Contracts - Warranties And Indemnities 2011


Published on

Presentation by Steven Brown on use of warranties and indemnities in drafting contractings

1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • In order to be successful in an action for damages, the onus will be on the party alleging the breach to establish a sufficient connection between the breach and the loss suffered.Causation can be established in one of two ways:1. if it can be proved that, but for the other party's breach, the alleging party would not have suffered the loss or damage; 2. the other party's breach is so connected with the alleging party's loss or damage that, "as a matter of ordinary common sense and experience it should be regarded as the cause of it."3 Even if a causal link is established, a loss resulting from the breach may not be compensable if it is too remote. The alleging party must be able to satisfy the test for remoteness as set out in Hadley v Baxendale (1854) 9 Ex 341.The two limb test in Hadley v Baxendale provides that damage will not be too remote if it may be reasonably considered:1. as arising naturally according to the usual course of things from the breach (the first limb); or2. to have been reasonably in the contemplation of the parties at the time they made the contract as a probable result of it (the second limb).
  • In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] QB 26, the plaintiffs had chartered a ship from the defendants which was to be fit for ordinary cargo service.Due to the age of the machinery and the incompetency of staff, 20 weeks of sailing were lost as a result of engine trouble and the plaintiffs rescinded the charter, suing for damages and breach of contract.The court held that while the defendants were in breach of their obligations, seaworthiness was not a condition of the contract and did not entitle the plaintiffs to rescind. It held that the breakdown and delays suffered did not defeat the main purpose of the contract and stated that when classifying a term, the court should consider the events which occurred as a result of the breach at the time of the purported rescission of the contract and decide whether the occurrence of those events would deprive the party of substantially the whole benefit of the contract as intended by the parties.
  • Contracts - Warranties And Indemnities 2011

