CONTRACT LAW AND CONTRACTUAL RISK TRANSFER: THE PITFALL OF NOT KNOWING THE RESTRICTIONS

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1 experience innovation trust CONTRACT LAW AND CONTRACTUAL RISK TRANSFER: THE PITFALL OF NOT KNOWING THE RESTRICTIONS APRIL 12, 2016 RIMS Annual Conference & Exhibition San Diego, California April 12, :30 AM- 12:30 PM 1

2 Prepared and Presented by: Daniel W. Houston Senior Vice President, Enterprise Risk Management Principal EPIC Insurance Brokers and Consultants- Atlanta 2405 Satellite Boulevard, Suite 200 Duluth, GA and- Keri Rhodes Director, Risk & Claims Management Arby s 1155 Perimeter Center West Atlanta, GA krhodes@arbys.com 2

3 Disclaimer The following presentation is a basic interpretation and summary of the many aspects of contract law and does not purport to be complete in any way. This information is current as of the date presented. 3

4 4 A Contract is the Legal Framework Within Which Parties May Create Their Own Rights and Duties by Agreement

5 Types of Contracts Standard Form Agreements Modified Standard Agreement Forms Letter Agreements Purchase Orders Custom Agreements 5

6 Other Types of Business Contracts Commonly Used in Business Arbitration Agreement Asset Purchase Agreement Assignment Agreement Bonus Agreement Collaboration Agreement Consulting Agreement Credit Agreement Deferred Compensation Plan Development Agreement Distribution Agreement Employee Stock Plan Employment Agreement Equipment Lease Export Sales Agreement Franchise Agreement Guaranty Agreement Indemnification Agreement Joint Venture Agreement Lease License Agreement Loan Agreement Manufacturing Contract Merger Agreement Non-Disclosure Agreement Operating Agreement Promissory Note Repurchase Agreements Sales Contract Services Agreement Shareholder Agreement Stock Option Agreement Stock Purchase Agreement Supply Agreement Trademark License Agreement Underwriting Agreement Voting Agreements Waiver Agreement 6

7 Export Sales Agreement- Terms of Payment Cash in Advance Letter of Credit Open Account Applicability Risk Pros Cons Recommended for use (a) in low-risk trading relationships or markets and (b) in competitive markets to win customers with the use of one or more appropriate trade finance techniques Substantial risk to the exporter because the buyer could default on payment obligation after shipment of the goods Boost competitiveness in the global market Help establish and maintain a successful trade relationship Significant exposure to the risk of non-payment Additional costs associated with risk mitigation measures Consignment Sales 7

8 Legal Framework of a Contract Affords Significant Freedom to the Contracting Parties to Determine the Terms of Their Agreement Provides the Parties with Legal Remedies for Breach of Their Agreement This Enhances the Commercial Efficiency of Contracting 8

9 A Contract Agreement Between Two or More Parties Creates Obligations Obligations are then Enforceable or Otherwise Recognized by Law Records Expectation and Constitutes the Ground Rules for their Relationship until Each Party s Contractual Undertaking is Discharged 9

10 The Intention to Create a Legal Relationship The concept of a contract as a bargain or agreement struck by (at least) two parties is based upon the premise that the end results will be a meeting of the parties minds on the terms and conditions that will form their agreement with each other. Each will normally agree to do, or perhaps not do, certain things in return for the promise of the other to do certain things of a particular nature. In the process of reaching this meeting of the minds, the parties must establish certain elements of the contract itself. One of the essential elements of an agreement is a promise. Obviously, not all promises can be taken as binding on the party making them. Some may be made by persons with no intention of becoming legally obligated to fulfill them, for example, promises made between family members. This type of promise cannot be taken as the basis for a contract. The first requirement, then, for a valid contract must be the intention on the part of the person making a promise (the promisor) to be bound by the promise made. This intention to create a legal relationship is an essential element of a valid contract. It is generally presumed to exist at law in any commercial transaction where the parties are dealing with one another at arm s length. The intention to create a legal relationship is a presumption at law because the creation of the intention would otherwise be difficult to prove. If the intention is denied, the courts will usually use the conduct of the party at the time that the statements were made as a test and examine the conduct and statements from the point of view of the reasonable person. 10

11 Categories of Contracts Express Contracts Express contracts arise when the parties speak the elements to which they have mutually assented. Oral Contracts are Express Contracts that are generally legally enforceable however, difficult to prove. Implied Contracts Implied contracts are when the promise can be inferred from the parties rather from their Expressed words. 11

