Contract%20 issues%20risk%20allocation 2018.02.05

© 2017 NTT DATA, Inc. All rights reserved.
ISSUES IN CONTRACT DRAFTING
Minh-Hien Nguyen – NTT DATA
February 20, 2018

2 © 2017 NTT DATA, Inc. All rights reserved.
o Warranties
o Limitation of Liability (LOL)
o Compliance with FCPA
o Indemnification
o Interplay between Provisions
o Checklist of Things to Consider
CONTENT

© 2017 NTT DATA, Inc. All rights reserved. 3
• Each Party represents to the other that is a legal entity duly organized and existing, and is in
good standing, under the laws of the jurisdiction of its organization.
• The execution, delivery, and performance of this Agreement has been duly authorized by all
appropriate corporate action on each Party’s respective part.
• Each Party will comply with all laws applicable to such Party in the performance of its
obligations under this Agreement.
• Services will be performed in a good and workmanlike manner.
• The materials and services provided under this Agreement do not and will not infringe,
misappropriate or otherwise violate any Intellectual Property Right of any person.
REPRESENTATIONS AND WARRANTIES – SAMPLE CLAUSES

• EXCEPT AS EXPRESSLY PROVIDED ELSEWHERE IN THIS AGREEMENT, NEITHER
PARTY MAKES AND EACH PARTY DISCLAIMS AND EXCLUDES ALL OTHER
WARRANTIES, TERMS AND CONDITIONS, EXPRESS OR IMPLIED, WHETHER BY LAW
OR OTHERWISE, INCLUDING ANY WARRANTIES OR CONDITIONS (1) OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, PERFORMANCE,
SUITABILITY OR NON-INFRINGEMENT; (2) RELATING TO THIRD-PARTY PRODUCTS,
SOFTWARE OR SERVICES; (3) FOR THE PERFORMANCE OF OR RESULTS TO BE
OBTAINED FROM THE SERVICES; OR (4) THAT THE SERVICES OR SOFTWARE WILL
BE PROVIDED WITHOUT INTERRUPTION OR ERROR.
DON’T FORGET THE WARRANTY DISCLAIMERS

o Warranties
CONTENT

• ALWAYS look to see if the contract contains an LOL clause.
• Disclaim consequential, indirect and punitive damages.
• List specific categories of damages that are disclaimed.
• Put a monetary cap on the damages.
• Clearly state that the LOL provision applies to all types of claims and is an agreed to
allocation of risk.
LIMITATION OF LIABILITY CLAUSE

EXCEPT FOR ______, NEITHER PARTY WILL BE LIABLE FOR ANY INCIDENTAL,
INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF ANY
CLAIMS UNDER THIS AGREEMENT. ANY STATUTORY DAMAGE AWARD UNDER THE
COPYRIGHT ACT OR ANY INCREASED DAMAGE AWARD UNDER THE LANHAM ACT OR
PATENT ACT SHALL NOT BE CONSIDERED AS “PUNITIVE” DAMAGES UNDER THIS
SECTION.
NEITHER PARTY SHALL HAVE LIABILITY FOR THE FOLLOWING: (1) LOSS OF
REVENUE, INCOME, PROFIT, OR SAVINGS; (2) LOST OR CORRUPTED DATA OR THE
RECOVERY OF SUCH; (3) LOSS OF BUSINESS OPPORTUNITY; (4) BUSINESS
INTERRUPTION OR DOWNTIME; OR (5) LOSS OF GOODWILL.
SAMPLE LIMITATION OF LIABILITY CLAUSE – PART 1

