Drafting Enforceable Limitation of Liability Clauses …media.straffordpub.com/.../presentation.pdf2017/03/30 · Common uses of LOL •Can be used with sale of goods: UCC 2-719 •Very

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Presenting a live 90-minute webinar with interactive Q&A

Drafting Enforceable Limitation of

Liability Clauses in Business Contracts Limiting Potential Damages and Avoiding Enforceability

Pitfalls With Carefully Negotiated Provisions

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, MARCH 30, 2017

Kenneth M. Gorenberg, Partner, Barnes & Thornburg, Chicago

Steven M. Richman, Member, Clark Hill, Princeton, N.J.

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DRAFTING ENFORCEABLE LIMITATION OF LIABILITY CLAUSES IN BUSINESS CONTRACTS

Strafford Publications Webinar – March 30, 2017

Kenneth M. Gorenberg

Barnes & Thornburg LLP

One North Wacker Drive

Suite 4400

Chicago, Illinois 60606 312-214-5609

[email protected]

https://www.linkedin.com/in/kengorenberg

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Client Negotiates Deal, Then…

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Allocation of Risk

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Allocation of Risk

In general:

• Limitation of liability prevents or limits transfer of risk between the parties

• Indemnification transfers risk between the parties

• Insurance transfers risk to a third party

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Two Species of LOL Clauses

Limitation to certain types of liability

Limitation in amount of liability

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Limitation as to type of liability

– Generally allow direct damages – Often disallow:

• Consequential or incidental damages, including – expenses to investigate or mitigate direct damages – lost profits and income – lost savings – loss of facilities and core equipment – loss of goodwill – damage to reputation – loss of opportunities

• Indirect and special damages, including business interruption

• Punitive damages

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Limitation as to amount of liability

– a/k/a damages cap, which often will be one or more of:

• Percentage of fees

• All fees

• Fees over a period of time

• Fixed dollar amount

• Amount covered by insurance

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TIP

• Consider limiting both the type and the amount of damages

– Dual limitation for same circumstance

• Insurance is an example

– Different limitations for different circumstances

• Damage to goods or services provided

• Damage caused by goods or services provided

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Common exceptions to any LOL

• Third-party claims under indemnification provisions

• Breach of confidentiality (and other restrictive covenants)

• Gross negligence, willful misconduct, or fraud

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Common uses of LOL

•Can be used with sale of goods: UCC §2-719

•Very common with provision of services

•TIP: consider context

• B2B or B2C?

• Professional not allowed to limit its liability?

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Challenges in negotiation

• Caps

• New service or new provider

• Infringement – generally makes the service contracted for unusable

• Security/Privacy Issues

• Taxes/Withholding (primarily an issue in international contracts)

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UCC Sec. 2-719 for Sale of Goods

(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of the goods, repayment of the price, or to repair and replacement of non-conforming goods or parts; and (b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, but limitation of damages where the loss is commercial is not.

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DRAFTING TIPS

• No forms or blanks

• Make it conspicuous, CLEAR, and unequivocal

• Make it specific, related to contract, and allow a meaningful remedy –Not unconscionable

–Won’t fail of essential purpose

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DRAFTING TIPS

• Don’t rely solely on undefined “consequential or incidental damages”

• If exclusive remedy, say so

• Probably exclude gross negligence, willful misconduct, and fraud, i.e., allow these claims

• Probably exclude third-party claims, i.e., address these claims separately in indemnification provisions

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Sample 1 A. YOU AGREE THAT WE WILL NOT BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING DIRECT, INDIRECT,

INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES (EVEN IF WE HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM, RELATING TO OR CONNECTED WITH: (A) THE USE OR INABILITY TO USE OUR SERVICE, (B) THE COST OF REPLACEMENT OF ANY GOODS, SERVICES OR INFORMATION PURCHASED OR OBTAINED AS A RESULT OF ANY INFORMATION OBTAINED FROM OR TRANSACTIONS ENTERED INTO THROUGH OR FROM OUR SERVICE, (C) DISCLOSURE OF, UNAUTHORIZED ACCESS TO OR ALTERATION OF YOUR CONTENT, (D) STATEMENTS, CONDUCT OR OMISSIONS OF ANY SERVICE PROVIDERS OR OTHER THIRD PARTY ON OUR SERVICE, (E) ACTIONS OR INACTIONS OF OTHER USERS OF OUR SITE OR OUR SERVICE OR ANY OTHER THIRD PARTIES FOR ANY REASON, OR (F) ANY OTHER MATTER ARISING FROM, RELATING TO OR CONNECTED WITH OUR SERVICE OR THESE TERMS.

B. WE WILL NOT BE LIABLE FOR ANY FAILURE OR DELAY IN PERFORMING UNDER THESE TERMS WHERE SUCH FAILURE OR DELAY IS DUE TO CAUSES BEYOND OUR REASONABLE CONTROL, INCLUDING NATURAL CATASTROPHES, GOVERNMENTAL ACTS OR OMISSIONS, LAWS OR REGULATIONS, TERRORISM, LABOR STRIKES OR DIFFICULTIES, COMMUNICATIONS SYSTEMS BREAKDOWNS, HARDWARE OR SOFTWARE FAILURES, TRANSPORTATION STOPPAGES OR SLOWDOWNS OR THE INABILITY TO PROCURE SUPPLIES OR MATERIALS.

C. IN NO EVENT WILL OUR AGGREGATE LIABILITY TO YOU OR ANY THIRD PARTY IN ANY MATTER ARISING FROM, RELATING TO OR CONNECTED WITH OUR SERVICE OR THESE TERMS EXCEED THE SUM OF ONE HUNDRED ($100) DOLLARS.

D. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF CERTAIN WARRANTIES OR THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES. ACCORDINGLY, SOME OF THE LIMITATIONS OF THE FOREGOING SECTIONS MAY NOT APPLY TO YOU.

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Sample 2 D. Indirect and Consequential Damages:

i. Provider waives and releases all claims against Customer for indirect, consequential or punitive damages directly or indirectly arising out of this Agreement or the Work regardless whether caused or contributed to by the sole, joint or concurrent negligence, strict liability, preexisting condition, or any other fault of Customer. As used in this Agreement, “indirect damages” or “consequential damages” includes, without limitation, loss of revenue, profit or use of capital, production delays, loss of product, reservoir loss or damage, losses resulting from failure to meet deadlines and downtime of facilities, vessels or aircraft. ii. Customer waives and releases all claims against Provider for indirect, consequential or punitive damages directly or indirectly arising out of this Agreement or the Work regardless whether caused or contributed to by the sole, joint or concurrent negligence, strict liability, preexisting condition, or any other fault of Provider. As used in this Agreement, “indirect damages” or “consequential damages” includes, without limitation, loss of revenue, profit or use of capital, production delays, loss of product, reservoir loss or damage, losses resulting from failure to meet deadlines and downtime of facilities, vessels or aircraft.

