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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., firstname.lastname@example.org provides speakers, programs, and seminars for various C. Gregory Burgess trade associations; business email@example.com groups; and clients. For information regarding a Allen L. Anderson program, contact Julia S. firstname.lastname@example.org Fees email@example.com. FEES & BURGESS, P.C. Jeffrey L. Roth 213 Green Street firstname.lastname@example.org Huntsville, Alabama 35801 Newsletters Stacy L. Moon Telephone (256) 536-0095 email@example.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 firstname.lastname@example.org 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 email@example.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 firstname.lastname@example.org email@example.com with your general information purposes contact information. only. Anyone needing specific Bryant L. Lewis legal advice should consult an firstname.lastname@example.org attorney.
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