SELLER BUYER
SELLER’S TOTAL LIABILITY FOR ANY AND ALL
CLAIMS IN THE AGGREGATE IN ANY CONTRACT
YEAR SHALL NOT EXCEED THE TOTAL AMOUNT
PAID BY BUYER DURING THE PRIOR CALENDAR
QUARTER OF THIS AGREEMENT FOR THE
SPECIFIC SERVICE GIVING RISE TO SUCH
CLAIM(S).
EXCEPT FOR … SELLER’S INDEMNIFICATION
OBLIGATIONS … SELLER’S TOTAL LIABILITY FOR
ANY AND ALL CLAIMS IN THE AGGREGATE IN ANY
CONTRACT YEAR SHALL NOT EXCEED THE
GREATER OF THE TOTAL AMOUNT PAID BY BUYER
UNDER THIS AGREEMENT DURING THE
PRECEDING 12 MONTHS OR [$500,000].
ANY AND CLAIMS IN THE AGGREGATE IN ANY
CONTRACT YEAR SHALL NOT EXCEED THE TOTAL
AMOUNT PAID BY BUYER UNDER THIS
AGREEMENTDURING THE PRIOR CALENDAR OF
THIS AGREEMENT FOR THE SPECIFIC SERVICE
GIVING RISE TO SUCH CLAIM(S).
ANY AND ALL CLAIMS IN THE AGGREGATE IN ANY
CONTRACT YEAR SHALL NOT EXCEED THE
GREATER OF THE TOTAL AMOUNT PAID BY BUYER
UNDER THIS AGREEMENT DURING THE
PRECEDING 12 18 MONTHS OR [$500,000].

THESE LIMITATIONS, EXCLUSIONS, AND DISCLAIMERS SHALL APPLY TO ALL CLAIMS
FOR DAMAGES, WHETHER BASED IN CONTRACT, WARRANTY, STRICT LIABILITY,
NEGLIGENCE, TORT, OR OTHERWISE. THE PARTIES AGREE THAT THESE LIMITATION
OF LIABILITY ARE AGREED ALLOCATIONS OF RISK CONSTITUTING IN PART THE
CONSIDERATION FOR PARTY A PROVIDING X TO PARTY B AND SUCH LIMITATIONS WILL
APPLY NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY AND EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
LIABILITIES.

o Warranties
CONTENT

• Within the United States, the Foreign Corrupt Practices Act (“FCPA”) is the relevant law (40
years old). Deputy AG Rod Rosenstein delivered remarks in Nov. 2017 on the FCPA.
• The FCPA broadly prohibits improper payments to foreign officials.
• The FCPA has two components:
(1) anti-bribery provisions criminalizing the bribery of a foreign official to obtain or retain
business; and
(2) accounting provisions requiring companies who issues securities in the U.S. to
maintain accurate books and records and an effective system of internal controls.
• The anti-bribery provisions apply to all US corporations and those with whom they do
business. Rosenstein said DOJ will enforce FCPA against domestic and foreign companies.
ANTI-CORRUPTION MATTERS

• 19 individuals have pleaded guilty or been convicted in FCPA cases in 2017.
• Trial conviction against former Guinean Minister of Mines, for laundering proceeds from $8
million in bribes.
• Trial conviction against Chinese billionaire for bribing UN officials.
• Trial conviction against South Korean earthquake research center director who laundered
bribery proceeds in the US.
• Two former executives of Rolls Royce, a former employee, and a consultant pleaded guilty to
a conspiracy to bribe foreign officials for the benefit of a Rolls Royce US subsidiary.
• Many more investigations are ongoing, including that against Hertz Corporation and Alexion
Pharmaceuticals.
• The DOJ works with US Attorneys, US Postal Inspectors, the FBI, and law enforcement in
other countries to investigate and prosecute violations of the FCPA.
FCPA IN THE NEWS IN 2017

Each party acknowledges that the Foreign Corrupt Practices Act of the United States (“FCPA”)
applies to transactions conducted under this Agreement and agrees to comply with the FCPA.
Each party agrees that it will not engage in any of the following activities in connection with this
Agreement:
A. offer, promise, or give any financial or other advantage to any persons (public or private):
(i) in order to induce a person to improperly perform a relevant function or duty;
(ii) to reward a person for such improper activity; or
(iii) where the person knows or believes that the acceptance of the advantage is itself an
improper performance of a function or duty, or
SAMPLE FCPA COMPLIANCE LANGUAGE – PART 1 (Anti-bribery)

