Risky Business in COMMERCIAL PROCUREMENT CONTRACTING

1. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

2. Risky Business in COMMERCIAL PROCUREMENT CONTRACTING Breakout Session # 408 April 12th, 2006 10:45am-11:45am Jeffrey L. Roth Allen L. Anderson FEES & BURGESS, P.C. 213 Green Street Huntsville, Alabama 35801 Telephone (256) 536-0095 jroth@feesburgess.com anderson@feesburgess.com www.feesburgess.com NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

3. Dispute Resolution Warranty Warranty Limitations and Disclaimers Limitation of Liability NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

4. These issues arise in: Negotiated Agreements: (Electronic Data Interchange, “white paper” contracts). Forms: purchase orders, purchase order acknowledgments, sales orders (“battle of the forms” environment). “No Contract” Environment: (no such thing). NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

5. I. Dispute Resolution NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

6. KEYS • Be proactive in agreement forms regarding procedure to resolve, • Attempt to resolve them without “legal interference,” OR • At least give your lawyer a chance! NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

7. “Discourage litigation, persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser– in fees, expenses, and waste of time. As a peacemaker, the lawyer has a superior opportunity of being a good man.” Abraham Lincoln NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

8. Litigation is the least acceptable and least cost-effective method for resolving business disputes NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

9. I. The Common Types of Alternate Dispute Resolution • Mediation • Early Neutral Evaluation • Arbitration • Med-Arb • Mini-Trial • Summary Jury Trial NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

10. Mediation Procedure selection of mediator opening statement by mediator initial joint session opening presentation— “caucuses” between mediator and each party draft of a settlement agreement or memorandum or understanding NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

11. Arbitration Procedure • alternative to court proceeding • grounded in contract • cannot be forced to do so • arbitrator is not obliged to comply strictly with court rules of evidence • each party presents its own case • arbitrator’s decision is final • parties are bound to comply with the award NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

12. “Mediation Explosion” Over 1500 law firms have signed the CPR Institute of Dispute Resolution Law Firm Pledge, which requires them to ensure that lawyers responsible for litigation are knowledgeable about ADR and, where appropriate, will discuss its availability with their clients. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

13. Alternative to Court Proceedings Grounded in Contract Cannot be Forced to do so Arbitrator is a neutral Person Each Party Presents its Case Arbitrator is not obligated to Comply strictly with Rules of Evidence Arbitrator’s decision is Final Parties are bound to comply with the Arbitral Award Arbitration NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

14. Mediation Assisted negotiation Parties decide if any settlement will be binding Parties control Parties may withdraw Parties able to vent feelings, tell story Encourages and facilitates “win-win” solutions Low cost Arbitration Adjudication Arbitrator issues binding decision Parties relinquish control Parties may not withdraw Parties may present case, testify under oath “Split the baby”, tends to result in a “win-lose” award Can be but is not always Mediation Compared to Arbitration NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

15. What should a Supply Chain or Other Agreement contain? NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

16. Applicable law does make a difference in certain situations Choice of Law Headquarters vs. Contracting location NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

17. Geographic Location (Barbour County vs. Madison) Court? Mediation? Arbitration? Rules? Venue and Forum NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

18. Escalation of dispute Helps avoid: • Obstinate executive; • Executive focused on narrow portion of the business; • Shines the “Sarbanes-Oxley” light; • Usually underlying issues relation to egos, reserves, or timing. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

19. rigid schedule to prevent “foot dragging” and delay in remedy Time Schedule NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

20. Prevailing Party Pays Attorney Fees? NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

21. Sometimes impediment to settlement; • can create “all or nothing” scenario; • the object is to settle not litigate. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

22. CHOICE OF LAW The laws ____________________ shall govern this agreement, with the exception ofits conflict of law principles, and the exclusive jurisdiction for the resolution of any dispute under this agreement shall be in the ____________ courts of _____________. (You can still propose mediation but know you will end up “at home”!) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

