Drafting international contracts for a global marketplace

Transcription

1 Drafting international contracts for a global marketplace Nicole Mansell, General Counsel & Compliance, Arjowiggins Security Christine Gateau, Litigation Partner, Hogan Lovells Mikael Salmela, Corporate/Commercial Partner, Hogan Lovells 25 March 2014

2 Agenda I. Overview of difficulties encountered in drafting international contracts II. General principles and example clauses III. Upcoming trends 2

3 I. Overview of difficulties encountered in drafting international contracts

4 The Legal Map of the World 4

5 Applicable law and choice of venue Every jurisdiction has its own conflict of laws rules Choice of law is respected in all jurisdictions Mandatory law rules apply in all jurisdictions Once choice of law is determined, venue rules raise their own sets of hurdles 5

6 Overview of difficulties Common law vs Civil law Different legal traditions (i.e. judge-made-law vs codified law) Different approaches (i.e. wording of the contract vs will of the parties) Different legal concepts (e.g. consideration vs cause) differences derive from sources of contract law Common law: practice, customs and court decisions Civil law: legislative statutes and codes. a further layer of complexity derives from international instruments International law (CISG) & non-national sources (lex mercatoria, UNIDROIT principles) 6

7 Overview of difficulties Additional practical difficulties: Widespread use of Anglo-American contract models, even for transactions governed by Civil law systems Asset transfer agreements, SPAs, IT agreements, outsourcing agreements Differences even between/among civil law jurisdictions and common law jurisdictions Global trade: more complex and costly Strictly speaking one size does fit all but experience shows this may be the trend in practice 7

8 Overview of difficulties French hidden defects U.S. FCPA provisions Belgian liability limitation English indemnity clause AllPosters 8

9 II. General principles and example clauses Absolute obligations vs best efforts Warranties Liability provisions Indemnity provisions Penalties vs liquidated damages Mitigation of loss

10 Absolute obligations vs best efforts 10

11 Absolute obligations vs best efforts Absolute obligations vs Best efforts or Reasonable efforts Most stringent obligation: legal duty to comply, whatever the circumstances are otherwise breach of the contract High standard of diligence: legal duty to make such efforts are as reasonable in the light of: the party's ability, the means at its disposal, & the other party's justifiable expectations Lower standard: obligation to try to achieve the desired result, but not in a materially detrimental way to its own interest case-by-case analysis: uncertainty Beware: the above nuances do not necessarily fit with civil law systems (e.g. obligation de résultat vs obligation de moyens) 11

12 Absolute obligations vs best efforts Absolute obligations vs Best efforts or Reasonable efforts Each of the Parties undertakes that their respective employees, agents, contractors and suppliers have due regard to safety and abide by the relevant regulations while performing works and services within and around the Terminal and on board each Carrier, which it brings to the Terminal. 12

13 Absolute obligations vs best efforts Absolute obligations vs Best efforts or Reasonable efforts Each of the Parties shall use their best efforts to ensure that their respective employees, agents, contractors and suppliers have due regard to safety and abide by the relevant regulations while performing works and services within and around the Terminal and on board each Carrier, which it brings to the Terminal. 13

14 Absolute obligations vs best efforts Absolute obligations vs Best efforts or Reasonable efforts Each of the Parties undertakes, to the extent possible and commercially reasonable, that their respective employees, agents, contractors and suppliers have due regard to safety and abide by the relevant regulations while performing works and services within and around the Terminal and on board each Carrier, which it brings to the Terminal. 14

15 Absolute obligations vs best efforts Absolute obligations vs Best efforts or Reasonable efforts Each of the Parties (i) undertakes to implement all means necessary to ensure that their respective employees, agents, contractors and suppliers have due regard to safety, and (ii) guarantees that such employees, agents, contractors and suppliers shall abide by the relevant safety regulations, while performing works and services within and around the Terminal and on board each Carrier, which it brings to the Terminal. 15