B. offer, promise, or give any financial or other advantage to a public official, either directly or
through a third party intermediary, with the intent to obtain or retain business or an advantage in
the conduct of business by either
(i) influencing the official in his official capacity,
(ii) inducing such foreign official to do or omit to do any act in violation of his lawful duties,
(iii) securing any improper advantage; or
(iv) inducing the official to use his influence with a government or instrumentality thereof
to affect or influence any act or decision of such government or instrumentality.
SAMPLE FCPA COMPLIANCE – PART 1 (continued)

• Each Party shall (a) maintain, throughout the duration of dealings between the Parties, its own
anti-corruption policies and procedures, including without limitation, adequate procedures
designed to ensure that the Party complies with the FCPA; (b) provide a copy of such policies
and procedures to the other Party on request; and (c) monitor and enforce such policies and
procedures as appropriate.
• Each Party shall maintain true, accurate, and complete accounting books and records relating
to all of its activities under this Agreement. Each Party shall provide information,
documentation and reasonable assistance to the other Party to support an inquiry or
investigation of a suspected violation of the FCPA.
SAMPLE FCPA COMPLIANCE – PART 2 (Records)

• A Party may immediately terminate this Agreement or suspend its performance under this
Agreement if it has reasonable belief that the other Party has breached its compliance with
this Section X of the Agreement.
SAMPLE FCPA COMPLIANCE – PART 3 (Remedy)

o Warranties
o Indemnification
CONTENT

Each Party shall defend and indemnify the other against third party claims, including reasonable
attorney’s fees, costs and final damages awarded or settlement amount, for tangible property
damage and bodily injury (including death) to the extent directly caused by such Party’s gross
negligence or willful misconduct in the performance of its obligations under this Agreement.
SAMPLE INDEMNITY FOR PERSONAL INJURY & PROPERTY DAMAGE

Except as stated below, Indemnitor shall, at Indemnitor’s expense, defend and indemnify
Indemnitee, including reasonable attorney’s fees, costs and final damages awarded or
settlement amount, against any third-party claim that X infringes or misappropriate that third
party’s U.S. patent, copyright, trade secret, or other intellectual property.
SAMPLE INDEMNITY FOR INTELLECTUAL PROPERTY – PART 1

EXCLUSIONS TO THE OFFERED INDEMNITY:
SELLER shall have no obligation for any claim arising from
(1) modifications that were not made by SELLER;
(2) combinations by BUYER with a third party product or software;
(3) SELLER’s compliance with BUYER’s written instructions, including the incorporation of
any software or other materials or processes that BUYER provided or requested; or
(4) BUYER’s failure to incorporate free software updates or upgrades that would have
avoided the alleged infringement.

EXCLUSION TO THE EXCLUSION: SELLER shall have no obligation for any claim arising
from … (2) combinations by BUYER with a third party product or software
• that is not intended or suggested by Product documentation or otherwise intended or
suggested by SELLER unless the [products/services/software] are responsible for induced or
contributory infringement….
• that is not intended or suggested by Product documentation or otherwise intended or
suggested by SELLER excluding any combination for which combining the
[product/services/software] causes the alleged infringement….
• unless such combination is a reasonable and intended use of the [products/services/software]
and the [products/services/software] embody essential features of the patented invention….

