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Don't Gloss Over Boilerplate Provisions

Posted on Tue, May 06, 2014 @ 11:51 AM

by Joseph S. BurnsJoseph S. Burns

On March 27, 2014, in a decision styled Biotronik AG v. Conor Medsystems Ireland, Ltd., the New York Court of Appeals highlighted, in a 4-3 decision, the pitfalls of glossing over boilerplate contract language, when it ruled that a “no consequential damages” clause in an agreement did not preclude the plaintiff from proceeding with a $100 million claim for lost profits.

Plaintiff, an exclusive distributor of defendant’s medical devices, sued for breach of contract – claiming lost profits – when the defendant terminated the distribution agreement. A clause in the agreement provided as follows: "Neither party shall be liable to the other for any indirect, special, consequential, incidental, or punitive damages with respect to any claim arising out of this agreement (including without limitation its performance or breach of this agreement) for any reason."  Relying on this provision, defendant argued that plaintiff’s claim for lost profits was clearly barred, as lost profits fell within the definition of consequential damages.

It is generally believed that lost profits – particularly those that do not directly flow from a breach of the agreement – are consequential damages.  The Biotronik court pointed out, however, that lost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and such profits were the direct and immediate fruits of the contract – i.e., such profits were a direct and likely result of the breach. Indeed, after conducting a very fact-intensive analysis, the court concluded that plaintiff’s lost profits should be considered general damages (rather than consequential) because the damages were a direct and probable result of the breach, even though the profits would have been earned pursuant to a contract other than the breached agreement. As such, the court concluded that plaintiff’s claim for loss profits was not barred by the provision prohibiting the recovery of consequential damages.

The takeaway from this decision is that attention should be paid to these sorts of standard boilerplate clauses. Indeed, such provisions should be crafted to avoid the scenario in Biotronik. For instance, consider the following:

  • Identify with specificity any and all damages that should be excluded.  For example, the limitation of liability provision could specify that the other party shall not, in any event, be entitled to recover “lost profits, lost revenue, lost income, or any revenue arising from loss of anticipated business, even if such damages were or should have been foreseeable by the breaching party.”

  • Include a liquidated damages provision that excludes recovery for actual damages, and be sure to note that such sum is not a penalty, but a reasonable estimate of damages in the event of a breach.

  • Specify that the limitation of liability provision is an integral part of the agreement that has been bargained for by the parties, and that such provision will remain in effect even if any other provision of the agreement fails of its essential purpose.

Tags: Business Law, Corporate Law, Contracts

Contract Drafting Tips for Small Businesses

Posted on Fri, Mar 23, 2012 @ 02:22 PM

Jack B. Harrisonby Jack B. Harrison

If you own or manage a business, you’re likely to have entered into contracts with employees, vendors, consultants, renters and landlords, banks and other financial institutions, insurers, and, of course, customers and clients. To help prevent your agreements from getting you into the wrong kind of bind, here are six tips on drafting legal contracts:

  1. Want a contract that’s binding? Say so:

    Judge Richard Posner, a noted federal judge and scholar on the topic of contracts recently decided a case in which he explained why not every document which expresses a mutual understanding is or should be enforceable as a contract, especially when that document includes language that specifically disclaims the intent to form a contract.” It almost seems redundant. Why would you need a paragraph saying that the contract is binding? After all it’s a contract right? Well, as Judge Posner tells us, make sure your contract specifically says that the intent is to bind the parties to a contract.

  2. “But it was free” doesn’t matter if it isn’t right for you:

    Is it really a good idea to simply search the Internet for a free confidentiality agreement form because you need to hire a consultant for your business? First, think about why you need the confidentiality agreement at all.  After all, the point of a confidentiality agreement is to protect the confidential and proprietary information that your company uses to create whatever competitive advantage it has in the marketplace, arguably the single most valuable asset of the company. So, if using a free confidentiality agreement form on the Internet that looks like it may be effective, you need to be sure that it was drafted to favor the company not the consultant.

  3. Using a form contract? Make sure you don’t put your business at risk:

    Form contracts account for a large percentage of all agreements used to complete business transactions today.  Yet, did you carefully review the specifics of the form contract before signing it and binding your company.  Do not assume the form contract is an agreement designed to be equitable to both parties. Generally, terms in a standard form contract are designed to favor the party that presents it. To limit your company’s risk, it is vitally important to be able to recognize and negotiate unfavorable provisions out of form contracts. Simply because it is a form contract does not mean it is not subject to negotiation and modification.

  4. Clear and understandable language is crucial:

    You get an agreement from a new business partner or vendor. As you begin to read it your eyes glaze over. The language in the agreement is simply gobbledygook. Quantum physics may be hard to read certainly.  But that is because quantum physics is, in fact, hard, no matter how well you write it (even for quantum physicists). On the other hand, contracts should be easy to read – clear declarative sentences organized into paragraphs arranged in a logical order.

  5. A little ambiguity isn’t always a bad thing:

    Normally, common sense suggests that clarity should be a primary goal in drafting contracts. However, as Judge Posner has stated, ambiguity may play a valuable role in contract drafting. As he explains in The Law and Economics of Contract Interpretation, an economic analysis of contract interpretation reveals that the presence of intentional ambiguities in contracts is not only rational but, in many circumstances, desirable.

  6. Prepare for the unexpected. And get it in writing:

    Obviously you want to avoid litigation over contract terms.  One key to avoiding litigation costs is drafting well-written force majeure and make-up provisions in your contracts. If you fail to review these provisions carefully during contract negotiations, you may end up paying damages to end-users or paying your attorneys later to litigate poorly drafted and inconsistent clauses in your contract. Missing key terms or inconsistent definitions often ultimately leads to costly litigation, which no business wants to endure.

Tags: Small business, Confidentiality Agreement, Form Contracts, Contracts