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Managing Litigation for In-House Counsel Breakfast Discussion Group

Part 1 of 2

Bulletproofing Your Contracts Lessons for Commercial Contract Clauses from the Litigation Battlefield

March 12, 2013

DISCLAIMER. This presentation is intended for in-house lawyers and is for general information and educational purposes only. Nothing in this presentation, either in writing or in any audio or video recording, should be relied upon or used as the basis for making decisions without advice of counsel or legal representation.

Call in toll free at 888-853-9384 and use this 10-digit access code: 2124512900

Steven R. Schoenfeld, Esq. Bradford S. Babbitt, Esq.

Robinson & Cole LLP Robinson & Cole LLP

[email protected] [email protected]

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Commercial Contract Clauses

• The “rules of engagement”

• Disputes can delay and can determine outcome

• Risks posed by “boilerplate”

Limitations on Liability

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Liability Limits – Goals

• Prohibit certain forms of monetary relief

– Consequential or punitive damages

• Cap damages

– Consideration paid under the contract

• Prohibit non-monetary relief

– Injunctions, reformation, rescission

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Liability Limits – Enforceability

• Generally enforceable

• Exceptions:

– Intentional wrongdoing

– Special (e.g., fiduciary) relationship

• Closely scrutinized:

– employment contracts

– consumer transactions

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Liability Limits – Extension

• “Himalaya Clauses”

• Extend liability limits to third parties, such as

subcontractors and agents involved in performing

the contract

• Typically enforced, provided the parties:

– Contemplated services of the third parties

– Clearly intended to limit their liability to third parties

Liability Limits – Punitive Damages

• Limits on statutory punitive damages not

enforced

– Contrary to public policy

• Can limit punitive damages available through

arbitration

– Consumer contracts unlikely enforced

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Liability Limits – Examples

• Example 1:

• Student loan guarantee corporation contracts

with IT company to manage borrower data

• IT Company employee loses hard drive containing

borrower social security numbers in an airport

• Student loan guarantee corporation sues IT

Company to recover its out-of-pocket costs for

mitigating the breach of privacy

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• “In no event shall IT Company be liable for any

loss of profits, loss of business, or loss of data, or

for special, incidental, indirect or consequential

damages however arising even if IT Company has

been advised of the possibility of such damages.”

• IT Company moves for summary judgment

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• Motion denied

• Were the expenses indirect damages, which were

barred, or direct damages, which weren’t

addressed?

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• Example 2:

• Private equity firm sold publishing company to

another private equity firm

• Buyer sues: fraud in the inducement

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• Limit of Liability:

– Buyer’s recourse limited to indemnity fund

• Integration clause:

– buyer not relying on any representations or warranties other than those expressly provided in the agreement

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• Limit of Liability:

– applied to claims arising out of the agreement as well as claims arising out of the transaction

– excluded any judgment or award other than against the indemnity fund

• Buyer had to prove that Seller had lied about a

representation contained in the four corners of the

sale agreement

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Liability Limits – Drafting Considerations

• Governing law

• Potential damages for both sides

• Are lost profits consequential damages or

direct/expectation damages?

• Should equitable relief be precluded?

• Can damages be quantified?

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• Define the transaction to include both the written

agreement and the deal itself

• Broadly identify the potential risks associated

with the deal and the associated causes of action

• Identify each type of damage you are

limiting/prohibiting

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• Limit relief that an arbitrator can grant

• Add the award of attorney’s fees and costs where

one party seeks damages or relief expressly

barred by the contract

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• Include a specific integration clause to mitigate

against potential fraud exceptions

• Damage caps must be logically related to the deal

• Use recitals to support damage cap

Indemnification Clauses

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Indemnification

• Claims made by third-parties

• Direct claims for losses

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Indemnification – Enforcement

• Typically, cannot seek indemnification for losses

due to one’s own negligence

• Indemnitees will seek indemnification provisions

that grant indemnification even where they were

contributorily negligent

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Indemnification – Enforcement

• Most jurisdictions only enforce indemnification

clauses as to third-party claims

• Direct claims continue to be asserted

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Indemnification – Direct Claims

• Key language:

– “indemnify”

– “hold harmless”

• Key definitions:

– “Loss”

– “triggering event”

– “occurrence”

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Indemnification – Example

Seller indemnifies and holds harmless Buyer from . . . any and all Loss (as defined below) resulting from:

(a) Seller’s misrepresentation or breach of warranty,

(b) Seller’s non-fulfillment of any covenant or agreement, and

(c) claims by any third party arising out of facts or circumstances relating to the Company or the Business

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Loss: any and all loss, injury or damages incurred

by Buyer in connection with any and all actions,

suits, proceedings, hearings, investigations,

charges . . . expenses and fees (and including court

costs and reasonable attorneys fees and expenses

incident to any of the foregoing)

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Seller indemnifies Buyer

and

Buyer indemnifies Seller

for

50% of any and all losses as a result of operation of

the Business prior to the Closing Date including

losses arising from events or occurrences prior to the

Closing Date.