• Each Party agrees to indemnify, defend, and hold harmless the other Party from and against
any and all suits, claims, demands, losses, damages, costs and expenses (including
attorneys’ fees) and liabilities incurred in connection therewith, arising out of any or related to
third party claims due to the Party’s breach of its obligations under Section X (Compliance
with Laws) or Section Y (Data Security).
SAMPLE INDEMNITY FOR CERTAIN BREACHES

BASIC DETAILED
The Indemnitee will (a) promptly notify the
Indemnitor in writing of any claim subject to
indemnification, (b) grant the Indemnitor sole
control of the defense and resolution of such
claim, and (c) cooperate with the Indemnitor,
at the Indemnitor’s expense, in defending
and resolving such claim.
The indemnity is conditioned upon Indemnitee’s promptly
(i) notifying Indemnitor any claim subject to indemnification
(provided that Indemnitor will only be relieved of its
indemnification obligations to the extent it is materially
prejudiced by a lack of such notification); (ii) granting
Indemnitor sole control of the defense and resolution of
such claim (provided however, that in no event will
Indemnitor have the right to enter into a settlement which
would involve any payment of consideration by Indemnitee
or impose any obligation on Indemnitee without
Indemnitee’s prior written consent); and (iii) cooperating
with Indemnitor, at Indemnitor’s expense, in defending and
resolving such claim. Indemnitee shall have a right to
retain separate counsel at Indemnitee’s sole expense.
SAMPLE INDEMNITY – PROCEDURE

o Warranties
o Indemnification
CONTENT

CAPPED CARVED OUT
• Indemnitor shall, at Indemnitor’s expense,
defend and indemnify Indemnitee against
any third-party claim …, subject to the
dollar amount limitations of Section X
(Limitation of Liability).
• Except for the Parties’ indemnification
obligations under Section(s) X-Y of this
Agreement, neither Party’s total liability for
any and all claims arising out of this
Agreement shall exceed ….
INDEMNITY VS. LOL – IT’S NEGOTIABLE

• Possible to have 2 different LOL caps: General Cap and Super Cap
(a) NEITHER PARTY WILL BE LIABLE FOR ANY INCIDENTAL, INDIRECT, PUNITIVE, SPECIAL OR
CONSEQUENTIAL DAMAGES ….
(b) THE LIABILITY OF EACH PARTY FOR ANY AND ALL CLAIMS ARISING OUT OF ANY SCHEDULE
UNDER THIS AGREEMENT SHALL NOT EXCEED … (THE “GENERAL LIABILITY CAP”).
(c) THE LIMITATIONS AND EXCLUSIONS SET FORTH IN (a) AND (b) SHALL NOT APPLY TO EACH
PARTY’S (i) GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, (ii) INDEMNIFICATION
OBLIGATIONS FOR IP INFRINGEMENT, OR (iii) BREACHES OF THE CONFIDENTIALITY OR DATA
SECURITY SECTIONS OF THIS AGREEMENT.
(d) EXCEPT FOR … GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AND …, THE LIABILITY OF
EACH PARTY FOR ANY AND ALL CLAIMS ARISING OUT OF A BREACH OF SECTION X
(CONFIDENTIALITY) OR SECTION Y (DATA SECURITY) SHALL NOT EXCEED … (THE “SUPER
LIABILITY CAP”). THE SUPER LIABILITY CAP IS INCLUSIVE OF AND NOT IN ADDITION TO THE
GENERAL LIABILITY CAP.
PARTLY CAPPED / PARTLY UNCAPPED – ANOTHER STRUCTURE

Insurance follows indemnities.
1. Party A shall defend and indemnify Party B against ….
2. Party A shall maintain, at its expense, insurance of the types and with limits of liability not
less than those set forth below: ….
3. The policies under [the required insurance sections] shall show Party B as an additional
insured to the extent of the insurable risks and liabilities assumed by Party A.
WHAT ABOUT INSURANCE?

