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					        Risky Business in Procurement
                Contracting
Breakout Session # 203

Jeffrey L. Roth, Attorney, Fees & Burgess, P.C.
Allen L. Anderson, Attorney, Fees & Burgess, P.C.

Date:    April 14, 2008
Time:    3:00 pm - 4:00 pm
 Dispute Resolution

 Warranties

 Warranty Limitations and Disclaimers

 Limitations on Liability
           These issues arise in:
Negotiated Agreements:
   • Electronic Data Interchange; “white paper”
     contracts.
Forms:
   • Purchase orders; purchase order
     acknowledgments; sales orders (“battle of the
     forms” environment).
“No Contract” Environment:
   • (No such thing).
I. Dispute Resolution
                      Keys
•   Be proactive in agreement forms regarding
    procedures for resolution;

•   Attempt to resolve disputes without “legal
    interference”; OR

•   At least give your lawyer a chance!
“Discourage litigation, persuade your neighbors to
compromise whenever you can. Point out to them
how the nominal winner is often the real loser – in
fees, expenses, and waste of time.           As a
peacemaker, the lawyer has a superior opportunity
of being a good man.”
Litigation is the least acceptable and least cost-
effective method for resolving business disputes.
        “ADR Explosion”
Over 1,500 law firms have signed the CPR
Institute of Dispute Resolution Law Firm Pledge,
which requires them to ensure that lawyers
responsible for litigation are knowledgeable about
ADR and, where appropriate, will discuss its
availability with their clients.
 Alternative Means of Dispute
          Resolution

"Any procedure that is used to resolve issues in
controversy, including, but not limited to,
conciliation, facilitation, mediation, fact-finding,
mini-trials, arbitration, and use of ombuds, or any
combination there of . . ."

                                 5 U.S.C. § 571(3).
         Common Forms of
    Alternate Dispute Resolution

• Mediation       • Med-Arb

• Early Neutral   • Mini-Trial (non-
  Evaluation        binding)

• Arbitration     • Summary Jury Trial
                    (binding)
         Mediation Procedure
• Selection of mediator
• Opening statement by mediator
• Initial joint session
• Opening presentation — “caucuses” between
  mediator and each party
• Draft of a settlement agreement or memorandum
  of understanding
           Arbitration Procedure

• Alternative to court           • Each party presents its
  proceeding                       own case
• Grounded in contract           • Arbitrator’s decision is
• Cannot be forced to do so        usually final
• Arbitrator is not obliged to   • Parties are bound to
  comply strictly with court       comply with the award.
  rules of evidence
         Mediation vs. Arbitration
           Mediation                         Arbitration
•   Assisted negotiation         •   Binding adjudication
•   Parties decide if any        •   Parties relinquish control
    settlement will be binding   •   Parties may not
•   Parties control                  (generally) withdraw
•   Parties may withdraw         •   Parties may present case,
•   Parties able to vent             testify under oath
    feelings, tell story         •   “Split the baby,” tends to
•   Encourages and facilitates       result in “win-lose” award
    “win-win” solutions          •   Can be low cost, but not
•   Low cost                         always
Alternative Dispute Resolution
In the event there is any claim, dispute, or other matter
arising out of, or related to, this Agreement, the Parties
shall initially cooperate in good faith to resolve the same
between executives of the Parties who do not have direct
responsibility for administration of this Agreement, and
shall explore whether techniques such as mediation,
minitrials, mock trials, or other techniques of alternative
dispute resolution might be useful in resolving the matter
in question. If the Parties cannot agree within ten (10)
business days on a different method of resolving the
matter, the matter may be submitted by one of the Parties
to non-binding mediation. In such event, the Parties shall
agree upon a mediator, and the mediation shall be held at
Customer’s headquarters unless otherwise agreed.
Alternative Dispute Resolution
If neither Party submits the matter to mediation, or if the
mediation is not successful, then the matter shall be
decided by binding arbitration in accordance with the
American Arbitration Association Commercial Rules. The
demand for arbitration shall be made within a reasonable
time after the time period stated above for the Parties to
agree on an alternate means of resolving the matter has
expired. The award rendered by the arbitrators shall be
final, and judgment may be entered upon it in accordance
with applicable law in any court having jurisdiction
thereof.
Arbitration clauses are definitely enforceable in
the United States under the Federal Arbitration
Act, if properly written, in virtually all
commercial contexts.
What Else Should My Agreement
            Contain?
        Choice of Law
Headquarters vs. Contracting Location