E. PROVIDER’S AGGREGATE LIABILITY UNDER THIS AGREEMENT OR OTHERWISE IS LIMITED TO THE COVERAGE ACTUALLY AFFORDED BY PROVIDER’S INSURANCE POLICY, SUMMARY OF WHICH IS ATTACHED HERETO AS APPENDIX A.

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Sample 3 EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER CUSTOMER NOR PROVIDER SHALL BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL, REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS, ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES (REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES), OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY OR OTHERWISE (INCLUDING THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS AGREEMENT), REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS FORESEEABLE OR THE PARTY SUFFERING THE LOSS OR DAMAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.

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Sample 4

15. Limitation of Liability 15.1. EXCEPT FOR BREACHES OF CONFIDENTIALITY, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, ANY LOSS OF PROFIT, LOSS OF USE, OR BUSINESS INTERRUPTION, BASED ON ANY CLAIM UNDER THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 15.2. TO THE EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL THE LIABILITY FOR DAMAGES HEREUNDER OF PROVIDER OR ANY MEMBER OF THE PROVIDER GROUP OR ITS EMPLOYEES OR AGENTS EXCEED THE AMOUNTS ACTUALLY PAID TO PROVIDER BY CUSTOMER.

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Sample 5 15. Exclusion of Consequential and Other Indirect Damages. EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER PROVIDER NOR GUARANTOR, ON THE ONE HAND, NOR CUSTOMER ON THE OTHER HAND SHALL BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL, REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS, ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES (REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES), OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY OR OTHERWISE (INCLUDING THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS AGREEMENT), REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS FORESEEABLE OR THE PARTY SUFFERING THE LOSS HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE. 16.7 CAP on Liability. Provider’s liability under this Agreement as a whole for any and all Losses of Customer and the Indemnitees under this Agreement, including without limitation, claims for indemnification under this Section 16, will not exceed fifty percent (50%) of the amount of the Up-Front Fee and any Earned Royalties Provider has received under this Agreement, with the exception of Losses of Customer or any Affiliate of Customer due to Provider losing ownership of any Original Licensed Patents due to the situations described in Section 11.1 11.2, or 16.1, wherein Provider’s aggregate liability for Losses under this Agreement will be limited to one hundred percent (100%) of the Up-Front Fee and any Earned Royalties Provider has received under this Agreement.

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Sample 6

E. Disclaimer of Damages. EXCEPT FOR LIABILITY OF THE PARTIES UNDER THE CONFIDENTIALITY AND INDEMNIFICATION SECTIONS OF THIS AGREEMENT, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH THIS AGREEMENT, EVEN IF THE PARTY WHO IS LIABLE HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES, EXCEPT WHEN SUCH DAMAGES ARE CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY, ITS EMPLOYEES, AGENTS, OR SUBCONTRACTORS. EXCEPT FOR LIABILITY OF THE PARTIES UNDER THE CONFIDENTIALITY AND INDEMNIFICATION SECTIONS OF THIS AGREEMENT NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND IN AN AMOUNT IN EXCESS OF THE AMOUNTS PAID TO PROVIDER BY CUSTOMER DURING THE THEN PRIOR TWELVE MONTHS FOR THE PROVISION OF THE CONTENT AND THE SERVICES PROVIDED HEREUNDER.

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Sample 7

14. LIMITATION OF LIABILITY Except for claims pertaining to Confidential Information, third-party claims under the indemnification provisions of this Agreement, or damages resulting from a party’s gross negligence or willful misconduct, neither party will be liable to the other for any indirect, special, punitive, exemplary or consequential damages, or incidental losses or damages of any kind, including, but not limited to, lost profits, lost savings or loss of use of facilities or equipment, regardless of whether arising from breach of contract, warranty, tort, strict liability or otherwise, even if advised of the possibility of such loss or damage, or if such loss or damage could have been reasonably foreseen.

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Sample 8

6. Limitation of Liability. Except for claims pertaining to Confidential Information, Licensor Trademarks, Return of Materials, Non-Solicitation, third-party claims under the indemnification provisions of this Agreement, or damages resulting from a party’s gross negligence or willful misconduct, neither party will be liable to the other for any indirect, special, punitive, exemplary or consequential damages, or incidental losses or damages of any kind, including, but not limited to, lost profits, lost savings or loss of use of facilities or equipment, regardless of whether arising from breach of contract, warranty, tort, strict liability or otherwise, even if advised of the possibility of such loss or damage, or if such loss or damage could have been reasonably foreseen.

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Sample 9 (c) EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NONE OF COMPANY ON THE ONE HAND, NOR SERVICE PROVIDER NOR GUEST CONTRIBUTOR ON THE OTHER HAND WILL BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL, REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS, ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES (REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES), OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY OR OTHERWISE (INCLUDING THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS AGREEMENT), REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS FORESEEABLE OR THE PARTY SUFFERING THE LOSS OR DAMAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.

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Sample 10

8.2 EXCEPT FOR LIABILITY OF THE PARTIES FOR BREACH OF CONFIDENTIALITY AND CLAIMS UNDER THE INDEMNIFICATION SECTION OF THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES BY REASON OF A BREACH OF THIS AGREEMENT OR ANY WARRANTY OR OBLIGATION HEREUNDER, EVEN IF SUCH PARTY KNOWS OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF ANY SUCH LIABILITY.

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ENFORCEABILITY CHALLENGES

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What if LOL is considered an exculpatory clause?

• Also known as waiver, release or assumption of risk

• Disfavored and strictly construed everywhere

• Generally unenforceable in Louisiana and Montana by statute and in Virginia (as to bodily injury) by common law

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UCC Sec. 2-719 for Sale of Goods

(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of the goods, repayment of the price, or to repair and replacement of non-conforming goods or parts; and (b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, but limitation of damages where the loss is commercial is not.

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Sommer v. Fed. Signal Corp., 79 N.Y.2d 540 (NY Ct. App. 1992)

“Holmes shall not be liable for any of [810’s] losses or damages … caused by performance or nonperformance of obligations imposed by this contract or by negligent acts or omissions by Holmes.”

• Also a limit of lesser of $250 or 10% of annual service charge

• Holmes disregarded fire alarm

LOL not enforced: “It is the public policy of this State … that a party may not insulate itself from damages caused by grossly negligent conduct. (Citation omitted.) This applies equally to contract clauses purporting to exonerate a party from liability and clauses limiting damages to a nominal sum.”