12 Elements of a Contract An intention to create a legal relationship Offer Acceptance Consideration Capacity to contract Legality 12

13 Elements of a Contract Element Description Example An Offer One party must promise to do or refrain from doing some specified thing in the future, conditioned on an act, forbearance, or return promise given in exchange I will build a house for you, if you pay me $1,000 Acceptance The agreement by one who receives an offer, by express act or implied conduct, to the terms of the offer I accept your offer to build my house or Here is $1,000 Consideration Something (such as an act, a forbearance or a return promise) that was bargained for and received by each party to a contract The built house and the $1,000 13

14 Elements of a Contract: Consideration Consideration means something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances. For example, a promise to make a gift is not enforceable because it is onesided. Consideration is an essential element for the formation of a contract. It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. Consideration must have a value that can be objectively determined. For example, a promise of love or affection is not enforceable because of the subjective nature of the promise. 14

15 Tiers or Hierarchies of Contracts Prime Contracts (e.g., Project Owner to the Contractor). Prime Contracts contain flow down provisions to lower tier contracts. Subcontracts- the Achilles Heel of the process. 15

16 Why is Dan So Persnickety? Case Law: An Expensive Comma With one year s notice, Aliant terminated a contract it had with Rogers Communications. Rogers felt it should get the benefit of a full five-year locked-in term, before anything could be terminated. The agreement stated it shall continue in force for a period of five years from the date it is made, and thereafter for successive five year terms, unless and until terminated by one year prior notice in writing by either party. Rogers felt the deal had to last at least five years; Aliant thought it could get out within a year. Answer: English professors have given round 1 to Aliant, saying the second comma allows the notice period to modify the whole sentence. Note: Extra fees of over $2 million will apply in order to revive the deal. 16

17 17 Basic Elements of a Contract

18 Basic Elements of a Contract Introductory Provisions The Body Language of Representation Language of Performance Language of Obligation Language of Discretion Language of Condition Language of Prohibition Concluding Clause and Attachments 18

19 Review Sample Contract This sample contract will help you understand the general structure of a contract. The sample contract begins with notes about sections that typically appear in contracts. A brief overview of basic contract law principles that we have discussed is applied. 19

20 Preamble The sample contract s Preamble (i) identifies the agreement through a title, (ii) identifies the parties to the agreement, and (iii) identifies the date on which the agreement was entered into. THIS SALES AGREEMENT made and entered into this [ ] day of [month] [year] (the Effective Date ), by and between, [First Party], a corporation having its principal office located at [street address], [Country] ( First Party ), and [Second Party], a corporation ( Second Party ). 20

21 Recital / Introduction The sample contract then continues with Recitals that (i) provide an introduction to the agreement and why it is being entered into, and (ii) identify important terms and possibly third parties. Instead of the traditional recitals, some contracts have an introduction that serves a similar purpose. WITNESSETH WHEREAS, First Party is engaged in the manufacture of products described on Schedule A (the Products ); WHEREAS Second Party is engaged in the business of marketing, selling and distributing products within [Country] (the TERRITORY ); and WHEREAS First Party desires that Second Party market, sell and distribute the Products in the Territory; 21

22 Body The body of the sample contract contains the heart of the agreement the reason why the contract was entered into. Topics such as the key terms of the agreement, the type and amount of consideration, and the parties ongoing rights, duties and responsibilities are discussed in the body of the contract. NOW THEREFORE in consideration of the mutual covenants herein contained, and other good and valuable consideration, the parties hereto mutually agree as follows: 1.1 First Party hereby appoints Second Party as First Party s exclusive partner in the Territory, and grants Second Party the exclusive right to promote, market, sell and distribute the Products in the Territory under First Party's Brand name(s) and Trademark(s). 1.2 Second Party accepts such appointment and agrees to use its commercially reasonable efforts to promote, develop and increase sales of the Products within the Territory. 1.3 Second Party shall not actively sell the Products in territories that (i) First Party allocated exclusively to a third party or (ii) First Party reserves for itself or an affiliate. 22

23 Boilerplate Boilerplate is ready-made, all-purpose language that is inserted in many kinds of contracts. Despite being commonplace, boilerplate terms play key administrative roles. If something goes wrong and the parties to a contract end up in arbitration or court, a boilerplate term may be at the center of the dispute. 2.1 Neither party shall be in default hereunder by reason of any failure or delay in the performance of any obligation under this Agreement where such failure or delay arises out of any cause beyond the reasonable control and without the fault or negligence of such party. 2.2 The provisions of this Agreement shall be construed and the performance thereof governed in accordance with the laws of the State of, USA. 23