Applicable law does make a difference.
           Venue and Forum
Geographic Location (Barbour County vs. Madison
  County)

     • Court?
     • Mediation?
     • Arbitration?
     • Rules?
   Choice Of Law, Venue, and
            Forum
 The laws of ____________________ shall govern
 this agreement, with the exception of its conflict
 of law principles, and the exclusive jurisdiction
 for the resolution of any dispute under this
 agreement shall be in the ____________ courts of
 _____________.
(You can still propose mediation but know you
 will end up “at home”!)
         Escalation of Disputes
                   Helps avoid:

• Obstinate executive
• Executive focused on narrow portion of the
  business
• Shines the “Sarbanes-Oxley” light
• Usually underlying issues relating to egos,
  reserves, or timing
            Time Schedule


Rigid schedule to prevent “foot dragging” and
delay in remedy.
Prevailing Party Pays Attorneys'
              Fees?
• Sometimes impediment to settlement

• Can create “all or nothing” scenario

• The object is to settle not litigate
Beware the obligation to proceed with
performance or payment in the face of the
dispute. Sometimes the threat of a work stoppage
or withholding of payment is best leverage.
           Famous Last Words
• Completely investigate all facts prior to “pulling
  the trigger”
• Make a realistic objective assessment (take your
  beating now)
• Negotiate fairly with conviction
• Search for “intangibles”
II. Warranties
• Sale of Goods/Merchants vs. Individual
  Consumers or Sellers, Uniform Commercial Code

• Buyers fight to keep or enhance; Sellers fight to
  limit and disclaim
 Express Warranties Under UCC
• Affirmation of fact or promise
• Description of goods
• Sample or model

IF:   “basis of the bargain”
              Most Common
1. Seller/Manufacturer - free from defects in
   material, design, and workmanship for
   certain time.
2. Service Provider/Assembler - workmanship
   only, if design provided by Buyer; “flow
   through” of components warranty.
3. Distributor- pure “flow through” of
   manufacturer’s warranty.
         Product Warranty
Seller/Manufacturer warrants that Products
manufactured hereunder will conform to, and be
manufactured     in   accordance    with,   the
Specifications and will be free from defects in
material and workmanship for a period of
_____(__) days from the date of delivery of the
Products to Buyer.
          What Specifications?
• BEWARE the performance warranty if Seller. Do
  “Specifications” include performance
  specifications or just published documentation?

• May be highly desirable to Buyer!
    Implied Warranties under UCC
•   Merchantability (also under CISG)
•   Fitness for Particular Purpose (also under CISG)
•   Title
•   Non-infringement.


(generally apply to leases also, except finance leases)
         Merchantability:
goods are of “merchantable” quality
Most important are:
• Capable of passing without objection in the trade
  under the contract description (cars have engines)
• Fit for ordinary purpose (the goods work)
• Goods are adequately contained, packaged, and
  labeled
• Conforms to any promises or affirmations on
  container or label (dealer is responsible)
  Fitness for a Particular Purpose
• Reliance on Seller’s judgment
• If Seller has reason to know use of goods and
  Buyer is relying on Seller’s judgment


(technical advice in selecting product)
                      Title

• Free of any claim, lien, or other encumbrances
            Non-Infringement


• Free from “rightful claim of any third person by
  way of infringement or the like” unless Buyer
  supplies specifications/design.
           Infringement Issues
• Make, use, or sell?
• As Seller, do not offer unless you know; if
  required, give a warranty with a knowledge
  qualifier.
• As Buyer, make sure that the warranty is express,
  complete as to geography, and intellectual
  property coverage.
   Knowledge Representation
To the best of Supplier’s knowledge, the exercise
of rights pursuant to this agreement and/or use of
the Product pursuant to this agreement will not
infringe any valid intellectual property rights
owned by persons other than Customer.
         Product Warranty
Manufacturer warrants that Products manufactured
hereunder will conform to, and be manufactured in
accordance with, the specifications and will be
free from defects in material and workmanship for
a period of _____(__) days from the date of
delivery of the Products to Buyer.
PLUS
  • Title
  • Non-infringement
  • Express warranties
  • Fitness for particular purpose
  • Adequately contained, packaged, and labeled
     Warranties in Government
           Contracting
Use of warranties not generally mandatory!