16 Warranties and acceptance 16

17 Warranties and acceptance Warranties and acceptance Different types of warranties: express: clearly stated (or "expressed"), verbally, or in writing implied: provides automatic coverage but may provide less protection Until the product (or service) is accepted, the party can reject the product (or service) and refuse to pay for the product during a period that should be fixed in the contract. Warranties and acceptance are common to both civil and common law systems The mechanics of these warranties may, however, differ Disclaimers of implied warranties are not necessarily valid in all jurisdictions 17

18 Warranties and acceptance What should a good acceptance clause provide for? Staged acceptance Scope of approval Penalties/liquidated damages Long stop dates Time periods Remedy provisions No acceptance of latent defects What should a good warranty clause provide for? Scope Duration Mechanics and procedure Extent of remedies Caps Carve-outs Survival post-termination Triggers 18

19 Warranties and acceptance - Example Supplier warrants to Customer that the Goods are of satisfactory quality and free from defects as shall be determined by the Customer, the Goods conform in all respects with the Contract, applicable laws and any specification supplied or advised by the Customer to the Supplier or agreed in writing by the Customer, the Goods are free from design defects and entirely fit for the purpose for which they are intended to be used by the Customer. Supplier warrants to Customer that the Goods are of satisfactory quality and free from defects as shall be determined by the Customer, the Goods conform in all respects with the specifications of the Contract, applicable laws [in the country of Supplier?] and any specification supplied or advised by the Customer to Supplier which Supplier has or agreed beforehand in writing by the Customer, the Goods are free from design defects and entirely fit for the purpose for which they are intended to be used by the Customer. 19

20 Warranties and acceptance - Example With respect to Goods that fail to comply with the Contract, the Customer may require the Supplier to correct or replace such Goods at the Supplier s risk and expense or reduce the Contract price appropriately. The Supplier shall also indemnify the Customer against all costs, claims or liabilities that the Company incurs as a result of the occurrence of such non-conformities or defects or non-performance of the Goods or Services. With respect to Goods that fail to comply with the above warrantycontract, Customer may require Supplier [at whose option?] to correct or replace such Goods at Supplier s risk and expense or reduce the Contract price appropriately. The Supplier shall also [indemnify?] the Customer against all costs, claims or liabilities that Customer incurs as a result of the occurrence of such non-conformityies or defects or nonperformance of the Goods. 20

21 Warranties and acceptance - Example Missing in the previous examples: - Duration - Claim process - Carve-outs (supplier friendly) - Reference to acceptance - Endemic defects (customer friendly) - Limitations on remedies (supplier friendly) 21

22 Warranties and acceptance Example Supplier warrants that the Products shall meet, during a period of [6 months] starting from the delivery of Products (the "Warranty Period"), to the Supplier's published specifications, applicable laws, as set out in Schedule 1. Supplier is not liable for any defects caused by neglect, improper storage, misuse or mistreatment, including improper integration, modification or testing in any way. Customer is solely responsible for ensuring that all Products are handled, stored and sold in a proper manner following the delivery of the Products to Customer. Supplier shall notify Customer of all claims made by any third party relating to Products within the 48 hours following the receipt of such claim by Customer. If any Product fails to conform to the warranty set forth above, Supplier s sole liability shall be at its option to replace such Products, or credit Customer's account for the amount paid by Customer for such Products. Supplier s liability under this warranty is limited to Products that are (i) returned during the Warranty Period to Supplier's warehouse and (ii) determined by Supplier not to conform to such warranty. If Supplier elects to replace such Products, it shall have a reasonable time to provide replacements. Replaced Products shall be warranted for a [new full] warranty period. If the analysis of an alleged defect shows that it is not covered by Supplier's obligations outlined in this Clause, Supplier is entitled to charge Customer for the failure analysis at its then applicable rates. In such case, Supplier excludes all reimbursement of expenses incurred for the purpose of operating the warranty set out in this Clause, in particular transportation and labour costs, and costs for the acquisition of any material. If Parties are unable to reach agreement on the existence/origin of an alleged defect, Supplier is entitled, at its sole option, to submit the alleged default products to an accredited laboratory or [***] for inspection and testing, whose conclusion shall be binding on the Parties. The provisions of this Clause set out a contractual warranty granted to Customer, in replacement of all other warranties [, including Supplier's guarantee for hidden defects (if applicable),] to the extent permitted by Applicable Laws. Supplier disclaims all warranties for the merchantability, use, performance, application or fitness for particular purpose or use of the Products. [Supplier/Customer?] shall ensure that the Products comply with the Applicable Laws of the Territory. 22