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Scott & Fetzer Co. v. Montgomery Ward & Co., 493 N.E.2d 1022 (Ill. 1986) “[Wards] does not desire this contract to provide for full liability of [Burns] and agrees that [Burns] shall be exempt from liability for loss or damage due directly or indirectly to occurrences, or consequences therefrom, which the service is designed to detect or avert; that if [Burns] should be found liable for loss or damage due to a failure of the system in any respect, its liability shall be limited to a sum equal to 10% of the annual service charge or $250.00, whichever is the greater, and that the provisions of this paragraph shall apply if loss or damage, irrespective of cause or origin, results directly or indirectly to person or property from performance or nonperformance of obligations imposed by this contract or from negligence, active or otherwise, of [Burns], its agents or employees.” • Burns’ fire-warning system allegedly failed • Millions of dollars in damage to Wards warehouse and adjacent tenants

LOL not enforced: “Such clauses are not favored and are to be strictly construed against the party they benefit, especially when that party was also the draftsman. Such clauses must spell out the intention of the parties with great particularity and will not be construed to defeat a claim which is not explicitly covered by their terms.” (Citations omitted.)

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Core-Mark Midcontinent, Inc. v. Sonitrol Corp., 300 P.3d 963 (Colo. Ct. App. 2012) “[CORE-MARK] UNDERSTANDS AND AGREES THAT IF [SONITROL] SHOULD BE FOUND LIABLE FOR ANY LOSS OR DAMAGES DUE FROM A FAILURE TO PERFORM ANY OF ITS OBLIGATIONS OR A FAILURE OF THE EQUIPMENT TO PROPERLY OPERATE, [SONITROL]'S LIABILITY SHALL BE LIMITED TO A SUM EQUAL TO THE TOTAL OF ONE-HALF YEAR'S MONITORING PAYMENTS, OR FIVE HUNDRED DOLLARS ($500) WHICHEVER IS THE LESSER, AND THIS LIABILITY SHALL BE EXCLUSIVE AND SHALL APPLY IF LOSS OR DAMAGE, IRRESPECTIVE OF CAUSE OR ORIGIN, RESULTS DIRECTLY OR INDIRECTLY TO PERSONS OR PROPERTY FROM PERFORMANCE OR NON-PERFORMANCE OF ANY OF [SONITROL]'S OBLIGATIONS OR FROM NEGLIGENCE, ACTIVE OR OTHERWISE, OF [SONITROL], ITS EMPLOYEES OR AGENTS.” • Sonitrol detected burglary six times over seven hours and never called police • Sonitrol called fire department 19 minutes after fire alarm and 12 minutes after fire department

arrived • LOL in burglar alarm installation and service contracts are routinely upheld, BUT • LOL not enforced as to willful and wanton conduct

“Because of the egregiously wrongful nature of the conduct, enforcing a limitation of liability provision to shield a party from the consequences of such conduct is deemed to be contrary to public policy. [Citations.] Moreover, limiting liability for ‘[a] willful failure to monitor th[e] system or a deliberate disregard of a contractual duty would not be consistent with the intended protection service set forth in the contract.’”

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Lucier v. Williams, 841 A. 2d 907 (NJ App. Div. 2004) “Client agrees that, to the fullest extent permitted by law, CAL's total liability to Client for any and all injuries, claims, losses, expenses, damages or expenses arising out of this Agreement from any cause or causes shall not exceed the total amount of $500, or 50% of fees actually paid to CAL by Client, whichever sum is smaller.”

• Lucier paid $385 for home inspection report

• Leaks cost $8,000 to $10,000 to repair

LOL not enforced: “Applying these principles to the home inspection contract before us, we find the limitation of liability provision unconscionable. We do not hesitate to hold it unenforceable for the following reasons: (1) the contract, prepared by the home inspector, is one of adhesion; (2) the parties, one a consumer and the other a professional expert, have grossly unequal bargaining status; and (3) the substance of the provision eviscerates the contract and its fundamental purpose because the potential damage level is so nominal that it has the practical effect of avoiding almost all responsibility for the professional's negligence. Additionally, the provision is contrary to our state's public policy of effectuating the purpose of a home inspection contract to render reliable evaluation of a home's fitness for purchase and holding professionals to certain industry standards.”

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Pitts v. Watkins, 905 So. 2d 553 (Miss. 2005)

Similar facts and outcome as Lucier

“If in fact the Pittses are able to prove duty, breach, causation and damages, they should not be limited to $265 in damages when it is alleged that Watkins's negligence caused them to incur $30,000 to $40,000 in damages. This would be an unconscionable result.”

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Gladden v. Boykin, 739 S.E.2d 882 (So. Car. 2013) “LIMIT OF LIABILITY: []It is understood and agreed that should [Palmetto] and/or its agents or employees be found liable for any loss or damages resulting from a failure to perform any of it's [sic] obligations, including but not limited to negligence, []breach of contract or otherwise, the the [sic] liability of [Palmetto] and/or it's [sic] agents or employees shall be limited to a sum equal to the amount of the fee paid by the client for this inspection and report.” • Palmetto refunded home inspection fee before lawsuit “The Residential Property Condition Disclosure Act … imposes liability on a seller if she knowingly withholds [defect] information. S.C.Code Ann. § 27-50-65.” LOL upheld: “Courts should not refuse to enforce a contract on grounds of unconscionability, even when the substance of the terms appear grossly unreasonable, unless the circumstances surrounding its formation present such an extreme inequality of bargaining power, together with factors such as lack of basic reading ability and the drafter's evident intent to obscure the term, that the party against whom enforcement is sought cannot be said to have consented to the contract.”

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Food Safety Net Services v. Eco Safe Systems USA, Inc., 147 Cal.Rptr.3d 634 (Cal. Ct. App. 2012)

"IN NO EVENT SHALL [FOOD SAFETY] BE LIABLE FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING (BUT NOT LIMITED TO) DAMAGES FOR LOSS OF PROFIT OR GOODWILL REGARDLESS OF (A) THE NEGLIGENCE (EITHER SOLE OR CONCURRENT) OF [FOOD SAFETY] AND (B) WHETHER [FOOD SAFETY] HAS BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. [Food Safety's] total liability to you in connection with the work herein covered for any and all injuries, losses, expenses, demands, claims or damages whatsoever arising out of or in any way related to the work herein covered, from any cause or causes, shall not exceed an amount equal to the lesser of (a) damages suffered by you as the direct result thereof, or (b) the total amount paid by you to [Food Safety] for the services herein covered. We accept no legal responsibility for the purposes for which you use the test results.“

• Eco Safe claims lost business because Food Safety’s test didn’t show that Eco Safe’s ozone wash was better than chlorine rinse

• LOL upheld

“Eco Safe identified no evidence that the clause was the product of unequal bargaining power, that it contravened public policy, or that it affected the public interest.”

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Statutory Anti-Indemnity Laws

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SAMS Hotel Group, LLC v. Environs, Inc., 716 F.3d 432 (7th Cir. 2013) (Indiana law)

“The Owner agrees that to the fullest extent permitted by law, the [architect’s] total liability to the Owner shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract or breach of warranty.” • Fee was $70,000 • Owner claimed damages of $4.2 million LOL upheld: Indiana requires specific mention of own negligence for indemnification or exculpatory clause, but not in “a case like this one, in which two commercial entities, well aware of the risks involved, freely and knowingly negotiated a limitation of liability clause so as to allocate those risks in advance.”

