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Red Flags in Customer Contracts Part II
 

Red Flags in Customer Contracts Part II

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Part II of V: Unlimited Liability

Part II of V: Unlimited Liability

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Red Flags in Customer Contracts Part II Red Flags in Customer Contracts Part II Presentation Transcript

  • RED FLAGS IN CUSTOMER CONTRACTS Part II of V: Unlimited Liability August, 2012 Satya S. Narayan SNarayan@rroyselaw.com Royse Law Firm, PCCopyright © 2012, Satya S. Narayan. All rights reserved.
  • UNLIMITED LIABILITY• Direct damages• Incidental damages• Consequential damages• Punitive damages• Extra-contractual liability 2
  • UNLIMITED LIABILITY• Definition: Damages that are a direct result of the vendor’s contract breach. Put the customer in the position they would occupy if the vendor performed the contract as promised.• Examples • Cost of cover (i.e., difference between market price or purchase price of substitute products/ service and price of undelivered or defective products/ services) • Cost to repair or complete work • Liquidated damages (i.e., reasonable dollar amount specified in the contract because the parties believe damages arising from a particular breach will be difficult to ascertain; must not be a penalty) 3 View slide
  • UNLIMITED LIABILITY• Definition: Damages that are reasonably associated or related to actual damages; incident to the vendor’s breach.• Examples: • Expenses in effecting cover • Recall and transportation expenses • Inspection charges 4 View slide
  • UNLIMITED LIABILITY• Definition: Damages that are not a direct result of the contract breach, but are a consequence of the breach and are reasonably foreseeable at the time of contracting.• Examples: • Customer’s loss of profits or loss of operating revenue due to vendor’s delay or failure to deliver products or services.Alert! Consequential damages may break your business. 5
  • UNLIMITED LIABILITY• Definition: Damages awarded when defendant acts with recklessness, malice, or deceit; designed to punish the defendant. Generally not awarded for breach of contract; but punitive damages are available for torts (i.e., civil wrongs identified in common law or judge- created law and by statute) arising out of a contract.• Examples: • Punitive damages for fraud • Some states prescribe punitive damages for violating consumer laws • Infringement??Alert! Punitive damages can be several multiples of actual damages. 6
  • UNLIMITED LIABILITY• Definition: Liability arising outside the terms of the contract (i.e., liability that is in addition to any breach of contract claims) for wrongful or illegal vendor acts.• Examples: • Liability for torts or civil wrongs • Criminal liability 7
  • UNLIMITED LIABILITY• One-sided customer favorable limitation of liability: • CUSTOMER SHALL NOT BE LIABLE TO VENDOR FOR ANY PUNITIVE, INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOSS OF PROFITS, GOODWILL, USE, OR DATA ARISING FROM OR RELATED TO THIS AGREEMENT EVEN IF CUSTOMER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. CUSTOMER’S TOTAL CUMULATIVE LIABILITY ARISING FROM OR RELATED TO THIS AGREEMENT IS LIMITED TO [XXX] DOLLARS.• No limitations on liability (i.e., no disclaimer of damages; no cap on aggregate liability) 8
  • UNLIMITED LIABILITYFirst instinct is to take the customer favorable limitation of liabilityand make it mutual; but that may not be the best approach for youand may not be acceptable to the customer.• Disclaimers, caps and exclusive remedies• Exclusions from liability limitations (understand what are market non- negotiable exclusions)• Period for bringing claims• Governing law of the contract• Insurance 9
  • UNLIMITED LIABILITY• You may be sued• Tool for customers to demand more than you expect• May be a red flag for investors and acquirers 10
  • Questions? Satya S. Narayan E-mail: SNarayan@rroyselaw.com Phone: 650.521.5745 PALO ALTO LOS ANGELES SAN FRANCISCO1717 Embarcadero Road 11150 Santa Monica Blvd., 135 Main Street, Palo Alto, CA 94303 Suite 1200 12th Floor Los Angeles, CA 90025 San Francisco, CA 94105 11