23 Liability provisions 23

24 Reminder of usual liability exposure SUPPLIER Contract Contractual Claim/ Allocation of Liability CUSTOMER Non contractual claims (only?) THIRD PARTY Eg employee or end user THIRD PARTY Eg employee or end user 24

25 Liability provisions Strict liability vs Liability for fault (Common law) (Civil law) Automatic liability irrespective of the reasons for such liability Liability arises for the nonperforming party only if that party is actually responsible for the breach 25

26 Liability provisions Strict liability The Supplier shall be liable for any damages that it, its employees, representatives and Subcontractors, cause to the other Party or to its Affiliates in relation to the Works and Services and/or arising in connection with the performance of the Contract. 26

27 Liability provisions Liability for fault The Supplier shall be liable for any damages that it, its employees, representatives and Subcontractors, causes to the other Party due to a breach of its obligations under or to its Affiliates in relation to the Works and Services and/or arising in connection with the performance of the Contract. 27

28 Liability provisions Scope of damages Civil and common law concepts refer to "direct" and "indirect damages" Consequential damages is specific to common law: No consequential damages vs Foreseeability Lost profit: Direct damage (or not recoverable) vs Direct or Consequential damage 28

29 Where do Direct Damages End and "Indirect" or "Consequential Damages" Start? first line second line third line 29

30 Liability provisions Some myths about direct and indirect/consequential loss: they mean the same thing they each have the same meaning in every contract in which they appear direct losses are smaller than indirect/consequential losses loss of profit and economic loss are always indirect loss Potential Direct Loss: Physical damage Loss of profits Unlimited economic loss Damage to reputation Potential Indirect/Consequential Loss: Physical damage Loss of profits Unlimited economic loss Damage to reputation 30

31 Liability provisions As regards loss of profits and other economic loss Do not assume it can or should be excluded In many contracts it is the main or only foreseeable category of loss: Investment bank services Database management Front office BPO Can be direct or indirect loss 31

32 Liability provisions some "Golden Rules" Exclusion/limitation clauses are not always obvious Assess position/impact on all parties Consider every contract on its merits Be clear and draft to facilitate severability Consider alternatives (insurance/mitigation steps) A key golden rule: be realistic (and reasonable) Many jurisdictions have implemented reasonableness tests The liability clause may not work: where limitation/exclusion is excessive where the applicable breach amounts to gross negligence where it has not been specifically accepted by the other party The key may not be in the drafting of the liability clause, but in the drafting of the obligations leading to liability 32

33 Liability provisions - example wording Step 1: consider describing background to address reasonableness test The Parties consider the terms on limitation of liability to be reasonable and a fair allocation of risk bearing in mind (i) the [uncertainty surrounding the success of the Results], (ii) the fact that the Parties represent themselves as being professionals of same specialty, (iii) the cost plus arrangement pursuant to which Supplier passes through costs while charging a limited margin to Customer and (iv) the aim of the Parties to improve the cost efficiency of the activities carried out under this Agreement. 33