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1800 Ocotillo, LLC v. WLB Group, Inc., 196 P. 3d 222 (Ariz. 2008) “Client agrees that the liability of WLB, its agents and employees, in connection with services hereunder to the Client and to all persons having contractual relationships with them, resulting from any negligent acts, errors and/or omissions of WLB, its agents and/or employees is limited to the total fees actually paid by the Client to WLB for services rendered by WLB hereunder.” • Ocotillo claimed increased construction costs due to WLB’s faulty survey • Arizona anti-indemnity statute does not apply

LOL upheld: “Anti-indemnification statutes are primarily intended to prevent parties from eliminating their incentive to exercise due care… Although it is possible that a limitation of liability provision could cap the potential recovery at a dollar amount so low as to effectively eliminate the incentive to take precautions, this is not the case here.”

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Lanier at McEver v. Planners & Engineers, 663 S.E. 2d 240 (Ga. 2008) “In recognition of the relative risks and benefits of the project both to [Lanier] and [PEC], the risks have been allocated such that [Lanier] agrees, to the fullest extent permitted by law, to limit the liability of [PEC] and its sub-consultants to [Lanier] and to all construction contractors and subcontractors on the project or any third parties for any and all claims, losses, costs, damages of any nature whatsoever[,] or claims expenses from any cause or causes, including attorneys' fees and costs and expert witness fees and costs, so that the total aggregate liability of PEC and its subconsultants to all those named shall not exceed PEC's total fee for services rendered on this project. It is intended that this limitation apply to any and all liability or cause of action however alleged or arising, unless otherwise prohibited by law.” Unenforceable under OCGA § 13-8-2(b): “A covenant, promise, agreement, or understanding in or in connection with or collateral to a contract or agreement relative to the construction, alteration, repair, or maintenance of a building structure, appurtenances, and appliances, including moving, demolition, and excavating connected therewith, purporting to indemnify or hold harmless the promisee against liability for damages arising out of bodily injury to persons or damage to property caused by or resulting from the sole negligence of the promisee, his agents or employees, or indemnitee is against public policy and is void and unenforceable.”

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Dillingham v. CH2M Hill Northwest, 873 P. 2d 1271 (Alaska 1994) “That, the OWNER agrees to limit the ENGINEER'S liability to the OWNER and to all construction Contractors, Subcontractors, material suppliers, and all others associated with the PROJECT, due to the ENGINEER'S sole negligent acts, errors, or omissions, such that the total aggregate liability of the ENGINEER to all those named shall not exceed Fifty Thousand Dollars ($50,000) or the ENGINEER'S total compensation for services rendered on the portion(s) of the PROJECT resulting in the negligent acts, errors, or omissions, whichever is greater.” Unenforceable under Alaska Statute 45.45.900: “A provision, clause, covenant, or agreement contained in, collateral to, or affecting a construction contract that purports to indemnify the promisee against liability for damages for (1) death or bodily injury to persons, (2) injury to property, (3) design defects or (4) other loss, damage or expense arising under (1), (2), or (3) of this section from the sole negligence or wilful misconduct of the promisee or the promisee's agents, servants or independent contractors who are directly responsible to the promisee, is against public policy and is void and unenforceable.”

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Witt v. La Gorce Country Club, Inc., 35 So. 3d 1033 (Fla. Ct. App. 2010) •Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999): negligence claim against professional is not barred by economic loss rule or by contract with professional’s employer

LOL not enforced: cause of action against professional is extra-contractual, so remedy can’t be limited by contract

50







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Fla. Stat. Ann. § 558.0035

Supersedes Witt IF “(a) The contract is made between the business entity and a claimant or with another entity for the provision of professional services to the claimant; (b) The contract does not name as a party to the contract the individual employee or agent who will perform the professional services; (c) The contract includes a prominent statement, in uppercase font that is at least 5 point sizes larger than the rest of the text, that, pursuant to this section, an individual employee or agent may not be held individually liable for negligence; (d) The business entity maintains any professional liability insurance required under the contract; and (e) Any damages are solely economic in nature and the damages do not extend to personal injuries or property not subject to the contract.”

51







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California Civil Code §2782.5

“Nothing contained in Section 2782 shall prevent a party to a construction contract and the owner or other party for whose account the construction contract is being performed from negotiating and expressly agreeing with respect to the allocation, release, liquidation, exclusion, or limitation as between the parties of any liability (a) for design defects, or (b) of the promisee to the promisor arising out of or relating to the construction contract.”

52







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California Civil Code §2782.5

Markborough California, Inc. v. Superior Court, 227 Cal. App. 3d 705 (Cal. Ct. App. 1991)

• no affirmative duty to notify other party of LOL clause

• enforceable if opportunity to accept, reject or modify

Greenwood v. Murphy, 2008 WL 4946224 (Cal. Ct. App. 2008)

• objectively reasonable belief that financial hardship prevented arm’s length negotiation

• LOL not enforceable

53



54

Limitation of Liability and Indemnification

Steven M. Richman

Clark Hill

210 Carnegie Center

Princeton, NJ 08540

609l.785.2911

[email protected]

mailto:[email protected]

55

Types of Relief/Damages

• Direct/Actual Damages

• Liquidated damages provision

• Injunctive relief

• Consequential and incidental damages

• “Willful misconduct” and “malice”

• Interest

• Enforcement/recognition issues

• Attorneys Fees

56

Limitations of Damages

• Clauses that limit the type of damages, the amount of damages, or a liquidated damages clause.

• Generally enforceable as long as not a penalty, and as long as does not allow contract to fail of its essential purpose

• Warranty: repair and replace; scope, choice, who decides

• Define consequential, incidental, lost profits • Statutory formulas (UCC)

57

Purpose: Risk Allocation

• Indemnification clauses are critical to allocating risk in any business contract

• Failure to properly draft or negotiate these clauses can lead to your client being held responsible for unanticipated damages

• Worst-case scenario: your client may face litigation for another party’s wrongdoing

58

Are They Necessary?

• Common law provides right to seek contribution for other party’s negligence. 17 Vista Fee Assoc. v. Teachers Ins. and Annuity Association of America, 259 A.D.2d 75 (1st Dep’t 1999).

• A party is not allowed to recover more from the breach than it would have gained had the contract been fully performed. Freund v. Washington Square Press, Inc., 34 N.Y.2d 379 (1974).

59

What Exactly Do They Do?

• They allocate risk.

• They are a function of leverage, of a party seeking to get more than otherwise entitled to at common law

• Used to shift liability and cut through common law proofs to contractual enforcement

60

Liquidated damages

• RESTATMENT (SECOND) CONTRACTS: § 356 (1) Liquidated Damages and Penalties

Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

61

Uniform Commerical Code

• UNIFORM COMMERCIAL CODE: § 2-718(1)

Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

62

Liquidated damages

• MODERN TEST:

(1) The stipulated amount must be reasonable in light of the anticipated or actual loss caused by the breach; and

(2) actual damages would be difficult to estimate in advance or to prove after a breach occurs.