24 Ending and Signatures The sample contract concludes with a statement of the parties intention to create a legally binding agreement and signature blocks for the parties to the agreement. IN WITNESS THEREOF, the parties, intending to be legally bound, have executed this Agreement as of the date first above written. FIRST PARTY By: Name and Title SECOND PARTY By: Name and Title 24

25 Evaluate the Risk Before determining the types of insurance, limits, wording to be required, you must have a very good idea of the types of harms that could arise from the activities contemplated under the Contract. You should determine issues such as 25

26 Questions to Ask to Assist You In Evaluating the Risk 1. What type of activities will take place during the term of the Contract? 2. Who could be harmed by these activities? 3. What property could be damaged and how severely? 4. What is the likely maximum loss for each activity? 5. Is there a possible pollution exposure? 6. Are crowds likely to be involved? 7. Will inherently dangerous activities, such as blasting, be part of the project? 8. Will there be any military base exposure? 9. How likely is it that my organization would be a defendant in the event of a loss? 10. Is the risk low enough to allow changes in limits, etc.? Tip: Always ask for/demand a copy of the complete Contract, Addendums Exhibits and All Other Attachments. 26

27 Contractor Insurance Requirements: An EXAMPLE (Check Your State Laws) Contractor s Insurance: The Contractor shall procure and maintain for the duration of this Contract, and for three (3) years thereafter, at its sole cost and expense such insurance as will fully protect it and and s boards, officials, directors, officers, employees, agents and volunteers from incidents, accidents and claims for personal injury, bodily injury, and property damage which may arise from or in connection with the performance of the work and for the Contractor s professional liability (errors and omissions) under this Contract, whether such services and work are performed by the Contractor, its agents, representatives, employees, or by any subcontractor or any tier directly employed or retained by either. 27

28 Consider New CGL Form and Think Umbrella The following is the minimum insurance and limits that the Contractor must maintain. If the Contractor maintains higher limits than the minimums shown below, requires and shall be entitled to coverage for the higher limits maintained by the Contractor. Any available insurance proceeds in excess of the specified minimum limits of insurance and coverage shall be available to. 28

29 Insurance Policies Approval All insurance policies, endorsements, certificates, and/or binders shall be subject to approval by as to form and content. These requirements are subject to amendment or waiver only if so approved in writing by. A lapse in any required insurance coverage during this Agreement shall be a breach of this Agreement.* *Review the nature of the Contract first. 29

30 Liability Insurance 1. Workers Compensation & Employer s Liability Insurance. Workers Compensation Insurance in compliance with the applicable Workers Compensation Act(s) of the state(s) wherein the work is to be performed or where jurisdiction could apply in amounts required by statutes. Employer s Liability Insurance, with limits of liability of not less than $1,000,000 per accident for bodily injury or disease. 2. Commercial General Liability Insurance, including contractual liability insurance, product and completed operations, personal and advertising injury, and any other type of liability for which this Contract applies with limits of liability of not less than $1,000,000 each occurrence / $2,000,000 policy aggregate for personal injury, bodily injury, and property damage. Commercial General Liability Insurance shall be written on an occurrence form. 30

31 Liability Insurance (Continued) 3. Automobile Liability Insurance with limits of liability of not less than $1,000,000 per accident for bodily injury and property damage if automobiles are to be used in the delivery of or in the completion of services and work or driven onto s property. Insurance shall include all owned, non-owned and hired vehicle liability. 4. Umbrella Insurance with limits of liability excess of Employer s Liability Insurance, Commercial General Liability Insurance and Automobile Liability Insurance in the amount of not less than $3,000,

32 Liability Insurance (Continued) 5. Cyber Liability insurance with limits of not less than $3,000,000 for each occurrence/policy aggregate of $3,000,000 covering incidents Such policy shall also include coverage for losses arising from the breach of information security or cyber liability including Errors & Omissions, Security and Privacy Liability and Media Liability, involving privacy violations, information theft, damage to or destruction of electronic information, intentional and/or unintentional release of private information, alteration of electronic information, extortion and network security (...). 32

