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JULY 25, 2016
CONTRACT LAW AND CONTRACTUAL RISK TRANSFER
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Contract Law and Contractual Risk Transfer
American Gas Association (AGA) RISK MANAGEMENT COMMITTEEE
Boston, MassachusettsJuly 25, 2016
2:45 PM- 3:00 PM
33
Prepared and Presented by:
Daniel (Dan) W. HoustonSenior Vice President,
Enterprise Risk Management Principal
EPIC Insurance Brokers and Consultants- Atlanta2405 Satellite Boulevard, Suite 200
Duluth, GA 30096678-542-2652
44
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.
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A Contract is the Legal Framework Within Which Parties May Create Their Own Rights and Duties by Agreement
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Types of Contracts
• Standard Form Agreements
• Modified Standard Agreement Forms
• Letter Agreements
• Purchase Orders
• Custom Agreements
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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
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Export Sales Agreement-Terms of Payment
• Cash in Advance• Letter of Credit• Open Account
• Consignment Sales
Applicability 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
Risk Substantial risk to the exporter because the buyer could default on payment obligation after shipment of the goods
Pros Boost competitiveness in the global market
Help establish and maintain a successful trade relationship
Cons Significant exposure to the risk of non-payment
Additional costs associated with risk mitigation measures
99
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
1010
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
1111
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.”
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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.
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Elements of a Contract
• An intention to create a legal relationship• Offer• Acceptance• Consideration• Capacity to contract• Legality
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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”
AcceptanceThe 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”
ConsiderationSomething (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
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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 one-sided.
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.
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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.
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Why is Dan So Persnickety?Case Law: An Expensive Comma
With one year’s notice, Aliant terminated a contract it had with RogersCommunications. Rogers felt it should get the benefit of a full five-yearlocked-in term, before anything could be terminated. The agreement statedit “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 terminatedby one year prior notice in writing by either party.” Rogers felt the deal hadto 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 secondcomma allows the notice period to modify the whole sentence. Note: Extrafees of over $2 million will apply in order to revive the deal.
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Basic Elements ofa Contract
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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
2020
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.
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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”).
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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;
2323
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” (see below for more on “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.
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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. The sample contract includes two boilerplate terms, (i) force majeure, and (ii) governing law.
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.
2525
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 SECOND PARTY
By: ____________ By:____________
Name and Title Name and Title
2626
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 such issues such as …
2727
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.
2828
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.
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Consider New CGL Form/ 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 ____________________.
3030
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.
3131
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.
3232
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 $3,000,000.
3333
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 (...) .
3434
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.
3535
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.
3636
Possible Cyber...
Module 1: Loss of Data
Module 2: Denial of Service
Module 3: Privacy Liability
Module 4: Cyber Extortion
Module 5: Transmission of Virus
Module 6: Unauthorized Access
Module 7: Unauthorized Use
Module 8: Physical Theft of Hardware, Laptops, Servers, Etc.
Module 9: Errors and Omissions
Module 10: Failure to Deliver
Module 11: Copyright
Module 12: Breach, Theft or Use of your Copyright or Software Code
Module 13: 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
Module 14: Business Interruption Loss
Module 15: Period of Restoration
Module 16: Administrative/Regulatory Proceedings
Module 17: Legal Proceedings Against You
Module 18: Crisis Management Fund
Module 19: Social Engineering
Module 20: IoT
Module 21: Trolling
3737
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.
3838
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).
3939
Certificates of Insurance
• Certificates of Insurance showing that such coverage is in force shall be filed under this Contract by the Contractor to ____________________.
4040
Non-Limitation on the Contractor’s Liabilityand 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.
4141
Confidential Information: EXAMPLE US
• 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 third- parties 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
4242
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.
•
4343
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.
4444
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.
4545
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.
4646
Additional Insured Endorsements-A Brief History
• Broad Form Coverage - (1985)
“Any Liability” / “Arising Out Of”
CG 20 10 11 85 – Ongoing Operations and Completed Operations
• Broad Form Coverage – (1993)
“Any Liability” / “Arising Out Of” (Narrowed to Ongoing Operations)
CG 20 10 10 93 – Removal of Completed Operations
• Broad Form Coverage – (2001)
“Any Liability” / “Arising Out Of”
CG 20 10 10 01 – Ongoing Operations
CG 20 37 10 01 – 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 20 10 07 04 – Ongoing Operations
CG 20 37 07 04 – Completed Operations
• Limited Form Coverage – (2013)
“Personal Injury and Property Damage” / “Caused In Whole or In Part” (And Additional Limitations)
CG 20 10 04 13 – Ongoing Operations
CG 20 37 04 13 – Completed Operations
4747
Routes of Recovery – Risk Control
Owner
Owner’s CGL Insurance
Contractor’s CGL Insurance
Blanket Contractual Liability
Contractor
Contractual Indemnity Clause
#1 - Control
#2 - Control#3 - Finance
Liability Claim
4848
WRAP UPQ & A