63

Liquidated damages

• “If the difficulty of proof of loss is great, considerable latitude is allowed in the approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude is allowed in that approximation.” (Restat 2d of Contracts, § 356, comment b)

64

Liquidated damages

• Holt's Cigar Co. v. 222 Liberty Assoc., 404 Pa. Super. 578 (1991) ($ 500.00 per day for each day delayed)

• held that a stipulated damages clause was an unenforceable penalty because, inter alia, “conspicuously absent is any indication that the chancellor demonstrably considered whether the per diem stipulation was . . . chosen due to the difficulties in proving with certainty the precise extent of actual damages for breach . . . .”

• Not enforced: testimony was picked randomly

65

Attorneys Fees

• Two issues:

– Contractual rights versus first party indemnification

– What are attorneys fees

66

Attorneys Fees

• Where there is a limitation on consequential and other than direct damages, parties may seek to recover through first party indemnification theories.

• Do not use “boilerplate” clauses

• If have fees for prevailing party, what does prevailing mean? Consider defining

• Also, include pre and post judgment, appeal, expert witness fees, other related aspects

67

General Comments

• Several issues, but key aspect is the scope of the indemnification and triggers; claims v. loss

• Courts generally enforce strictly against the indemnitee

• Indemnification against one’s own negligence allowed if clear in document

• Duty to defend is broader than duty to indemnify but is a function of the language of the indemnification

• Mutual indemnification: cross-defense

• Insurance issues: anti-subrogation rule

• Interplay with insurance requirements

68

General Comments (cont’d)

• Specific indemnification: e.g., intellectual property

• Contractual indemnification versus common law indemnification

• Merger into contractual warranty claims • Fault versus non-fault • Statute of limitations issues • Parties liable for own negligence • Statutory restrictions against indemnifying from

negligence in some cases, e.g., construction

69

Common Law vs. Contract

• “In contractual indemnification, the one seeking indemnity need only establish that it was free from any negligence and was held liable solely by virtue of the statutory liability. Whether or not the proposed indemnitor was negligent is a non-issue and irrelevant . . . In distinction, in the case of common-law indemnification, the one seeking indemnity must prove not only that it was not guilty of any negligence beyond the statutory liability but must also prove that the proposed indemnitor was guilty of some negligence that contributed to the causation of the accident for which the indemnitee was held liable to the injured party by virtue of some obligation imposed by law . . .” Correia v. Professional Data,259 A.D. 2d 60, 65 (1st Dep’t 1999)

70

Statutory Restrictions

• States may carve out exceptions:

• NY General Obligations Law Section 5-322.1 has certain limitations on clauses that purport to force the other party to indemnify for the party’s own negligence

• Relates generally to construction of a building; cannot have an indemnification for your own negligence regarding a construction contract

71

The Ground Rules

• Construed “strictly against the party seeking indemnification." Angelo Iafrate Const., LLC v. Potaschick Const., Inc., 370 F.3d 715, 721 (8th Cir. 2004).

• Purpose is to provide remedy beyond common law

• Contractual indemnity is a right set forth in the contract; common law or implied rights to indemnification is a policy decision based on the court’s desire to not unjustly enrich a party. McCarthy v. Turner Construction, Inc., 17 N.Y. 3d 369 (2011).

72

Scope is Key

• Do not rely on boilerplate

• Focus on the particulars of the industry, business practices, and context

• Gauge the probabilities of occurrences

• Anticipate problems: the “what ifs”

• Consistent with other documents

• Burden of proof as to liability on indemnitee

73

Construing Scope

• Courts will look to the specific language and, if it is unambiguous, interpret it in accordance with its plain meaning. Martinez v. City of New York, 73 A.D. 2d 993 (2nd Dep’t 2010) (“The right to contractual indemnification depends upon the specific language of the contract.”

• “The language of an indemnity agreement “should not be extended to include damages which are neither expressly within its terms nor of such character that it is reasonable to infer that they were intended to be covered under the contract”) Zanghi v. Laborer’s International Union of North America, 21 A.D. 3d 1370, 1372 (4th Dep’t 2005)

• “An indemnification agreement will not be read to impose obligations upon the indemnitor which are neither disclosed at the time of its execution nor reasonably within the scope of its terms and the over-all intendment of the parties at the time of its making.”). Tokyo Tanker Company Limited v. Etra Shipping Corp., 142 A.D. 2d 377 (1st Dep’t 1989)

74

Exactly What is Covered?

• Product liability claims

• Personal and property injury

• Intellectual property infringement

• Representations, warranties and covenants

• Other?

• Draft to cover in scope

75

General and Specific

• Absent a more specific intent, general terms will govern.

• Specific provisions govern over general ones where inconsistency.

• Under the doctrine of ejusdem generis¸ "when general words follow specific words . . . the general words are construed to embrace only the objects similar in nature to those objects enumerated by the preceding specific words." Isetts v. Borough of Roseland, 364 N.J. Super. 247, 257-58 (App. Div. 2003)(citations omitted).

76

General Enforceability Issues

• “A contract cannot be enforced in any form of action if its terms are incomplete or incomprehensible.” West v. Downer, 127 S.E. 2d 359 (Ga. Sup. Ct. 1962).

• May also invite parol and extrinsic evidence

77

Enforceability

• A broad indemnification clause, even without mention of the indemnitor’s fault or negligence, provided it is clear and unambiguous, will be given effect. See, e.g., In re New York City Asbestos Litigation, 41 A.D. 3d 299 (1st Dep’t 2007) (indemnification "against any and all liability for injury to person or property occasioned... wholly or in part, by any act or omission of" supplier)

78

One’s Own Negligence

• Courts have held that if plain and unmistakable, a broad contractual provision pursuant to which one party agrees to indemnify the other for the other party’s own negligence, will be enforceable.

79

Loss versus Liability

• “The first cause of action of the corporate plaintiff and the second cause of action on behalf of both plaintiffs is based on an agreement to protect plaintiffs "from" and "against" certain claims. An agreement to hold plaintiffs harmless from claims constitutes a promise to indemnify against loss rather than a promise to indemnify against liability and, in the absence of an allegation of actual loss, a cause of action is insufficient.”). Cody v. Gaynes, 279 A.D. 910 (2nd Dep’t 1952)

• To find an indemnification obligation to be one indemnifying liability as opposed to loss, the provision should include language such as “any and all liability for losses and/or expenses of whatsoever kind of nature(including, but not limited to, interest, court costs, and counsel fees)” and otherwise expressly require indemnification “as soon as liability exists or is asserted” or “any claims, losses, liabilities and expenses.” 23 NY Jurisprudence (2nd Ed.) Contribution, Indemnity, and Subrogation § 131.