34 Liability provisions - example wording Step 2: Excluding any liability caps for certain heads of losses Injury or loss of life: Notwithstanding any other provision of the Agreement, nothing in the Agreement shall be construed so as to exclude or limit a Party's liability under the Agreement for death, sickness, or personal injury caused by such Party. Damage to property: Notwithstanding any other provision of the Agreement, nothing in the Agreement shall be construed so as to exclude or limit a Party's liability under the Agreement for damage caused to the property (bien immeuble) of the other Party. Willful intent, fraud and gross negligence: The limitations of liability of a Party shall not apply in the case of gross negligence, fraud or wilful misconduct of that Party. 34

35 Liability provisions - example wording Step 3: Limitation of liability in relation to other heads of losses The amount for which Supplier may be liable under the Agreement shall be subject to each of the following limits: in the case of Supplier s liability to Customer, Supplier s liability: in respect of any single breach or related series of breach under the Agreement giving rise to such liability, shall not exceed [XX] (Indexed); and in respect of all breaches committed during a calendar year, shall not exceed [XXX] (Indexed); and in the case of Supplier s aggregate liability to Customer under the Agreement, Supplier s liability in respect of any and all liabilities shall not exceed [XXX] (Indexed). without prejudice to limitations provided elsewhere in the Agreement in relation to liquidated damages, the cumulative liquidated damages payable by Supplier shall in no event exceed the limitations of liability set out above. The amount of liquidated damages paid by Supplier under the Agreement shall be taken into account to determine whether the above limitation is reached. 35

36 Liability provisions - example wording Step 4: Extend the liability limitation to other legal concepts pertaining to liability (where possible) : warranties product liability tort? punitive damages? Step 5: Include a time limit for bringing claims The limitation period for Customer's claims shall be one year from the earliest date permitted by Applicable Laws. 36

37 Liability provisions - Interpretation issues Does your exclusion of a particular type of loss cover the consequences of that loss? Does your exclusion of a particular type of damage cover anyone suffering that damage? Does your exclusion of a particular cause of a breach cover all varieties of that cause? e.g. no liability for damage to property: does this exclude income which would have been generated using that property? e.g. no liability to customer for death/ personal injury: does this extend to claims against the customer for end user death/personal injury? e.g. no liability where cause is shortage of components: can you allocate your limited component supply between customers? 37

38 Indemnity provisions 38

39 Indemnity provisions Establish a firm risk allocation scheme which allocates responsibility for specific risks and enables each party to measure the risk exposures it will absorb or insure. Allocation of risks is made without regard to the cause Determination of liability is not a prerequisite Can give rise to liability that would not otherwise arise under contractual damages Example: X indemnifies Y and its officers, employees and agents against any liability, loss, damage, costs or expenses incurred or suffered by Y or its officers, employees or agents arising directly or indirectly from or in connection with any act or omission of Z or an officer, employee or agent of Z With respect to Goods that fail to comply with the Contract, the Customer may require the Supplier to correct or replace such Goods at the Supplier s risk and expense or reduce the Contract price appropriately. The Supplier shall also indemnify the Customer against all costs, claims or liabilities that the Company incurs as a result of the occurrence of such non-conformities or defects or non-performance of the Goods or Services. 39

40 Indemnity provisions The concept of indemnity is not, as such, a generally acknowledged commercial contract mechanism in civil law jurisdictions But equivalent mechanisms can be implemented (in particular by being clear on the absence of liability being a pre-requisite) There are two main types of indemnity clauses: third-party indemnities: indemnifier agrees to hold the beneficiary harmless against any loss or damage arising from a claim by a third party; and first party indemnities: indemnifier holds the beneficiary harmless against any loss suffered by the beneficiary in relation to specified matters. 40