• Knock-for-knock indemnities are common in the oil & gas industry.
• Each party takes on the risk for injury to its own personnel and damage to its own property,
regardless of who was at fault, and agrees to indemnify the other party for any claims.
• Insurance coverage then applies to the party that takes on the indemnification obligations.
INSURANCE DOESN’T ALWAYS APPLY

• Deepwater Horizon – a fight over $750M’s worth of insurance coverage
• BP was an oil field developer.
• Transocean was the rig owner and driller that BP engaged to drill off the Gulf of Mexico.
• BP and Transocean agreed to the knock-for-knock allocation of risk, including for pollution
liability regardless of fault. Transocean agreed to indemnify BP for damages resulting from
above-surface pollution, and BP agreed to indemnify Transocean for all pollution risks
Transocean did not assume.
• The Deepwater Horizon (the enormous offshore drilling unit owned by Transocean) exploded
in 2010, killing 11 people and causing significant environmental damage.
BP LEARNED THAT INSURANCE DOESN’T ALWAYS APPLY

• The contract required Transocean to carry multiple types of insurance at Transocean’s
expense and to name BP, its affiliates, officers, employees and other related individuals and
entities as “additional insureds in each of [Transocean’s] policies, except Workers’
Compensation for liabilities assumed by [Transocean] under the terms of the [contract].”
• Transocean maintained essentially $750M coverage for general liability for its worldwide
operations, including the contract with BP.
• After the explosion, BP tried to tap into Transocean’s insurance policies to pay for the
damages in the Gulf.

• So what’s the problem?
• The insurance companies did not want to pay for BP’s claims.
• Transocean did not want to have its $750M coverage depleted by BP’s claims.
• Texas Supreme Court held in 2015 that BP was not an additional insured under Transocean’s
policies because the contract only required Transocean to indemnify for above-surface
pollution, with BP being required to indemnify for sub-surface pollution.
• The language “liabilities assumed by” Transocean effectively limited its risk.
• BP – KNOCKED OUT!

o Warranties
o Indemnification
o Checklist of Things to Consider
CONTENT

• Damages are addressed/limited and to what extent?
• Why is that – what is the rational (business, tech, financial, other) for asking for these limitations?
» Arguably, the party with more revenue/profits or the party with the ability/control to prevent the liability should take on more of
the liability
• What are the carve outs?
» For the type of conduct (fraud, willful infringement)?
» By section, sometimes liability limits to liability do or do not limit certain sections in the agreement?
• What direct damages are included – what is covered as direct liability?
• How are the following addressed or disclaimed: consequential, special, punitive, indirect, incidental damages?
• Are there caps to the damages that are covered, could be per section or per type of liability?
» Aggregate cap
» Rolling window cap
» Per occurrence cap
CHECKLIST OF SOME THINGS TO CONSIDER WHEN NEGOTIATING

• What is covered and not covered by indemnity?
• Why is it covered – what is the rationale (financial, business, tech, control, or otherwise) for those terms?
• To what extent and under what circumstances does liability attach, and how much?
• What type of responsibility attaches – indemnify, defend, and/or hold harmless?
• Who is indemnified, what parties/people?
• Who can invoke the indemnification clause? Is it a right for indemnitee or indemnitor?
• What damages are covered?
» Scope, geographic, time, market, actions?
• What actions/situations are covered?
• What type of IP is covered, type, geography, time duration?
• What are remedies if claims of infringement happen or liability attaches?

• What support from indemnitee is needed by indemnitor to successfully perform under indemnification clause?
• What are exclusions to coverage, conduct outside indemnity, the exemptions?
• What is the impact of limitation of liability to scope and language in indemnity?
• What is impact of crossing indemnities from both parties with indemnity going both ways, there can be strange consequences
depending upon who receives a claim first?
• What happens with split indemnity, for example when hardware and software are combined, and different parties are responsible for
different technical areas?
• What are the insurance requirements? Does the party have adequate insurance to cover its indemnification obligations? Is the party
self-insured? What are the risks for damages, and are those risks insurable?
• Is FCPA compliance going to be a factor? Who is on the other side of the deal? Are accounting records going to be needed by the
party to defend itself in the event of an investigation?

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