80

Voluntary Payments Distinguished

• “while the scope of subrogation is broad, it cannot be invoked where the payments sought to be recovered are voluntary. Simply stated, equitable subrogation is unavailable if payments made on behalf of another are made voluntarily; a mere volunteer, with no obligation to pay or interest to protect, is not entitled to aid by subrogation.” 23 NY Jur Contribution, Indemnity, and Subrogation § 174 (2012) (emphasis supplied).

81

Example

• Seller is obligated to indemnify Buyer

• 3P claims against Buyer

• Buyer turns claim over to Insurer, who pays 3P

• Insurer then seeks payment from Seller under contractual indemnity:

• Possible defense to ability of Insurer to rely on indemnification if payments voluntary. See Maryland Casualty Co. v. Grace, 292 N.Y. 194 (1944)(NY only require reimbursement per indemnification agreement for payments made if the amount paid was reasonable and in good faith).

82

E.g., New York Law

• Party cannot recover for a voluntarily made payment made (1) with full knowledge of the facts and (2) absent fraud or mistake of material fact or law. However, when the insurer pays for losses sustained by its insured, it is entitled to recover those payments from the wrongdoer by subrogation. NYP Holdings, Inc. v. McClier, 65 A.D. 3d 186, 189 (1st Dep’t 2009).

83

Relationship to Other Contract Issues

• Indemnification is a contractual obligation to pay on events coming within the scope of the contract

• It is a clause that is part of the contract

• If it is a sales contract, the Uniform Commercial Code will govern that contract

• Other provisions of the contract can impact indemnification provisions

84

Liquidated Damages: Mandated in Event of Breach

• “Parties to a contract may provide for anticipatory damages in the event of failure to complete performance within the time specified, as long as such agreement is neither unconscionable not contrary to public policy.” X.L.O. Concrete Corp. v. John T. Brady and Co., 104 A.D.2d 181 (1st Dep’t 1984)

• “A clear contractual provision limiting damages is enforceable absent a special relationship between the parties, a statutory prohibition, or an overriding public policy.” Smith-Hoy v. AMC Property Evaluations, Inc., 52 A.D.3d 809 (2d Dep’t 2008).

85

Indemnification of Settlement

• Should be addressed in the indemnification clause

• Business issues: do you want your indemnitor giving your customers a hard time?

• Who controls the terms of the settlement?

• Who conducts negotiation? Who approves? What criteria? Timing

86

To Notify or Not to Notify

• No requirement of notice unless by contract

• Where the contract does not require notice of settlement beforehand to the indemnitor, then if no notice is given, and the indemnitee proceeds to judgment or settlement, then in order to recover, the indemnitee must prove (1) it would have been liable and (2) there was no good defense to that liability. The rationale for applying this standard makes sense; it is that the indemnitor has no control over what it has to pay if there is no notice. Feuer v. Menkes Feuer, Inc., 8 A.D. 2d 294 (1959)

87

Burden of Proof: Liability and Reasonableness

• Burden is on the indemnitee to prove the reasonableness of settlement amount as against indemnitors. Schirmer v. Athena-Liberty Lofts, LP, 48 A.D. 3d 223 (2008)

• “Where a party voluntarily settles a claim, he must demonstrate that he was legally liable to the party whom he paid and that the amount of settlement was reasonable in order to recover against an indemnitor." Jemal v. Lucky Ins. Co., Ltd., 260 A.D. 2d 352, 353 (2d Dep't 1999).

88

Some Courts Require Showing of No Good Defense

• New York law, even if the agreement does not provide for notice, “where an indemnitor does not receive notice of an action settled by the indemnitee ‘in order to recover reimbursement [for the settlement], [the indemnitee] must establish that [it] would have been liable and that there was no good defense to the liability.’” Deutsche Bank Trust Company of America v. Tri-Lins Investment Trust, 74 A.D. 3d 32, 39 (2010)

89

Meaningful Opportunity

• If indemnitee fails to give indemnitor notice of proposed settlement and meaningful opportunity to assume defense, settling indemnitee not entitled to indemnification unless establishes amount of indemnified liability. Montauk Oil Transportation Corp. v. Tug “El Zorro Grande,” 54 F. 3d 111 (2nd Cir. 1995).

• Notice need not be in writing.

• Covenant of Good Faith and Fair Dealing

90

Sufficiency of Notice

• In Deutsch, notice had been served on the indemnitor and, as the court observed it had been “well aware” of the underlying action for two years and therefore had sufficient notice.

• Even though the provision did not address notice, the court held that if there is no notice given to the indemnitor then in order to get reimbursement, the indemnitee must establish (1) it would have been liable and (2) there was no defense to the liability. Even where there is notice, and the indemnitor is bound, it is bound only to reasonable good faith settlements.

91

Reasonableness Matters

• See also Dunn v. Uvalde Asphalt Paving Co., 175 N.Y. 214, 218 (N.Y. 1903)(“loss or damage may be voluntarily paid by the innocent party who is legally liable without waiting for judgment . . . but, in that event, he undoubtedly assumes the risk of being able to prove the actionable facts upon which his liability depends as well as the reasonableness of the amount which he pays.”)

92

Proofs

• Detailed submissions before pay 3P

• Level of investigation

• Can’t assume blank check

93

Relationship to Other Contract Issues

• Indemnification is a contractual obligation to pay on events coming within the scope of the contract

• It is a clause that is part of the contract

• If it is a sales contract, the Uniform Commercial Code will govern that contract

• Other provisions of the contract can impact indemnification provisions

94

Damages

• Liquidated damages provision

• Injunctive relief

• Limitations on consequential damages

• “Willful misconduct” and “malice”

• Interest

• Enforcement/recognition issues

95

Liquidated Damages

• “Parties to a contract may provide for anticipatory damages in the event of failure to complete performance within the time specified, as long as such agreement is neither unconscionable not contrary to public policy.” X.L.O. Concrete Corp. v. John T. Brady and Co., 104 A.D.2d 181 (1st Dep’t 1984)

• “A clear contractual provision limiting damages is enforceable absent a special relationship between the parties, a statutory prohibition, or an overriding public policy.” Smith-Hoy v. AMC Property Evaluations, Inc., 52 A.D.3d 809 (2d Dep’t 2008).

96

Indemnification and Limitation of Damages

• What if Party A agrees to indemnify Party B for all damages incurred by a third party?

• Third party recovers consequential damages against Party B.

• Party A and Party B, though, have limitation of damages clause precluding consequential damages

• Unless the indemnification clause limits recovery, Party A probably liable for all

97

Basic Principles

• Insurer/subrogee succeeds to rights and benefits available to insured/subrogor

• But cannot succeed to or acquire rights not possessed by insured. Chemtrol Adhesives, Inc. v. Am. Manufacturers Mutual Ins. Co., 42 Ohio St. 3d 40 (1989).