33 Possible Cyber... Module 1: Module 2: Module 3: Module 4: Module 5: Module 6: Module 7: Module 8: Module 9: Module 10: Module 11: Module 12: Loss of Data Denial of Service Privacy Liability Cyber Extortion Transmission of Virus Unauthorized Access Unauthorized Use Physical Theft of Hardware, Laptops, Servers, Etc. Errors and Omissions Failure to Deliver Copyright Breach, Theft or Use of your Copyright or Software Code Module 13: Module 14: Module 15: Module 16: Module 17: Module 18: Defamation, Invasion or other violation of a right of Publicity, Libel, Invasion or other violation by you of a right to Privacy, Product Disparagement, Slander, Trade Libel Business Interruption Loss Period of Restoration Administrative/Regulatory Proceedings Legal Proceedings Against You Crisis Management Fund Module 19: Social Engineering Module 20: Module 21: IoT Trolling 33

34 Liability Insurance (Continued) 6. Contractors Pollution Legal Liability (To Be Discussed) and/or Asbestos Legal Liability and/or Errors and Omissions (if project involves environmental hazards) with limits not less than $1,000,000 per occurrence or claim, and $2,000,000 policy aggregate. 34

35 Liability Insurance (Continued) 7. Professional (Errors and Omissions) Insurance- For Professional Services and for all Design/Build Projects with limits of liability of not less than $3,000,000 per occurrence or claim / $3,000,000 policy aggregate. Such coverage shall insure damage, injury and loss caused by error, omission or negligent acts, including all prior acts without limitation, related to the professional services to be provided under this Contract. The policy shall be amended to include independent contractors providing professional services on behalf of or at the direction of the Contractor. The definition of Contractual Liability shall be amended to state that liability under a contract of professional services is covered. Further, coverage shall be afforded for fraudulent acts, misappropriation of trade secrets, internet professional services, computer attacks, personal injury, regulatory actions, wrongful acts, contractual liability, privacy policy, and insured versus insured. The Contractor shall ensure that coverage under this policy continues for a period of thirty-six (36) months after completion of services. 35

36 Other Insurance Fidelity Bond Fidelity Bond (Employee Dishonesty) in the sum of not less than $. Property Insurance The Contractor assumes sole responsibility for loss or damage to its property and hereby releases and s boards, officials, directors, officers, employees, agents and volunteers from loss or damage to Contractor, its agents, representatives, employees, or by any subcontractor for property including tools, equipment, goods, machinery, materials and supplies. 36

37 Other Insurance Provisions The aforementioned insurance policies shall contain or be endorsed to contain, the following provisions: A provision that coverage afforded under such policies shall not expire, be canceled or altered without at least sixty (60) days prior written notice to. Workers Compensation and Employer s Liability and Property insurance policies shall contain a waiver of subrogation in favor of and s boards, officials, directors, officers, employees, agents and volunteers. Commercial General Liability, Automobile Liability (To Be Discussed) and Umbrella Liability insurance policies shall include an endorsement making and s boards, officials, directors, officers, employees, agents and volunteers Additional Insureds under such policies. Contractors Pollution Legal Liability (To Be Discussed). 37

38 Certificates of Insurance Certificates of Insurance showing that such coverage is in force shall be filed under this Contract by the Contractor to. 38

39 Non-Limitation on the Contractor s Liability and Best s Ratings The obligations for the Contractor to procure and maintain insurance shall not be construed to waive or restrict other obligations and it is understood that insurance in no way limits liability of the Contractor whether or not same is covered by insurance. All of the insurance herein specified shall be written on a form acceptable to and shall be A.M. Best Company rated A (Excellent) X $500 Million to $750 Million or greater. 39

40 Confidential Information: EXAMPLE United States The Contractor may be provided, have access to or become aware of s Confidential Information including s strategic plans, products, employee data, customer data and other technical and business information of (collectively referred to as the Confidential Information ). The term Confidential Information includes the deliverables as well as all information generated by the Contractor that contains, references or is derived from the Confidential Information and the Services including, without limitation, the Contractor s summaries, analysis, extracts, working papers and notes relating to the Services and the Deliverables (referred to as the Working Papers ). The Contractor agrees not to disclose the Confidential Information to thirdparties without the prior written approval of and not to make use of the Confidential Information other than as needed to perform the Services. The Contractor further agrees that it will only disclose the Confidential Information to its personnel on a need-to-know basis solely for the performance of the Services and will protect the Confidential Information with the same degree of care that 40

41 Confidential Information (Continued) the Contractor uses to protect its own confidential information, but no less than reasonable care or as the various laws may require or impose. All Confidential Information as well as other documents, data and information provided to the Contractor by is and will remain the property of to the extent that it was the property of at the time it was provided to the Contractor. All Confidential Information shall be returned to by the Contractor within five (5) business days of the completion of the Services under this Contract. The Contractor will keep no copies of the Confidential Information except that the Contractor may retain one copy of the Working Papers as required by law, regulation, professional standards or reasonable business practice. If requested by, an officer of the Contractor will certify in writing that, to the best of his/her knowledge, information and belief, all Confidential Information and all copies thereof (except for one copy of the Working Papers) have been delivered to or destroyed. 41

