance or guarantee by a seller promising to indemnify the buyer if the warranted fact proves to be untrue Disclaimer defined: contract language limiting or eliminating the sellers warranty liability to the buyer

19 3. Warranties and Disclaimers Express vs. Implied Distinction Express warranties arise: * under the UCC * at common law where ** the seller has provided a description of the goods or services ** made a promise or affirmation of fact about the goods or services

20 3. Warranties and Disclaimers Express vs. Implied Distinction Implied warranties arise by operation of law: * under the common law * under the UCC ** merchantability ** fitness for a particular purpose ** title ** infringements

21 3. Warranties and Disclaimers Disclaiming Warranties: Specify the express warranties, if any, that are being provided Identify the remedies available in the event the product or service does not comply Conspicuously specify by name the express and implied warranties that the seller is not providing

22 4. Dispute Resolution Provisions A.Choice of Governing Law B.Choice of Forum C.ADR D.Shifting of Attorneys Fees and Other Litigation Pursuit Costs E.Limitation on Time to Sue for Breach

23 5. Other Provisions A.Integration and merger provisions B.Waiver provision C.Severability provision

24 CONCLUSION COMMENTS? QUESTIONS? THANK YOU!