Tuesday, April 16, 2013

Your “View" of Contracts will always depend upon where you sit.

Everyone tends to view contract issues based upon where they sit and the impact it will have on them, not the impact the issue may have on the other party. Owners, Contractors and Subcontractors have different views of the same issue. Individuals involved in negotiations usually have different views based upon the level they are at in the organization as their goals and motivations will be different. A sales person may be focused on making the sale and getting their commission. A sales manager or president may be more focused on adding a new customer or penetration into a new market. Individuals in different geographies, different cultures and with different laws will have different views than people from other locations where risks may be viewed differently. The economics of the project or work will always create a different view for both parties. The potential risks involved will be viewed differently. Between regions or countries business may be done differently and behavior may be different based on cultures. Different markets will have different dynamics. What may be common in one market may be an exception in another market. To be successful in negotiations you always need to view issues from both parties perspectives so you understand not just what they are saying but why they are saying it as it opens up possible common solutions. I’ve had CEO’s of companies ask why they didn’t get a contract and when I explained why, I would explain why I needed certain commitments and why I was not prepared to accept the position their team held. Many times their response was “oh, we could have agreed to that”. I’ve also escalated negotiations up to the sales VP or CEO level to make sure the “no” I was getting represented the company’s position.

Recently I had someone ask a question about survival of terms. As a service provider they didn’t like customer wanting certain clauses to survive perpetually. They thought there should be a certain time limit for survival. In asking their question they showed that they were only thinking about the issue from their perspective and not the buyer or owner’s perspective. They were looking at it from a supplier perspective of wanting to have a firm period after which they had no liability. My response was to share a buyer or owner perspective of why an owner might want certain terms to remain open.

There are two types of claims a party needs to be concerned with. One is contractual liability. The other is third party liability. In most countries there are legal statute of limitations. What a legal Statute of Limitations does is create a legal cut off period after which claims may not be brought in court. Claims made within that period will continue until the dispute is resolved by the agreed method in the contract. This means that for certain clauses having them be perpetual may provide no real value when there are Statute of Limitations laws that prevent claims from being made after the allowable period in the statute of limitations has passed.

For example, a third party that is injured in New York state has six years after injury in which to make a claim. In New York, a claim under a contract has a two-year limit to make claims after the completion of all obligations. This means that if you had a warranty that was five years, after that warranty was complete there would be 2 years from that to file a contract claim. After that no claim under the contract could be brought.

For some liabilities such as product liabilities both the supplier and the buyer (if they resold it to a third party) can be potentially liable over the life of the product, where you would be excused from liability on each individual claim only after the individual's claim rights have expired under the Statute of Limitations.

One of the keys in how the buyer would view the issue would be whether they can be liable for the acts of the supplier or contractor to a third party who suffers injuries or damages as a result of the supplier or contractor’s negligence. In many locations a buyer or owner could be liable for the supplier's negligent actions under the theory of agency. In those locations buyer contracts usually include indemnifications and insurance requirements to protect against third party claims. All these rights and concepts will vary of course based upon the laws of the location agreed for both applicable contract law to be applied and jurisdiction.

The most common section that an owner or buyer may want to survive the completion of the contract are taxes, payment, warranties, indemnities, limitation of liability, choice of law and forum and order of precedence. Why would a buyer want each of these to survive the completion or expiration of a contract?

For taxes if a supplier failed to properly calculate or pay required taxes to a governmental authority the government could go against the owner or buyer at any time up until there is a statute of limitations that would prevent collection.

For payments, while this may apply in some cases where the supplier or contractor must pay the buyer or owner, in most cases this protects the supplier or contractor right to collect if the have not been paid.

Typical warranty clauses include both business warranties such as a period during which defective products or services will be repaired or replaced. That type of warranty can have a specific term that it will survive for. Other warranties are more legal and those are one that a owner or buyer would want to survive. For example a warranty that the work or product complied with applicable laws you would want to survive in the event that there was a claim by local authorities that it didn’t. Warranties can include commitments on behavior such as complying with applicable import or export laws as claims from applicable agencies could come at any time.

Indemnifications can be indemnifications against third party claims for injury, death or damage to personal property. They need extended periods as the third party can make claims at any time up to the Statute of Limitations has expired that would prevent the claim. You may also have intellectual property infringement indemnifications for third party claims that something the supplier or contractor used or provided infringes upon the intellectual property rights of a third party. In those cases the statute of limitations will vary based upon the location and may also vary based upon the type of intellectual property that is claimed to have been infringed upon. For example. in the U.S. claims of patent infringement have a six-year limitation. Infringement of copyright has a three year limitation.

Limitation of liability sections usually protect both parties and both parties should want those to survive as they may limit claims the buyer or owner can make against the supplier or contractor in that period after the contracts has been completed or expired. Without that surviving the supplier or contractor could potentially have unlimited liability.

The choice or laws and forum and order of precedence sections should survive so in the event of a dispute during the survival period, the courts will honor what was agreed by the parties. Further they will interpret the documents in the priority the parties agreed.

When you think about issues from both your and the other party’s perspective it becomes easier to explain what you need and why you need it to the other party. In the example, while the supplier may want to cut off liability. the buyer will be concerned with potential third party claims that could occur in the future based upon the supplier's actions or inaction during the contract. Excusing the supplier of liability to the buyer could have the buyer being solely responsible for the supplier's actions if the third party only sued the buyer.