98

Chemtrol (simplified facts)

• Chemtrol had contract with Midland-Ross • AMMI insured M-R. • Chemtrol sued for AMMI for property damage

based on defective products sold by M-R, under extra-contract theories including as negligence and strict liability, as well as breach of warranty

• Damages included consequential damages • Contract had liability limitation excluding

consequential damages • Property damage only; NO personal injury

99

Economic Loss Doctrine

• Denies recovery in negligence for purely economic loss • Product liability law protects personal injury but not economic

expectations (Chemtrol) • “In the instant case, Midland-Ross provided Chemtrol with an arch

dryer pursuant to the contract between them. If the defect in the arch dryer had caused personal injury or damage to other property of Chemtrol, Midland-Ross might be found to have breached its duty of care imposed by law, and recovery in negligence would accordingly lie. However, Chemtrol's losses here were economic, i.e., additional expenses incurred because the Midland-Ross arch dryer did not perform as expected. Midland-Ross' duty to provide a working arch dryer arose not under the law of negligence but rather under its contract with Chemtrol. Accordingly, it is the law of contracts, and not the law of negligence, to which Chemtrol must look for a remedy”

100

Distinctions

• Property damage can be covered if damage to other property, and therefore strict liability or negligence could lie

• But where the damages are economic—i.e., additional expenses based on lack of performance—then resolved under contract, not tort law

101

Limitation of Liability Issue

• UCC permits seller to limit buyer’s remedies for breach of warranty (UCC 2-718, 719)

• Assuming no unconscionability, will be upheld

• So Chemtrol as subrogee was bound by the limitations of damages

102

Phoenix Assurance Co. of NY v. Shell Oil Co., 611 So. 2d 709 (La. Ct. App.

1992) • Shell to sell ethylene to Quantum

• Shell factory accident and could not deliver

• Quantum claimed consequential damages in terms of business interruption

• Quantum’s subrogee insurers sued to recover

• Shell-Quantum contract had mutual bar on consequential damages

• Section 2-719 applicable; Shell won on point

103

Can Apply to Tort Claims if By Contract

• Plaintiff was subrogated to claims of truck purchasers

• Defendant contract with purchasers had limitation of consequential damages

• Courts split on whether strict tort liability can apply to property damages where that liability excluded by agreement. K-Lines, Inc. v. Roberts Motor Co., 541 P.2d 1378 (Or. Sup. Ct. 1975)

104

Velez v. Craine & Clark Lumber Corp., 33 N.Y.2d 117 (1973)

• Court considered whether a party can limit its liability for strict liability in tort:

• "We are then thrown back on broad principles of contract law. Although strict products liability sounds in tort rather than in contract, we see no reason why in the absence of some consideration of public policy parties cannot by contract restrict or modify what would otherwise be a liability between them grounded in tort."

105

Conclusions

• Party A seller and Party B buyer can limit their damages as between them, and including recovery as to tort claims, based on basic contract principles.

• If Party B’s customers sue Party B, limitation of liability will be a function of economic loss doctrine or equivalent and whether the limitation is enforceable against the consumer in those circumstances

• If Party B or its insurer pays more than it had to by ignoring its limitation of damages clause, it may be deemed a voluntary payment

• If Party A and B limit the scope of indemnification to take into account limitation of damages, then B may bear risk for consequential damages and not be able to recover from A

• Where B’s customers, not in privity with A, sue under tort and strict liability, limitation of damages clause in their contract with B not relevant.

106

Indemnification and Statutes of Limitations

• Parties generally free to establish contractual limitations of action

• If sales, UCC governs and mandates at least one year

• If not sales, may be function of other statute

107

Statute of Limitations Issues

• Generally, indemnification claim accrues from date the claim is paid to the third party

• Generally, claim for warranty or breach of sales contract accrues from date of delivery

108

Example

• Contract has 2 year limitation

• Seller indemnifies Buyer

• Sale of goods Seller to Buyer: January 5, 2008

• Sale from Buyer to 3P on January 5, 2009

• Property damage to 3P occurs February 5, 2009

• 3P files claim December 5, 2009

• Buyer pays 3P February 5, 2010

• Buyer claims against seller March 5, 2011

109

Analysis

• If starts from date of payment, then accrues on February 5, 2010

• But if accrues from date of sale to buyer, accrues January 5, 2008 and out of time

• Not a question of 3P ability to sue directly against original seller, or to assert other claims

• Issue is which limitations applies

110

Resolution

• Only one case found directly on point: Electric Insurance Company v. Freudenberg-NOK, 487 F. Supp. 2d 894 (W.D. Ky. 2007)

• Held: UCC statute and accrual on date of original sale applied for contractual indemnification claim, but common law indemnification accrued on date paid

• Difference results in levels of proof as noted above

111

First Party Indemnification

• The issue is whether an indemnification provision applies only to third parties or not. This will depend on the language; unless the clause has clear language that its indemnification provisions encompass first-party claims, it is likely that such a claim will be dismissed. See, e.g., Ingwerssen v. Planet Group, Inc. (D. Neb. 2011).

112

First Party Indemnification (cont’d)

• On the other hand, where there is plain language to that effect, the first party claim may be indemnified. Sequa Coatings Corp. v. Northern Indiana Commuter Transp. Dist., 796 N.E.2d 1216, 1229 (Ind. Ct. App. 2003) ("plain language" of an indemnity provision read to require first-party indemnification); see also LH Controls, Inc. v. Custom Conveyor, 974 N.E. 2d 1031 (Ind. Ct. App. 2012).

113

First Party Indemnification (cont’d)

• First and Seventh Circuits have rejected the argument that indemnification agreements should be read as only applying to the claims of third parties. Caldwell Tanks, Inc. v. Haley & Ward, Inc., 471 F.3d 210 (1st Cir. 2006); Edward E. Gillen Co. v. U.S., 825 F.2d 1155, 1157 (7th Cir. 1987).

• The provisions included the words “indemnify and hold harmless” but omitted the word “defend.” Caldwell held that a party could recover first party damages and attorney’s fees pursuant to a provision that read: “The Contractor… will indemnify and hold harmless the Owner…” Caldwell Tanks, Inc., 471 F.3d at 213-17.

• Therefore, the language used must be specific.

114

First Party Indemnification and Attorneys Fees

“The indemnification provision . . . encompasses loss "caused or arising out of" the failure to comply with the agreement . . . Interpreting the indemnification provision in the context of the contract as a whole, we do not find support that the parties intended the indemnification to cover first party attorney's fees. Where the contract provides no express provision for recovering attorney's fees in a first party action establishing the right to indemnity, however, we decline to extend this exception to the American rule, which generally does not allow for prevailing parties to recover attorney's fees.” Nova Research, Inc. v. Penske Truck Leasing Co., L.P., 405 Md. 435 (Md. 2008)

115

Third Circuit

The Travelers Indemnity Co. v. Dammann & Co., Inc., 594 F. 3d 238 (3rd Cir. 2010)

• Travelers insured Dammann, raw food producer.