Implied Warranties:

   • Implied Warranty of Merchantability
   • Implied Warranty of Fitness for a Particular
     Purpose
     Warranties in Government
           Contracting
Warranties may be disclaimed!

Express Warranties:

   • Government generally expects the same express
   warranties in commercial contracting.
III. Warranty Limitations and
          Disclaimers
           Express Warranties
• The express warranty and any disclaimers tending
  to negate or limit the warranty are construed
  wherever reasonable as consistent; but limitation
  is inoperative to the extent that such construction
  is unreasonable.
• Disclaimers narrowly construed to preserve
  express warranties.
• Court      attacks     usually      based     upon
  unconscionibility or fraud or lack of agreement to
  integration clause.
 Implied Warranties Limited by:
1. Specific language, i.e. “magic words”:
• Merchantability           —      must    mention
    “merchantability” and be conspicuous if in
    writing
• Fitness for a particular purpose — must be in
    writing and be conspicuous; “fitness” need not
    be mentioned (“there are no warranties which
    extend beyond the description on the face
    hereof” is sufficient)
• Title and non-infringement — must be specific
    and conspicuous.
  Implied Warranties Limited by:
2. “As is” or similar language (“with all faults”);
    must be conspicuous.

3. Buyer’s examination of the goods — if Buyer
    examines goods or Seller demands the Buyer
    examine goods and he does not, there are no
    implied warranties as to anything the Buyer
    should have found (does not apply to express
    warranties).
  Implied Warranties Limited by:

4. Custom or Usage – what have the parties
    understood historically? What is common in the
    industry?

5. Limitation of Remedy – listed remedies are
    “exclusive” – “repair or replacement at the
    Seller's option shall be the sole remedy of the
    Buyer for breach of warranty”; otherwise
    remedies are cumulative.
           Cumulative Remedies
                    For Buyers:

•   Repossession
•   Cost of cover
•   Contract/market differential
•   Consequential damages, if Seller had reason to
    know, and incidental damages
Remedies for Breach of Warranty
 under Government Contracting

1. Order the contractor to repair or replace the
   defective product

2. Retain the defective product at a reduced price

3. Correct the defect in-house or by contract
Remedies for Breach of Warranty
 under Government Contracting
4. Permit an equitable adjustment in the contract
   price or

5. Recover consequential damages
          Cumulative Remedies
                      For Sellers:

• Action for full purchase price (specific
  performance)

• Contract/resale differential

• Contract/market differential

• Lost profits
            BEWARE

Exclusive remedy will be enforced unless such
remedy “fails of its essential purpose.”
    Practical Limitations on Scope
•   Time/length (from…?)
•   Repair/replacement/credit
•   Whose option?
•   Exclude abuse/unauthorized repair/handling
•   No defect found reimbursement


            (Buyer and Seller perspectives)
Product Warranty and Disclaimer
A) Product Warranty
  Manufacturer warrants that Products manufactured
  hereunder will conform to the Specifications for a period
  of ___(__) days from the date of delivery of the Products
  to Buyer. If any returned Products fails to conform with
  the Specifications, Buyer's exclusive remedy and
  Manufacturer's sole liability will be for Manufacturer, at its
  sole option an expense, to correct, replace, or issue a credit
  for the nonconforming or defective Product. The warranty
  does not app to: (i) any first articles, prototypes, pre-
  production units, test units of a Product, (ii) any Products
  which have been altered or modified in any way by Buyer
  or third party; or (iii) any Products which have been
  subject to misuse, abnormal use, or neglect.
Product Warranty and Disclaimer
B) Disclaimer:
  The Warranty stated above is in lieu of all other warranties,
  conditions, or other terms, express or implied, statutory or
  otherwise, including without limitation any implied
  warranties of terms as to quality, fitness for particular
  purpose, merchantability, or otherwise, whether implied by
  custom or law. Without limiting the foregoing disclaimer,
  Buyer understands, acknowledges, and agrees that
  Manufacturer does not warrant any parts, components, or
  other materials used in the manufacture of the Products,
  but shall assign or transfer any warranty on such parts,
  components, or other materials to the extent they are
  assignable.
Limitation of Liability

 (beyond warranty disclaimers)
 Consequential and Incidental
         Damages

May be limited or excluded unless unconscionable
(personal injury in sale of consumer goods, but not
in commercial context).
• Consequential Damages may include economic
  loss, including loss of profits, damage to goodwill,
  or business reputation and personal injury or
  property damage.

