“We need to do a product recall.” Whether you are a large OEM, or one of its Tier 1 or lower suppliers, the words “product recall”, signal an unexpected and often uncontrollable liability exposure. For the OEM this exposure is comprised of the direct cost of the recall plus the loss of company goodwill, loss of use of the product by upset end-users, and perhaps a precipitating traditional bodily injury or property damage claim. Product recalls are a significant financial risk for all OEM’s – witness the recent flurry of automaker recalls. For the supplier who provided a defective part or component, the results can be more devastating. Typically there is just not enough profit margin in the supply of a part or component to cover the risks of a recall. Unlike a standard warranty claim remedy, the supplier not only has the obligation to repair or replace the defective part or component, but will likely be saddled with the costs of removal and reinstallation plus the other direct and indirect recall costs incurred by the OEM and end-user. This exposure could be a terminal financial blow for many part and component manufacturers.
Indemnification – the “I” word.
We all know indemnification provisions when we see them – those long, complex provisions that seek to allocate risk among parties to a contract. We have a general appreciation for the indemnification concept – shifting responsibility for a loss from one person to another and compensating someone for a loss already sustained. But a general appreciation for a concept doesn’t help us much when it comes time to read, interpret and negotiate the details of these complex and often poorly drafted provisions. If we are going to do a better job of managing our contractual risks then we need to understand why these provisions seem so much more difficult to deal with than other aspects of most contracts.
Business Teaming – turning trust into credibility
Today’s business world is a landscape of ever increasing competition and complexity. Few organizations can gather and maintain all the resources they would like to have at their disposal as they pursue and execute new work. In most industries this challenging reality is often overcome by taking advantage of strong teaming relationships between businesses. Solid business teaming arrangements can be a solution to meeting your business goals.
New Year – click refresh on contract forms
How long has it been since you have had a hard look at your standard contract forms? Have you really considered your commercial terms in light of their use in practice? When was the last time you assessed the implications of recent case law or changes in state and federal regulations? Are your current insurance coverages and limits reflected in your documents?
With the new calendar year, review and refresh your contract forms and templates; particularly if it has been several years since a fresh, independent read of your working forms. Read more
Contracts – Elements and Formation
A contract is simply an agreement between two or more persons to do or not to do a particular thing. However, as with most legal concepts the devil is in the details.
In most jurisdictions a contract is enforceable if it contains four basic elements:
(1) competent parties;
(2) proper subject matter;
(3) offer and acceptance; and
Limitation of Liability – Delaware Case Study
Limitation of liability provisions are a common tool for managing risk in contracts for services. The basis for the concept is simple economics. In many industries outsourcing work creates a risk management dilemma for both the client and the service provider. Often the economic risks associated with a service provider’s error, or a bad result, far exceed the fee paid by the client for the work. To manage the liability associated with this exposure many service providers seek to limit their liability to the amounts paid to them for their service (or even a fraction of that amount more closely associated with their potential profit margin).
Authority to Bind – “You did what?”
“IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their officers or duly authorized representatives.”
Usually, just above the signature block of most contracts, this short representation doesn’t get much attention. So, just who are these officers and duly authorized representatives? Do they actually have the ability to legally bind their company? Are they acting within their authority?
We exercise our understanding of authority on a daily basis. In our personal lives, for example, we sign a check for a purchase or authorize a medical provider to access our private health information. Likewise, most married folks check in with their spouse before committing to a “big” purchase or bringing home a new puppy. The failure to do so can result in the “you did what?” conversation – it’s generally better to avoid this result.
“Pay when Paid” v. “Pay if Paid” – a Subcontractor’s nightmare
“Everything was going along fine and then I stopped getting paid. Because I had a prior relationship with the prime contractor I just kept working. Then I found out the project was shut down and the owner was out of cash. What do I do now?”
This is a common scenario for many subcontractors. In many instance it can turn into a subcontractor’s worst nightmare – no payment, unexpected legal costs and yet a continuing obligation to make payroll or pay lower tier vendors and suppliers. The first step in the legal assessment is to review the contract documents between the subcontractor and the prime contractor. Specifically the payment provisions are usually the focus of that initial assessment. Is it a “pay when paid” or a “pay if paid” provision? Does the payment provision merely fix a time for payment or does it actually shift the risk of the owner’s insolvency to the subcontractor?
A Case Study in Rental Engine Warranties – Agape v. Covington
For aircraft owners planning is the key to a successful scheduled engine overhaul event. Owners seek estimates, select an overhaul shop, arrange for a rental engine and set the date for an engine exchange months in advance of a scheduled overhaul. Typically there will be at least two significant legal documents associated with this event. One is the engine overhaul agreement which sets forth the key liability terms, the detailed scope, a schedule and the expected cost associated with the engine overhaul. The second is the engine lease agreement which governs the lease of a substitute engine for use during the period needed to complete the engine overhaul. This “rental”, as they are commonly referred to, is often supplied by an overhaul shop as an accommodation while the customer’s engine is in the shop so that their aircraft can remain operational. The accommodation, which is not free, is an alternative to being grounded.
Liquidated Damages – a remedy for breach of contract
In the context of commercial contracts the term “liquidation” means to fix or establish the damages owed in the event of a breach of contract. Rather than add the calculation of the dollar amount of damages for breach to a list of items in dispute, a carefully drafted liquidated damages (“LD’s”) provision can establish the dollar damages for breach at the outset of the relationship. The law on the enforceability of LD’s varies slightly from state to state but the general rules are well settled and fairly easy to implement. Using a well crafted LD’s provision in a contract can offer benefits to both parties as they allocate particular transaction risks.