• IFF makes flavoring, bought vanilla beans from Dammann, which contained mercury

• IFF claimed damages against Dammann and Dammann sought coverage

116

Travelers (cont’d)

• Travelers brought DJ against Dammann and IFF for ruling of no coverage; Dammann counterclaimed for coverage of IFF’s claims of breach of contract, breach of fiduciary duty, breach of duty of good faith/fair dealing.

• Dammann third partied in supplier (CBI) to it of the bad beans and sought indemnification

• IFF sought leave to file cross claims against Dammann and CBI on breach of express and implied warranty, and product liability

117

Traveler’s (cont’d)

• Trial court denied motion on limitations grounds and economic loss doctrine

• On appeal, affirmed.

• Of relevance was claim based on express indemnification, found in two clauses:

– First: “Seller shall be responsible for claims by third parties against Buyer for loss or damage based on personal injury or destruction of property due to defects in the product for which Seller is responsible.”

118

Traveler’s (cont’d)

• Second clause:

– “Seller agrees to defend, indemnify and hold harmless Buyer from all claims, actions, losses, damages and expenses resulting from any inuury to persons, damage to property or action by any regulatory agency, arising out of or in any way associated with the design, installation, and/or operation of any production formulation, packaging, or support equipment (including equipment owned by Seller, Buyer or Third Parties), used in the production, processing or handling of the product(s) sold hereunder and all raw materials used in the production.”

119

Traveler’s (cont’)

• Trial Court said indemnification only applies to claims by third parties.

• Third Circuit:

– no New Jersey law to support that

– “Indemnity” as defined in Black’s Law Dictionary supports broad reading

– “we cannot hold that the first-party indemnification claims such as the one IFF seeks to maintain are categorically barred as a matter of law in New Jersey absent direct authority to that effect.”

120

Traveler’s (concluded)

• Applying contract interpretation rules, this clause did not constitute such 1P indemnity:

– “just as Damman cannot ‘defend’ IFF from itself or ‘hold harmless’ IFF for IFF’s own wrong, Damman cannot ‘indemnify’ IFF for IFF’s own loss. Put another way, the only sensible reading of that clause evidences a requirement that third-party liability exist for the clause to be triggered. IFF’s interpretation impermissibly reads that requirement out of the contract.”

– Practice point is to distinguish between other breach of contract claims and indemnification claims

121

Mutual Indemnification

• It is not uncommon for parties to agree to mutual indemnification to the extent that each agrees to “indemnify and hold harmless” the other for the other’s negligence. A mutual “duty to defend” clause raises the tautological situation where two parties that each owe each other a duty to defend, are both named in an action and both alleged to have committed negligence. Arguably, each owes the other a duty to defend.

122

Insurance Implications

• Anti-subrogation rule prevents insurer from suing its own insured.

• Applies to preclude suits against additional insureds. Pecker Iron Works of New York, Inc. v. Travelers Ins. Co., 99 N.Y.2d 391 (2003).

• In the case of mutual indemnification clauses, the anti-subrogation rule may be read to void a mutual indemnification where the alleged indemnifying party is also an additional insured under the indemnitee’s insurance policy. See, .e.g, Pennsylvania General Ins. Co. v. Austin Powder Co., 68 N.Y. 2d 465 (1986).

123

Strategies for Drafting & Negotiating Effective Indemnity

Provisions • Use specific language to use for

indemnification clauses that will greatly minimize risk

• Have spoken above of need to understand the scope and the industry, and the ability of the indemnitee to control the circumstances

124

Critical Provisions To Include and Exclude When Drafting

• Define scope

• “hold harmless”

• “loss and liabilities”

• “any and all”

• “arising out of or related to”

• “including own negligence”

• “whatever the cause”

125

Business Issues

• A supplier sells a part that goes into a machine or appliance, that is sold six months or a year after the part is made.

• The supplier has a one year warranty.

• Three years, five years, seven year later, the appliance malfunctions and a 3P suffers property damage.

• Consider an agreement to address amounts, percentage shares, time frame; otherwise, litigating hundreds or thousands of small cases

126

Ensure Maximum Protection: Ways to Identify Contingencies & Avoid Risks

• Using performance risks and warranty breach clauses for protection: use language to address ability to repair or replace, and tie to notice provisions

• Depends on practicalities

127

Ways to Handle Exclusive Remedy Clauses

• Repair or Replace: who determines?

• Cannot provide no remedy—”fail of essential purpose”

• If have a limitations of damages clause, use language to insist that if the repair or replace clause fails, the limitations of damages clause remains intact

• Some courts consider them dependent and if the repair or replace fails, the consequential damages one fails as well

128

Willful Misconduct

• Used an as exception to limitations of damages

• Difficult to prove, as no real “negligent” breach of contract; all breaches are intentional as a rule

• Creates litigation issues

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Metropolitan Life Insurance Co. v. Noble Lowndes Int’l, Inc., 84 NY 2d

430 (1994) • Willful acts require “truly culpable conduct,

not merely intentional nonperformance of the Agreement motivated by self-interest”

• “Willful” is term of tort, not contract, and requires “wrongful conduct in which defendant willfully intends to inflict harm on plaintiff at least in part through the means of breaching the contract between the parties . . .” with intentional wrongdoing.

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Representations, Warranties and Covenants

• Representations are statements of present facts as of the time they are made

• Warranties are promises that something is and will remain true in the future

• Covenants are promises to do or not do something.

• Draft when they end and if they survive, as relevant

• Merger clauses will not preclude fraud

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Indemnification Issues

• The indemnification can provide specifically for damages flowing from breach of representations, warranties and covenants.

• If not referenced, litigatable issue as to scope:

• Should also specify point at which indemnification obligation arises—at time of claim or actual loss

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Example

• "9. INDEMNITY

• (A) AGS shall at all times indemnify and hold harmless HLTD [Hooper], its successors and assigns and any of its officers, directors, employees representatives, and/or agents, and their heirs, executors, administrators, successors and assigns or each of them against and from any and all claims, damages, liabilities, costs and expenses, including reasonable counsel fees arising out of:

• (i) Any breach by AGS of any express or implied warranty hereunder and any express representation or provision hereof . . .” Hooper v. AGS Computers, 74 NY 2d 487 (1989)

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Keys to Mitigate Loss and Damages Issues With Indemnification Provisions

• To recap lessons:

– Narrow scope if indemnitor, broaden if indemnitee

– Address settlement, who controls litigation, chooses counsel, pays for it, approves settlement

– Negotiate caps, tie to warranty provisions, use time limitations

Documents

Drafting Enforceable Limitation of Liability Clauses …media.straffordpub.com/.../presentation.pdf2017/03/30 · Common uses of LOL •Can be used with sale of goods: UCC 2-719 •Very