• Incidental Damages include cost of “cover” or
  buying substitute goods, storage, or inspection
  charges and freight.
           Liquidated Damages
• Damages may be “fixed” or “liquidated,” if
  reasonable in light of the anticipated or actual
  harm caused by a breach!

• Daily dollar amount related to non-delivery,
  failure to meet quality, or other performance
  parameter(s).
          Unconscionability
Is a question for the court and is a principle to
prevent oppression and unfair surprise and not to
disturb the allocation of risks because of superior
bargaining power. Measured at the time of
contracting.
          Noncontract Damages
• Torts including negligence, strict liability, fraud,
  trespass

• Punitive damages, only in tort, not a contract issue

  Lawsuits often filed for torts to do an “end
  around” legitimate UCC contract limitations.
      Limitation of Liability
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL,
CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES
OF ANY KIND OR NATURE ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR CONNECTED
WITH OR RESULTING FROM THE MANUFACTURE,
SALE, DELIVERY, RESALE, REPAIR, REPLACEMENT,
OR USE OF ANY PRODUCTS OR THE FURNISHING OF
ANY SERVICE OR PART THEREOF, WHETHER SUCH
LIABILITY IS BASED IN CONTRACT, TORT,
NEGLIGENCE, STRICT LIABILITY, OR OTHERWISE,
EVEN IF SUCH PARTY HAD BEEN WARNED OF THE
POSSIBILITY OF ANY SUCH DAMAGES.
     Other Seller Strategies or
   Compromises by Buyer, Besides
            Exclusion?
Liquidated Damages
      • Limit to overtime and freight
      • Limit to profit

For All Damages
      • Limit to price paid for goods
      • Limit to certain dollar amount
      • Percentage of revenue
    Conversely, Buyer Will Want All
           These Damages
         (plus epidemic failure and recall coverage)

     Epidemic Failure                   Recall
•   Same failure mode          • NEVER agree without
•   Limit to warranty            insurance
    coverage                   • Put cost into product
•   “Super warranty”             cost
•   Limited time-frame         • Buy product to
                                 product
    Always Argue Facts Surrounding
           the Procurement
             Buyer                          Seller
•   Sole source                  • Increases costs of doing
•   Penalties from customer        business
•   Other quick source not       • Diverts resources from
    available if failure           intended application
•   Motivate seller to perform   • Others do not accept
•   Others accept
              Bottom Line…
1. Contract away/allocate/minimize risk
2. Pass on
3. Insure


  NEVER ACCEPT UNLIMITED RISKS OR
     RISKS BEYOND YOUR CONTROL
Questions?
                                                                      Speakers
                                     Michael L. Fees          Fees & Burgess, P.C.,
                                  mfees@feesburgess.com       provides speakers, programs,
                                                              and seminars for various
                                    C. Gregory Burgess        trade associations; business
                                 gburgess@feesburgess.com     groups; and clients.     For
                                                              information    regarding a
                                     Allen L. Anderson        program, contact Julia S.
                                 anderson@feesburgess.com     Fees jfees@feesburgess.com.

FEES & BURGESS, P.C.                  Jeffrey L. Roth
    213 Green Street              jroth@feesburgess.com
Huntsville, Alabama 35801                                            Newsletters
                                      Stacy L. Moon
Telephone (256) 536-0095          smoon@feesburgess.com     Fees & Burgess, P.C., publishes
 Facsimile (256) 536-4440                                   F&B Quarterly Bytes, focusing on
  www.feesburgess.com                  Leah M. Green        multiple practice areas, F&B HR
                                  lgreen@feesburgess.com    Corner, focusing on human resource
                                                            issues, and F&B SCM Memo,
These materials should not be         Nori D. Horton        focusing on the supply chain
construed as legal advice or a   nhorton@feesburgess.com    management industry. To receive
legal opinion on any specific                               any of these e-newsletters, please
facts or circumstances. The           Ryan G. Blount        provide     Julia    S.  Fees   at
contents are intended for        rblount@feesburgess.com    jfees@feesburgess.com with your
general information purposes                                contact information.
only. Anyone needing specific         Bryant L. Lewis
legal advice should consult an    blewis@feesburgess.com
attorney.

				
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