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• Defective product manufactured pre-Closing Date

• Product delivered to customers post-closing

• Buyer incurs expense due to defective product

• Seeks indemnity from Seller for 50% of expenses

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• Indemnities benefited both Buyer and Seller with

no way to allocate responsibilities

• Fatal drafting error: absence of definitions for

“event” or “occurrence”

• Court imposed a definition from state law

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Indemnification – Drafting Tips

• Definitions can determine outcome

• Choice of law is critical: controls interpretation

of indemnification provisions

• Address notice provisions, right to select counsel,

control of joint defense

Disclaimers of Warranties

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• Typically enforced if conspicuous

• Not enforced re personal injury claims in the

product liability context

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• Loosely drafted express warranties can undercut

a well-drafted disclaimer of implied warranties

• Express representations and warranties can’t be

open-ended or vague

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Disclaimers of Warranties – Example 1

• Software Sales Contract

– disclaimed warranties

– limited liability to the purchase price

– referenced other product descriptions

• accuracy of the system

• ease of use

• automation of system

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• Sale of Disaster Recovery Business

– Asset deal, following extensive due diligence

– Agreement: well-drafted disclaimer of implied

warranties, strong merger clause

– Agreement: express warranties concerning the

business’ assets and liabilities:

• number of computers, servers, trailers

• customer accounts

• financial statements

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• Sale of Disaster Recovery Business

– Representation: “assets sufficient to operate business”

– What assets (i.e., computers, servers) required

– Suit for breach

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• Sale of Disaster Recovery Business Unit

– Open-ended, non-specific express warranty including

that the assets were fit for a particular purpose,

defeated disclaimer of warranties,


• Lamps sold at auction

• Described as “Tiffany”

• Sale agreement disclaimed all warranties

• Description nullified disclaimer

– “puffing”

– Statement of fact

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• Drafting Considerations:

– Use both disclaimer and specific merger clause with

anti-reliance representations

– Avoid open-ended or vague representations

– Language should be conspicuous

Forum Selection Clauses

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• Mandatory versus permissive

• Default: permissive

• Key words:

– “sole”

– “only”

– “exclusive”

– “shall”

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• Enforcement requires reasonable communication

to opposing party in advance

• Inconvenience is not necessarily a bar

• Consumer contracts will be closely scrutinized

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Forum Selection Clauses – Example

• Define desired jurisdiction with precision

– Courts “in” the state

– Courts “of” the state

Questions and Answers

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About Robinson & Cole:

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Office Locations

About Robinson & Cole (Cont’d):

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Steven R. Schoenfeld is a partner in the Business Litigation Group in the New York office of Robinson & Cole LLP. He has been practicing for more than 20 years, and handles a wide variety of civil litigation for his clients, including commercial, intellectual property and bankruptcy litigation. Steve regularly speaks to in-house counsel and bar association groups regarding managing litigation. His full biography is on the Robinson & Cole website, www.rc.com.

Bradford S. Babbitt co-chairs Robinson & Cole’s Litigation Section. Over the past 20 years, Brad has tried contract and business tort disputes, he has handled copyright, trademark, and trade secret litigation in federal and state court and has represented companies in investigations conducted by state regulators and the Connecticut attorney general. His full biography can be located at www.rc.com

Robinson & Cole is a law firm with nine offices throughout the Northeast and Florida, serving regional, national, and international clients. With approximately 225 attorneys, we are ranked among the 200 largest law firms in the U.S. Clients range from Fortune 500 to start-up companies, as well as nonprofit and governmental organizations. Since 1845, the firm has established a rich history of community involvement, pro bono service, celebration of diversity, and a well-recognized dedication to client service. For more information about the firm, please visit www.rc.com.

Contact: Steven R. Schoenfeld Bradford S. Babbitt

(212) 451-2940 (860) 275-8209

[email protected] [email protected]

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