    1. 1. Warranties and Indemnities- Contract Considerations Steve Brown
    2. 2. Warranties and Indemnities -Contract Considerations Introduction  We have the knowledge of terms warranties and indemnities  Do we use it in a practical way
    3. 3. What is a contract?All contracts areagreementsbut I‟ll pick you up for dinner at 8 o‟clocknot all agreementsare contracts
    4. 4. The Difference BetweenAgreements and Contracts? Contractsare ALWAYS Legally enforceable Courts will enforce as the law dictates
    5. 5. Contracts – what are they?Legal Analysis –Enforceable forms of agreementsthat: comprise promises to performThe breach of which courts will giveremedies
    6. 6. Formalities and termsTerms of acontract conditions Warranties indemnities
    7. 7. Formalities and termsTest for a term being a condition orwarranty:"the test of essentiality is whether itappears from the general nature of thecontract considered as a whole, or fromsome particular term or terms, that thepromise is of such importance to thepromisee that he would not haveentered into the contract unless he hadbeen assured of a strict or substantialperformance of the promise, as thecase may be, and this ought to havebeen apparent to the promisor." Tramways Advertising Pty Ltd v Luna Park (N.S.W) Ltd (1938) (SR) (NSW) 632 at 641-642 per Jordan CJ
    8. 8. Formalities and terms Warranties contractual terms that act as an assurance. Damages for breach not termination of contract. EG „The statutory books of the company are not up to date.‟
    9. 9. Formalities and terms Warranties contractual terms that act as an assurance. Damages for breach not termination of contract. EG „The statutory books of the company are not up to date.‟
    10. 10. Formalities and terms Indemnities Are contractual terms whereby a party undertakes expressly to make good a loss that arises from a stated set of events
    11. 11. Formalities and termsIndemnities EG„In consideration of payment by thebuyer of the consideration, theseller shall indemnify, defend andhold harmless the buyer againstany liability, damage, loss orexpenses (including legal fees andexpenses of litigation) incurred byor imposed on it in connection with any claims, suits, actions,demands or judgments (including, but not limited to, actions in theform of tort, warranty or strict liability) arising directly or indirectlyfrom or in connection with bringing the statutory books up to dateand in accordance with all applicable legal requirements.‟
    12. 12. Difference BetweenWarranties Indemnities Damages only  Provide guaranteed Must prove loss compensation where a Only damages if party breach of warranty might can show warranty not give rise to damages breached resulted in  Compensation could be reduction of value of damages or some other asset acquired (loss) remedy Onus on party asserting  No clear duty to mitigate loss Duty to mitigate loss
    13. 13. Difference Between In the example warranty assuming NO disclosure had been made, the buyer claiming under the warranty would have to show  That the statutory books were not up to date; AND  The value of the business was reduced as a result of this Whereas with the example indemnity the buyer would simply demand repayment of its costs in updating the statutory books
    14. 14. Risk and (Expected) Return Negotiation  To get obtain bargain by minimizing risk of non performance  Because risk inherent in all commercial transactions
    15. 15. Because “ an ideal world the risk pendulum would lie perfectly balanced.. However, in reality the position depends upon the bargaining position of the two sides.”
    16. 16. Examples of Inherent Risk WR Ruffler Pty Ltd  Codelfa v Idohold Pty Ltd Constructions Pty Ltd v State Rail Authority of New South Wales
    17. 17. Lawyers Role In Practice Assist in the negotiation to  Identify the inherent risks  Assist in negotiation the sharing of the risks  Thereby minimizing the risks occurringby drafting clauses that are simple andhuman for the parties to read and use asmanagement tools not to be hidden away ina drawer.
    18. 18. Contracts – what are they?Practical Analysis – Contracts are:1. Risk Minimization tools2. Checklists or Rule BooksAttempting to ensure performance
    19. 19. Contracts – as riskmanagement toolsBuying an apple To construct a project
    20. 20. Contracts - As Checklists orRule Books  Who is to do what? - That is what has to be performed.  When are the servicesgoods to be supplied– when are they to be paid for?  How are the servicesgoods to be supplied.  Consequences of good or poor performance.
    21. 21. Why have a Contract instead ofan AgreementRisk Formality & Legalityleast formal to most formal formform of Agreement oral contract of written contract
    22. 22. Why we need to understandhow courts interpret contracts Maple Flack Co Ltd v Universal Furniture Products (Wembley) Ltd 16th installment of 200 defective not enough to terminate contract for failure to perform
    23. 23. How courts interpret contracts Courts use rules of construction as pointers to discover the presumed intention of the parties to a contract. The rules are not slavishly applied. The rules are used to produce as reasonable and just result as possible.
    24. 24. Rules of Contract Construction The object of construing a contract is to ascertain what the mutual intentions of the parties were as to who is to do what, how and when from the words they used to express the obligations each assumed by entering into the contract. The intention of the parties is the meaning of the words they have used. There is at common law no intention independent of that meaning. The intention of the parties must be ascertained from the words used, in light of the surrounding circumstances and the object of the contract, in so far as the object has been agreed or proved. Courts construe the objective intention of the parties not the parties actual intention.
    25. 25. AS 4360 - Risk Evaluation Evaluated list of legal requirements compared to business units functions Risk Yes acceptable AcceptIdentify Unacceptable No residual risktreatment Reduce Reduce Transfer in Avoidoptions Likelihood Consequence full or in partcl 4.5.1 Assess treatment Consider feasibility, costs and benefits, and levels of risk options cl 4.5.2 Recommend Treatment Strategy Choose treatment strategy cl 4.5.3 Prepare systems to embed plans to reduce, transfer, avoid risk Implement Reduce Reduce Transfer in Avoid treatment Likelihood Consequence full or in part plans Yes Cl 4.6 cl 4.5.4 Risk acceptable ? Retain
    26. 26. Drafting for Performance1. Understand the legal aspects.2. Identify potential risks by drafting a contract as a checklist .3. Take practical steps to eliminate/minimise those risks.By taking these actions you can then draft to:  Reduce the likelihood of an event;  Reduce the consequences of an event;  Transfer in full or in part the consequences of an event (Negotiate a price to accept the risk); and/or  Avoid the event.
    27. 27. Drafting for PerformanceReduce the likelihood of the event ofnon- performance. Due Diligence
    28. 28. Drafting for PerformanceReduce the consequences of anevent [of non- performance] bydrafting the following clause: Warranties Indemnities Liquidated Damages Restraints of Trade Post employment of key personnel Exclusion clauses
    29. 29. Drafting for Performance Transfer in full or in part the consequences of an eventFirm Price A price which is not variable for any reasonFixed Price A price, the final value of which is fixed by reference to some variable parameter such as inflation, currency exchange rate, or maintainable profits of the businessesEarnout/ A price based on the post acquisition profits of theWorkout Price business so that the seller shares in the on going growth of the businesses
    30. 30. Drafting for PerformanceAvoid the event [of non performance] Don‟t proceed with the contract if the terms cannot be agreed upon
    31. 31. Drafting for Performance Use standard forms and established precedents where possible Always ascertain if what the parties are seeking to achieve is achievable List the items to be performed (draft a checklist) Obtaining performance is the key
    32. 32. Drafting for Performance Know what the parties want; Do their calculations; Think long term; think strategically; Recognise the risks of both action and inaction; Be prepared to constantly measure performance against the established bench marks; Review the process to ensure continual improvement; Invest the time and the resources to do it right and Analyze the risks of non performance eg use of AS4360
    33. 33. Questions?