Bulletin aerospace legal developments june 2013

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"American Style" International Supply Contracts. Discusses Liquidated Damages Provisions and Problems for European Companies doing business with U.S.

"American Style" International Supply Contracts. Discusses Liquidated Damages Provisions and Problems for European Companies doing business with U.S.

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  • 1. “American Style” Master Supply Contracts: Liquidated DamagesDo you know what your international supply contract really means? When you are late in deliveries or haveto defend against claims for product defects, will you lose sleep over the damages that you will have to pay?Just consider the enormous contract claims that may arise from the groundings of the Boeing 787 due to thelithium-ion battery issues.European suppliers now sign « American Style » contracts with U.S. and even European aircraft manufac-turers or their first-tier contractors. Your contractual liability can often include liquidated damages, buyer’sindemnification against third-party claims, and consequential damages. Suppliers should rightly be con-cerned about how courts will enforce damages clauses for delay or other breaches of contract, particularly inthe United States.Consider, for example, liquidated damages ( “LD”).In the United States, LD are often defined as an agreement between parties to a contract that fixes (inadvance) the amount to be paid as damages for a contractual breach, for example, $1,000 per day for eachday that deliveries are late under a supply contract. (See Cuesport Properties, LLC v. Critical Developments,LLC, where the Maryland Court in May, 2013, reaffirmed a “Late Performance” provision providing for LDbased upon a stipulated sum per diem or per day.)Liquidated damages have several advantages.For sellers, a LD provision reduces uncertainty by capping the seller’s liability, even if the cap turns out tobe greater than actual damages to the buyer. For the buyer, a LD paragraph reduces uncertainty by fixingat least an acceptable level of compensation in the event of a breach. If there is a dispute, an LD provisioneliminates the need for the non-breaching party to prove its actual damages, and streamlines and reducesthe costs of dispute resolution because the buyer need only prove the amount of delay.The Uniform Commercial § Code 2-718, which most American states have adopted and which applies to allcontracts for the sale of goods, defines LD as follows: “Damages for breach by either party may be liquidat-ed in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harmcaused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwiseobtaining an adequate remedy.”Buyers will want to avoid a state court construing a liquidated damages provision as a “penalty” and, accord-ingly, unenforceable. In most states, a LD provision will be viewed as a “penalty” when the damage result-ing from a breach of contract is susceptible of definite measurement, or where the stipulated amount wouldbe grossly in excess of actual damages. However, the amount agreed upon will be construed as enforceableliquidated damages when the actual damages contemplated at the time of the agreement are uncertain anddifficult to determine with exactness, and when the amount fixed is not out of proportion to the probableloss. Analysis of a LD provision depends on the parties’ intent, and the breaching party will usually have theburden of proving a LD clause’s impropriety.U.S. courts usually will not intervene under what is known as the “blue pencil rule” to modify a “liquidateddamages” paragraph so that the buyer can enforce a lesser amount than that called for in the liquidateddamages provision of the contract. The judge will either declare the “liquidated damages” provision to beenforceable or strike the paragraph as excessive and an unenforceable “penalty.”Two U.S. cases illustrate the risks and rewards of relying upon liquidated damages for breach of contract:Legal Developments: U.S. Aerospace SectorJune 2013 BulletinCONTACT INFORMATIONAnthony H. AnikeeffGovernment Contracts703.760.5206aanikeeff@williamsmullen.comGregory R. BishopMergers & Acquisitions804.420.6930gbishop@williamsmullen.comGregory T. BryantInternational Tax919.981.4001gbryant@williamsmullen.comHon. Patrick O. GottschalkEconomic Development &Inbound Investment804.420.6425pgottschalk@williamsmullen.comJahna M. HartwigExport Controls202.833.9200jhartwig@williamsmullen.comEliot NormanInternational Contracts & InboundInvestment804.420.6482enorman@williamsmullen.comDavid P. SandersCustoms202.293.8113dsanders@williamsmullen.comNC | VA | DC
  • 2. Lefemine v. Baron.This Florida case dealt with a liquidated damages provision in a real estate contract, which providedthat the buyer would forfeit its deposit of 10% of the sales price ($37,000) if it breached the contract.The LD provision would have been reasonable on its face but for an additional provision which gave theseller the option of either keeping the deposit as LD or suing under the contract for actual damages. Thecourt stated:“The reason why the forfeiture clause must fail in this case is that the option granted to Seller either tochoose liquidated damages or to sue for actual damages indicates an intent to penalize the defaultingbuyer and negates the intent to liquidate damages in the event of a breach. The buyer under a liquidateddamages provision with such an option is always at risk for damages greater than the liquidated sum.On the other hand, if the actual damages are less than the liquidated sum, the buyer is neverthelessobligated by the liquidated damages clause because the seller will take the deposit under that clause.Because neither party intends the stipulated sum to be the agreed-upon measure of damages, the pro-vision cannot be a valid liquidated damages clause.”Lessons for Drafting U.S. Aerospace Supply Contracts:In construing a LD provision, the parties’ intent is of paramount importance. If the parties intend forliquidated damages to be the remedy, avoid references to the right to elect alternative or cumulativeremedies —it creates