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COMMERCIAL CONTRACTING: Limitation of Liability, Indemnification & Insurance
I. RISK MANAGEMENT
The Economist magazine - Annual risk survey, stated: "[T]he biggest obstacle to dealing effectively with risk remains human beings perceptions and misperceptions of it. People tend to get risk wrong in a variety of ways, often consistently."
There are two schools of thought regarding legal representation:
1. Forms to Litigation ("FLP Plan"): Cost /transactional approach, law firms generate forms. Clients using this approach request forms - or legal work when litigation results from the use of a "form".
2. Trust, Respect & Teamwork ("TRT Plan"): Value/team approach, the three legs of a working relationship. This creates a flywheel to grow a business exponentially. The work is proactive and collaborative - not reactive and competitive.
II. CRITICAL CONTRACT - RISK SHIFTING DEVICES
- INDEMNIFICATION: Transfers liability to a party (e.g. intellectual property ownership)
- LIMITATION OF LIABILITY & REMEDIES: contains dollar value and type of damages (e.g. direct damages)
- DISCLAIMER of WARRANTIES: eliminates underlying obligation to relieve liability
- WAIVER: relinquishment of rights
- CONDITIONS: E.g. "subject to" or "on the condition that" May be express (force majeure, satisfaction) or implied (UCC gap fillers) Compare to Covenants (e.g. good faith): A breach of a condition - no duty to perform. A breach of a covenant - gives rise to damages.
III. INDEMNIFICATION - THIRD PARTY DAMAGES
CONTRIBUTION v. INDEMNIFICATION
CONTRIBUTION (equitable or statutory): Requires that damages be proportionately shared by the liable parties. After defendant pays in full it can obtain a "contribution" from the co-defendant based on its pro rata share. [See G.L. c. 231B.] versus INDEMNIFICATION: Definition: Shifts the loss from one party to another. Mutually exclusive from contribution.
TYPES OF INDEMNIFICATION: 1. Expressed in Contract, 2. Implied in Contract, 3. Common Law - Tort - 4. Statute
TYPES OF INDEMNIFICATION EXPRESSED IN CONTRACT: Contract clause will be construed "fairly and reasonably"; Intent of the parties important.; Covers all reasonable losses, damages or liabilities.
IMPLIED IN CONTRACT (rare): Special Factors: where "intent" inferred; Special relationship: between the parties; Query: Does the implied indemnitor have control over the property or premises and agreed to protect the public from harm?
COMMON LAW TORT: Rest. of Torts (Second): A retailer may seek indemnification against a manufacturer for defective Products.
STATUTORY INDEMNIFICATION: Many MA Statutes provide indemnity for individuals and positions.; E.g. public officials, corporate officers & directors, police officers, etc.
IV. INDEMNIFICATION RIGHTS & DUTIES
LEGAL FEES: Reasonable legal fees and costs recoverable regardless of success of underlying claim. Must be presented to jury with claim.
NOTICE: Rule: lack of notice does not preclude right of indemnity. Exception 1: Contract requires notice Exception 2: Affects amount of award. [Was settlement reasonable?]
ENFORCEMENT: May be brought in the original case or in a later case. Exceptions: Must be explicit and conspicuous.
TYPES OF INDEMNIFICATION: Commercial Leases-Construction Contracts-Purchase Orders-Licenses; May be mutual or exclusive; Partial Indemnification for (i)Personal Injury, (ii) Property Damage or (iii) Economic or Business losses.
EXCEPTIONS FOR INDEMNITY ACTIONS: Sole negligence-Gross negligence-Willful misconduct
V. "HOLD HARMLESS & DEFEND"
HOLD HARMLESS - Why: Typical license limits indemnification damages "finally awarded".
- Problem: Buyer incurs legal costs for "groundless lawsuits". - Solution: Hold harmless clause requires Buyer be reimbursed all damages and expenses (including attorneys fees).
DEFEND - Why: Buyer may need legal representation up front.
- Broader than duty to indemnify (liability) versus defend (coverage).
- Duty owed to named insured and additional insureds.
- Test: Insurers look at policy and pleadings for coverage.
- Trigger date: When notice of claim provided.
- Settlement: Discretionary only.
- Test: "good faith and fair dealing". - Other Issues: Conflicts of interest in dual representation, claims exceeding policy limits, primary versus excess coverage, etc.
VI. DAMAGES
TYPES : General, Special (Incidental and Consequential), Liquidated, & Punitive.
GENERAL : Occur naturally & ordinarily from breach. UCC 2-706, 708, 709, 712, 713, 714.
SPECIAL : Incidental Damages includes transport, storing, reselling or substitute performance. (§2-710 & 715) . Consequential Damages includes Buyer's losses which were foreseeable by Seller and not preventable by Buyer.
LIQUIDATED: Reasonable, proof of loss, used if not reasonable to obtain adequate remedy (2-718). Void if unconscionable, a penalty or an adhesion contract.
PUNITIVE : Breaching party punished. Not allowed in UCC unless specifically in contract. - Only recoverable in MA by statute. Can be included in contract.
ATTORNEY'S FEES : Governed by state law. Not recoverable in MA unless in contract/statute
.VII. LIMITING LIABILITY OF PARTIES CAP ON AMOUNT - Dollar figure (e.g. "shall be limited to $200K").
- Value of contract (e.g. 2X value of contract or license fee). - Certain assets (e.g. assets of partnership not of partner)
CAP ON TYPE - Exclude consequential (or special damages) - Exclude interest or incidental damages (not recovered by buyer)
CAP ON TIME LIMIT - Limit time to file claim. (e.g. 1 year) - Limit time to mediate. (e.g. 45 days) - Allow injunction for intellectual property violations. (e.g. immediate)
CAP ON PROCESS
- negotiate
- mediate
- arbitrate
- litigate
CAP ISSUES
DIFFERENCES - Limited remedies vs. limited liability - both "contain" risk. - Limited remedies focus on specific relief (e.g. repair or replace).
- Exclusive Remedies. UCC §2-719 allows exclusive remedies. (If you are a buyer you may want to disallow them.) - Limited liability focus is on contracting parties - Indemnification focus is on third parties.
CAPS NOT RECOGNIZED
- unconscionable
- unreasonable
- fails of its essential purpose (for exclusive remedies) - "gross negligence or willful misconduct only" (some jurisdictions)
CAPS ON INDEMNIFICATION CLAUSE - If indemnification clause not intended to be subject to general limitation of liability clause it should be expressly excepted out.
LIQUIDATED DAMAGES
- limited liability
- ceiling amount only
- liquidated damages
- ceiling amount equals floor amount