Presenting a live 90-minute webinar with interactive Q&A Risk Allocation in Commercial Contracts: Indemnity, Reps and Warranties, Termination, Damages Provisions THURSDAY, FEBRUARY 28, 2019 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Amir Azaran, Partner, Loeb & Loeb , Chicago Mark Cohen, J.D., LL.M., Attorney, Boulder, Colo. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1 .
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Risk Allocation in Commercial Contracts: Indemnity, Reps and Warranties, Termination, and Damages Provisions Strafford CLE Webinar February 28, 2019 Mark Cohen, J.D., LL.M. Amir Azaran – Loeb & Loeb LLP
Risk Allocation – Types of Risk • Risk of non-performance • Risk of flawed performance • Risk of foregone opportunities • Risk of change circumstances -------------------------------------------- (And I would add risk of poor drafting) 6
Risk Allocation – Considering Risk • What are the client’s expectations? • What damages will the client incur from non-performance or flawed performance? • What possible remedies are available? • What is the risk that circumstances will change? • What is the risk that the client could get a better deal elsewhere? • What are the opportunity costs? 7
Risk Allocation – Two Functions of a Contract A typical contract serves two functions: 1. Clarify and Express Expectations. Who will do what, by when, in what manner, and how will the results and proceeds of their efforts (risks, losses, gains) be allocated; and 2. Dealing with Disruption . The contract should simplify and stream how the parties manage disruptive change and disagreement – how issues are identified, how parties are notified, and how the conflict is engaged and resolved. Linda Alvarez, Discovering Agreement, American Bar Association, 2016. 8
Drafting and Litigation: The Three Main Causes of Contract Disputes • Ambiguity When an ambiguity is found to exist and cannot be resolved by reference to other contractual provisions, extrinsic evidence must be considered by the trial court in order to determine the mutual intent of the parties at the time of contracting. Pepcol Mfg. Co. v. Denver Union Corp. , 687 P.2d 1310 (Colo. 1984). • Inconsistency Where it is impossible to reconcile conflicting clauses of a contract, it is proper to receive extrinsic evidence for the purpose of determining the intent of the parties. Ryan v. Fitzpatrick Drilling Co., 342 P.2d 1040 (Colo. 1959). • Failure to address an issue altogether Silence on a matter in a contract creates an ambiguity when it involves a matter naturally within the scope of the contract. Cheyenne Mtn. Sch. Dist. #12 v. Thompson , 81 P.2d 711 (Colo. 1993). Extrinsic evidence is admissible to determine the intent of the parties. 9
Drafting and Litigation: Questions of Fact and Questions of Law • Whether a contract is ambiguous is a question of law. Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310 (Colo. 1984) • However, once a court determines that a contract is ambiguous, the meaning of the ambiguous term is a question of fact. Dorman v. Petrol Aspen, Inc., 914 P.2d 909 (Colo. 1996) • Once a court determines that a contract is ambiguous, the intent of the parties is question of fact. Metropolitan Paving Co. v. City of Aurora, 449 F.2d 177 (10th Cir. 1971) 10
Drafting and Litigation: Questions of Fact and Questions of Law And If a Question of Fact Exists… NO SUMMARY JUDGMENT 11
Drafting and Litigation: The Parol Evidence Rule • In the absence of allegations of fraud, accident, or mistake in the formation of the contract, parol evidence may not be admitted to add to, subtract from, vary, contradict, change, or modify an unambiguous integrated contract. Boyer v. Karahenian, 915 P.2d 1295 (Colo. 1996) • Terms used in a contract are ambiguous when they are susceptible to more than one reasonable interpretation. B&B Livery, Inc. v. Riehl, 960 P.2d 134 (Colo. 1998) • An integrated contract is one that contains all the terms the contracting parties agreed to. Harmon v. Waugh, 414 P.2d 110 (Colo. 1966) 12
The Main Risk Allocation Provisions • Representations and Warranties • Indemnification • Limitation of liability • Termination • Exculpatory clauses Practice tip → reps/warranties, indemnification and limitation of liability provisions form the “core” risk allocation provisions of a contract, and are often “linked” in subtle ways 13
Representation and Warranties • Representations and warranties are different than contract covenants • Covenant – a promise to perform an obligation • Representation – a statement of fact as of the time the contract is formed • Warranty – a guarantee that a certain fact will remain true for the term of the contract • Generally, a breach of a representation or warranty allows the aggrieved party more ways to recover • Fraudulent misrepresentation • Ziff-Davis Rule – a warranty is a promise of indemnity if a statement of fact is false • CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990) 14
Representation and Warranties • Common representations and warranties in contracts • Authority to enter contract • Properly organized and in good standing • Compliance with law / all required consents • No conflicts with other contracts • Ability to perform • More “specialized” representations and warranties • Ownership / original work • No viruses or other harmful code • Pass through of third party warranties 15
Representation and Warranties • Implied warranties • UCC Article 2 – implied warranties of merchantability and fitness for a particular purpose • Many contracts will seek to disclaim implied warranties, and limit warranties only to those expressly stated in the contract • Practice tip → watch for warranty disclaimers that go too far • Party A’s performance hereunder is “as is” and “with all faults” 16
Indemnification • Indemnity clauses essentially place the entire burden of a given circumstance on the indemnifying party • Practice tip → an indemnity is appropriate where one party is able to minimize or control for a risk, and it would be difficult or impossible for the other party to do so • Often coupled with a duty to defend the other party • “Party A shall indemnify, defend, and hold harmless Party B against all damages, losses, costs, and expenses (including reasonable attorneys’ fees) resulting from…” • Common indemnity clauses • Failure to comply with law • Gross negligence or willful misconduct • Breach of (certain) representations and warranties 17
Indemnification • More specialized clauses • Third party claims of IP infringement • Costs related to a data security breach • Drafting considerations • Precisely define the breadth of indemnified parties • Affiliates, officers, directors, etc. • Usually drafted to protect against third party claims • What is a “first party” indemnity? • Define circumstances where the indemnity will not apply • Use of the other party’s materials • The other party’s alteration of improper use of the indemnifying party’s technology 18
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