©

2014

Mor

rison

& F

oers

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LP |

All R

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Managing Risks in B2B Contracts June 5, 2014

Mark Wicker, Morrison & Foerster LLP

Mark Zebrowski, Morrison & Foerster LLP

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Overview

• Identifying the risks

• Reducing the risks

• Enforcement

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Identifying the Risks

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Sources of Risk

• Legal duties • Implied warranty

• Risk of loss

• Indemnity and contribution

• Intellectual property

• Third parties / end users

• Lack of legal duties • Confidentiality

• Intellectual property

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Risks Between the Parties

• Data security and privacy

• Confidentiality

• Performance / breach

• Quality

• Timing / delay

• Transportation / handling

• Changed circumstances

• Consequential damages

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Third-Party Risks

• Customers / consumers

• Vendors / subcontractors

• Patent holders

• Government

• Liability to third parties for acts of other contracting party • Is your business partner your agent?

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Reducing the Risks

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Objectives

• Reduce risk to contracting party and third parties • Disclaim risk

• Shift risk to other party

• Increase likelihood of prevailing in a dispute

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Reps and Warranties

• Address areas of risk • Financial

• Legal / regulatory

• Intellectual property

• Exclude areas of risk • No rep / warranty / reliance

• As is

• Absolute versus “known” reps and warranties

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Excluding Types of Damages

• Lost profits / business

• Business interruption

• Indirect / consequential

• Special

• Punitive

• Goodwill

• Contract or tort

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Liability Caps

• Amount paid under the agreement

• Amount payable under the agreement

• An agreed-upon measure • E.g., $XXX per day

• A specific monetary amount • Cannot be a penalty

• Should have some relationship to actual / potential harm

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Carve-outs to Limitations on Liability

• Existing payment obligations

• Indemnification obligations

• Breaches of any confidentiality obligations

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Warranty Limitations

• Warranty disclaimers • Merchantability

• Fitness

• Non-infringement

• Express and implied

• “As is”

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Limitations on Limitations

• Cannot contract away liability for fraud

• May not be able to limit liability for willful or grossly negligent acts

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Indemnity Issues

• Who is obligated

• Who is indemnified

• What is covered

• Indemnitee’s obligations

• Indemnitor’s obligations

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Indemnity – Who is Obligated

• Party

• Affiliates / parents

• Successors / assigns

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Indemnity – Who is Indemnified

• Party

• Affiliates / parents

• Successors / assigns

• Upstream • Developers, suppliers, manufacturers

• Downstream • Resellers, distributors, customers and users

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Indemnity – What is Covered

• Claims, allegations, losses, liabilities or judgments

• Breach required

• Claims by third parties • Intellectual property, data breach

• Claims by indemnitee

• Disputes between indemnitor and indemnitee

• Fees and costs

• Settlements • Indemnitor approval

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Indemnitee’s Obligations

• Timely notice

• Cooperation • Fully

• Reasonably

• At whose expense?

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Indemnitor’s Obligation

• Indemnify / hold harmless

• Defend / pay

• Total or partial / capped

• Capped as part of damage limitation

• Other obligations under contract (e.g., for breach)

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Defend and Pay

• Who controls defense • Indemnitee may have right to do so unless disclaimed (Civ. Code

§ 2778)

• Joint representation • Conflicts / waivers

• Selection and control of separate counsel

• Common interest privilege • Put in writing

• Control of settlement

• Reservation of rights

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Indemnify and Hold Harmless

• Duty to indemnify may imply duty to defend unless excluded (Civ. Code § 2778)

• Indemnity and hold harmless may (or may not) be the same

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Indemnity Limitations

• Cannot indemnify against intentional torts or unlawful acts (Civ. Code §§ 1668, 2773; Ins. Code § 533)

• Willful infringement does not necessarily nullify indemnity obligation

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Risks of Indemnitor Not Indemnifying • Reduced control over process and cost

• Indemnitee proving plaintiff’s case to obtain indemnity

• Business relations

• Extra-contractual liability

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Enforcement

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Self-Effectuating Enforcement

• Holdbacks / retentions / progress payments / milestones

• Springing license

• Escrows • Software

• Cash

• Additional insured requirements

• Termination (e.g., license)

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Dispute Resolution Process and Procedure

• Applicable law

• Jurisdiction and venue

• Arbitration • Processes, procedure and discovery

• Provisional remedies

• Interplay with underlying litigation

• Claims against indemnitor in underlying suit

• Prevailing party attorneys’ fees and costs • Mandatory or discretionary

• Actual v. reasonable