42 Use of Premises The Contractor shall confine its apparatus, material and the operations of its workers to limits/requirements indicated by law, ordinances, permits, codes and any restrictions of, and shall not unreasonably encumber the premises with its materials or supplies. 42

43 Protection of Work, Property and Persons The Contractor shall adequately protect its own property from damage, will protect the s property from damage or loss, and will take all necessary precautions during the progress of the work to protect all persons and the property of others from injury or damage. The Contractor shall take all precautions for the safety of employees, and shall comply with all applicable provisions of Federal, State and local safety laws, building codes and any restrictions of to prevent accidents or injury to persons on, about, or adjacent to the premises where work is being performed. The Contractor shall erect and properly maintain at all times as required by the conditions, service and work, all necessary safeguards for the protection of its employees, the Contractor s employees, and the public, and shall post signs warning against potential hazards. 43

44 Indemnity: EXAMPLE The Contractor agrees to protect, defend at its own expense, indemnify, save and hold harmless, s boards, officials, directors, officers, employees, agents and volunteers from and against all losses, damages, costs and expenses-including reasonable attorney s fees, and from and against all liability, awards, judgments and decrees, of whatever nature for any and all damage to property of others and of the parties hereto, their boards, officials, directors, officers, employees, agents and volunteers, and of whatever nature for any and all injury or injuries (including death) to any person or persons including the boards, officials, directors, officers, employees, agents and volunteers of the party hereto, arising or in any way growing out of any of the acts or omissions or negligence whether of the Contractor, the Contractor s boards, officials, directors, officers, employees, agents and volunteers or of any tier of the Subcontractor, the tier s boards, officials, directors, officers, employees, agents and volunteers in connection with the performance of the services and work under this Contract. 44

45 Evidence of Insurance [1 of 3] Certificate(s) of Insurance: Evidence provided for each type of insurance required in the contract (e.g., Commercial General Liability, Automobile Liability, Workers Compensation...with Statutory Limits, Umbrella, Professional Liability or E&O, etc. per the contract specifications) General Liability is on an occurrence basis, not claims-made. Automobile Liability covers any auto (or non-owned & hired if contractor has no autos). Limits are at least as high as the minimum required in the contract. Workers Compensation provides Statutory Limits & Employers Liability of $1 million. Policies are current and will be suspended (tickler filed) for renewal followup if the contract period runs beyond the policy expiration date. Ideally, Excess Liability policies have coverage periods concurrent with primary policies. Insured name is the same as Contractor named in the contract. 45

46 Evidence of Insurance [2 of 3] The insurer s A.M. Best and Standard & Poor s ratings meet or exceed the Entity s minimum requirements. The insurer is admitted in, or non-admitted is acceptable yes no. No self-insured retention (SIR) on liability policies. Any must be disclosed and approved. Descriptions of operations, locations, etc. are correct. Certificate Holder (your entity) is correct, with attention to correct person. Certificate provides for 60-day notification (10 days for non-payment) to Entity of changes or cancellation. Certificate includes signature of authorized representative. 46

47 Evidence of Insurance [3 of 3] Endorsement(s) Additional Insured Status (appropriate endorsement) Primary Coverage (for discussion). Waiver of Subrogation Notice of Cancellation Entity-supplied endorsement provided and signed (for discussion). 47

48 Additional Insured Endorsements- A Brief History Broad Form Coverage - (1985) Any Liability / Arising Out Of CG Ongoing Operations and Completed Operations Broad Form Coverage (1993) Any Liability / Arising Out Of (Narrowed to Ongoing Operations) CG Removal of Completed Operations Broad Form Coverage (2001) Any Liability / Arising Out Of CG Ongoing Operations CG Reinstatement of Completed Operations through Creation of New Form Intermediate Form Coverage (2004) Personal Injury and Property Damage / Caused In Whole or In Part CG Ongoing Operations CG Completed Operations Limited Form Coverage (2013) Personal Injury and Property Damage / Caused In Whole or In Part (And Additional Limitations) CG Ongoing Operations CG Completed Operations 48

49 Routes of Recovery Risk Control Liability Claim #3 - Finance Owner #1 - Control Contractual Indemnity Clause #2 - Control Contractor Blanket Contractual Liability Owner s CGL Insurance Contractor s CGL Insurance 49

50 50 WRAP UP Q & A