41 Indemnity provisions - Example In consideration of the parties entering into this Letter the Company agrees to indemnify and hold harmless the Bank and its Associates from and against all liability, loss or damage (including without limitation, all sums of money, actions, proceedings, suits, claims, demands, damages, costs, expenses, fines, settlements, assessments, judgments, costs and expenses for advice or concerning any compromise, and legal costs on a solicitor-client basis) arising out of or in connection with the carrying out of the terms of the Engagement or resulting from or attributable directly or indirectly to the carrying out of the Engagement. In consideration of the parties entering into this Letter the Company agrees to indemnify and hold harmless the Bank and its Associates from and against all liability, loss or damage (including without limitation, all sums of money, legal actions or, proceedings, suits, third party claims, or demands, damages,reasonable and documented costs and, expenses, fines, settlements, assessments, judgments, reasonable and documented costs and expenses for advice or concerning any compromise, and legal costs on a solicitor-client basis) arising out of orincurred by the Bank or its Associates due to a failure by the Company to comply with its obligations under the terms of the Engagement or resulting from or attributable directly or indirectly to the carrying out of the Engagement. 41

42 Indemnity provisions Key tips to bear in mind This is not necessarily a clear pre-existing concept in your jurisdiction. You need to find the appropriate mechanism (e.g. France, "garantie", "responsabilité sans faute") Ambiguity in drafting creates uncertainty. In some jurisdictions this is interpreted against the drafter and/or the beneficiary of the indemnity. Consider extending indemnification to affiliates/third party contractors Consider if indemnifier's financial standing justifies requiring a third party guarantee or insurance Do not forget that prior to indemnifying, the indemnifier must "defend". This entails drafting that needs to take into account local law procedural aspects (e.g. how does a party defend another in court proceedings, or intervene in such proceedings?) For third-party indemnities, control on claim handling and settlement may require sophisticated provisions 42

43 Penalties vs liquidated damages 43

44 Penalties vs liquidated damages penalties vs liquidated damages (Civil law) (Common law) (Civil law) A provision seeking to deter breach by requiring payment of extra-compensatory damages A sum which the breaching party must pay on a breach is fixed in advance to compensate the injured party for its pre-estimated loss In both cases: - Make recovery of damages easier, avoiding the problems of proving actual loss - Avoid arguments as to: - the remoteness of losses - whether a party has taken all reasonable steps to mitigate its loss - Depending on governing law, grounds for challenging / varying the amount will differ 44

45 Penalties vs liquidated damages - Example If Vendor does not meet any Target Date, Purchaser shall [have the right to require Vendor] to pay [(and Vendor shall pay)] by way of delay damages 0.5% of the Purchase Price which has been paid by Purchaser to Vendor at such Target Date, per week of delay, up to a maximum amount of 5% of such Purchase Price. [The Parties hereby agree that such delay damages are a genuine pre-estimate of the likely loss or damage suffered by Purchaser in the event that the Target Date is not met by Vendor.] 45

46 Mitigation of loss 46

47 Mitigation of loss Plaintiff's duty to take reasonable steps to attempt to minimize the loss he suffered after the breach French law vs other laws (no mitigation) (mitigation) Nothing in this article shall restrict or limit a Party's general obligations to mitigate a loss it may suffer or incur as a result of an event that may give rise to a claim under this liability or indemnity. 47

48 III. Upcoming Trends Contract Reform in France Common European Sales Law

49 III. Upcoming trends 1) Contracts Reform in France Main purpose: codification of case law principles Key changes envisaged: precontractual negotiation abolition of the concept of "cause" possibility for courts to set the prices unilaterally courts can revise terms in case of hardship assignment of debt improvement of evidentiary rules Bill of 27 November 2013 on the modernisation and simplification of laws and procedures in the field of justice and home affairs For the time being the French Senate has refused the reform to be implemented via governmental regulations. 49

50 III. Upcoming trends 2) Common European Sales Law A common European Sales Law to facilitate cross-border transactions in the single market A contract law regime common to all Member States For improved market access of small and medium-sized enterprises An optional regime (voluntary basis) Focus on sales contracts Limited to cross-border contracts Identical set of consumer protection rules A comprehensive set of contract rules Whith an international dimension Attempt to harmonise contracting rules in Europe but conflict of law issues may remain 50

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