a risk to the buyer that the LD will be viewed as a penalty and unenforceable. Ata minimum, suppliers should insist that LD be limited to a specific type of breach (such as damagesfor delay) and attempt to limit the buyer’s right to sue for actual damages to other types of contactbreaches, such as for defective products or failure to obtain all governmental approvals. Otherwise, theremedies provisions of the supply contract will be of uncertain enforceability, increasing the litigationcosts and risks for both parties. .International Marine, LLC v. Delta Towing, LLC.In this case, decided in 2013 by the United States Court of Appeals, the sales agreement for two tug-boats provided for $250,000 in liquidated damages if the boat was used in violation of a noncompeti-tion provision. The court upheld the LD provision, noting that the parties had heavily negotiated the LDprovision, which was originally $4 million per violation, down to $250,000. Moreover, the difficulty inproving damages was established by evidence about the nature of the boat charter business to whichthe clause applied. Specifically, the court held it to be exceedingly difficult to estimate damages beforea non-competition clause is breached. Further, the amount fixed in the LD provision was reasonablebecause it approximated the actual loss that would result from a particular breach, i.e., the range ofexpected fees and contract duration. The Federal Court upheld the application of the LD provision to 36separate violations, even though the total of $9 million in damages was more than the sales price of atleast one of the tugboats under the contract.Lessons for Drafting U.S. Aerospace Supply Contracts:Do not expect American judges to modify an enforceable LD provision to make it reasonable in relationto the total contract amount. The provisions if properly drafted will be enforced strictly according totheir terms. A party can attempt to negotiate a cap on LD, so that they do not exceed the total contractamount, however. The type of non-competition provision in the maritime case is similar to those in air-craft or aerospace equipment leasing contracts; these parties should carefully study their LD provisionsprior to executing any such agreements.Développements Juridiques :Secteur Aérospatial AméricainBulletin de Juin 2013NC | VA | DCEliot Norman andBrendan O’Toole, WilliamsMullen.Bertrand Tamalet, lawstudent, University ofRichmond School of Lawprovided assistance in thepreparation of this Bulletin.He also holds a Masters inProcedural Law from theUniversity of Perpignan,France.Eliot Norman is a seniorpartner, Williams Mullen, andmember of the InternationalPractice Group based inWashington, D.C. BrendanO’Toole is an associate inthe firm where he focuseson commercial litigation.Mr. Norman advises on thenegotiation and enforcementof manufacturing supplyagreements and other legalissues for companies whoare exporting to or investingin the United States. EliotNorman speaks Frenchfluently and recently spoketo the AFJE (AssociationFrancaise de Juristesd’Entreprise) in Toulouse andto the BavAIRia AerospaceCluster in Munich on MasterSupply Agreements andrelated legal issues.For additional information:please contact Eliot Normanenorman@williamsmullen.
  • 3. ABOUT WILLIAMS MULLENQuarante-six avocats nommés“Legal Elite” par Virginia Businessmagazine en 2011.RECOGNIZED LEADER“About Us” may not be the right name for this section, because at WilliamsMullen, it is about you.At Williams Mullen, our goal is to help your business thrive in today’s economy.Success is based on finding workable solutions for you. Representing more than75 practices and industries, Williams Mullen focuses on finding answers andsolutions for your business and legal issues. Whether you are the general counselfor a Fortune 500 company, the owner of a private business, CEO of a non-profitorganization or head of a government entity, we have the right attorney or teamof attorneys to help you meet your goals.If you are looking for a legal partner to help you grow your business, you’vefound the right law firm. Now let’s work together on “Finding Yes.”> Manufacturing> Software> Retail> Transportation> Health Care> Hospitality> Insurance> Long Term Care> Banking> Construction> Financial Services> Government ContractsAntitrustAttorneys General andState Agencies PracticeAviationBankingBankruptcy & Creditors’RightsBusiness & CorporateBusiness Relocation/ExpansionBusiness SuccessionPlanningComplex BusinessLitigationConsumer FinanceCorporate FinanceCorporate Law &GovernanceEconomic DevelopmentFranchisingeDiscovery & InformationGovernanceEmployee Benefits &Executive CompensationEnergy & InfrastructureEnvironmentalFiduciary LitigationFinancial ServicesGovernment ContractsGovernment RelationsHealth CareImmigrationIntellectual PropertyInternationalLabor & EmploymentLand UseLitigationMaritimeMergers & AcquisitionsPatentsPetroleumPrivate Client & FiduciaryServicesPrivate EquityPublic FinancePublic-Private PartnershipReal EstateSecuritiesState & Local TaxTax ControversyTax LawTrademarksWhistleblower DefenseWhite Collar andInvestigationsWorksite EnforcementPractice Areas Include:Voted one of America’s BestCorporate Law Firms by CorporateBoard Member magazineNinety-eight Williams MullenAttorneys Named “Best Lawyersin America” 2012; eleven Named“Lawyers’ of the Year”Included in the AMLAW 200American Lawyer magazine’s list-ing of the 200 top law firms inthe United StatesEighteen attorneys and nine prac-tice areas ranked by Chambers USASixty-three Attorneys Named“Virginia Super Lawyers” and 32named “Virginia Rising Stars” for2012 published by Law & PoliticsForty-six Attorneys Named 2011“Legal Elite” by Virginia BusinessmagazineEight Attorneys Named 2011“Legal Elite” by Business NorthCarolina MagazineReceived a National First-TierRanking for the firm’s FiduciaryLitigation practice (Trusts &Estates) in the 2011-2012 U.S.News - Best Lawyers’ “BestLaw Firms” list; Received 80Metropolitan First-Tier RankingsNamedinCorporateCounselmag-azine as a “Go-To Law Firm®” forIntellectual Property, CorporateTransactions, Securities, Labor &Employment and LitigationIndustries Include:About Us