23. A.In the event there is any claim, dispute or other matter arising out of or related to this Agreement, the Parties shall initially cooperate in good faith to resolve the same between executives of the Parties who do not have direct responsibility for administration of this Agreement, and shall explore whether techniques such as mediation, minitrials, mock trials, or other techniques of alternative dispute resolution might be useful in resolving the matter in question. If the Parties cannot agree with ten(10) business days on a different method of resolving the matter, the matter may be submitted by one of the Parties to non-binding mediation. In such event, the Parties shall agree upon a mediator and the mediation shall be held at Customer’s headquarters unless otherwise agreed. If neither Party submits the matter to mediation or if the mediation is not successful, then the matter shall be decided by binding arbitration in accordance with the American Arbitration Association Commercial Rules. The demand for arbitration shall be made within a reasonable time after the time period stated above for the Parties to agree on an alternate means of resolving the matter has expired. The award rendered by the arbitrators shall be final and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof. B. Unless otherwise agreed in writing by both Parties, Supplier shall carry on the Services during any arbitration proceedings and Company shall continue to make payments in accordance with this Agreement. ALTERNATIVE DISPUTE RESOLUTION NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

24. Arbitration clauses areDEFINITELYenforceable in the U.S. underFederal Arbitration Act, if properly written, in ALL commercial contexts NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

25. Bewarethe obligation to proceed with performance or payment in the face of the dispute. Sometimes the threat of a work stoppage or withholding of payment is best leverage. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

26. Key to Disputes Completely investigate all facts prior to“pulling the trigger,” make a realistic objective assessment (take your beating now), negotiate fairly with conviction, search for“intangibles.” NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

27. II. WARRANTIES NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

28. Sale of Goods/Merchants vs. Individual Consumers or Sellers, Uniform Commercial Code • Buyers fight to keep or enhance them; Sellers fight to limit and disclaim them NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

29. Expressed Warranties Under UCC • Affirmation of factor promise • Description of goods • Sample or model IF: “basis of the bargain” NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

30. Most Common Seller/Manufacturer- free from defects in material, design, and workmanship for certain time Service Provider/Assembler-workmanship only if design provided by Buyer; “flow through” of components warranty. Distributor-pure “flow through” of manufacturers warranty. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

31. PRODUCT WARRANTY Seller/Manufacturer warrants that Products manufactured hereunder will conform to, and be manufactured in accordance with, the Specifications, and will be free from defects in material and workmanship for a period of _____(__) days from the date of delivery of the Products to Buyer. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

32. What Specifications? BEWARE performance warranty if seller. Do “Specifications” includeperformancespecifications or just published documentation? May be highly desirable to Buyer! NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

33. Implied Warranties under UCC • Merchantability (also under CISG); • Fitness for Particular Purpose (also under CISG); • Title; • Non-infringement. generally apply to leases also, except finance leases NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

34. Merchantability—goods are of “merchantable” qualityMost important are: • Capable of passing without objection in the trade under the contract description (cars have engines); • Fit for ordinary purpose (the goods work); • Goods are adequately contained, packaged and labeled; • Conforms to any promises or affirmations on container or label (dealer is responsible). NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

35. Fitness for a Particular Purpose • Reliance on Seller’s judgment; • If seller has reason to know use of goods and buyer is relying on seller’s judgment. (technical advice in selecting product) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

36. Free of any claim or lien. Title NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

37. Free from “rightful claim of any third person by way of infringement or the like” unless Buyer supplies specifications/design Non-Infringement NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

38. Infringement Issues • Make, use, or sell? • As Seller, do not offer unless you KNOW; if required, give a warranty with a knowledge qualifier. • As Buyer, make sure that the warranty is express, complete as to geography and intellectual property coverage. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

39. Knowledge Representation “To the best of Supplier’s knowledge the exercise of rights pursuant to this agreement and or use of the Product pursuant to this agreement will not infringe any valid intellectual property rights owned by persons other than Customer.” NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

40. PRODUCTWARRANTY Manufacturer warrants that Products manufactured hereunder will conform to, and be manufactured in accordance with, the Specifications, and will be free from defects in material and workmanship for a period of _____(__) days from the date of delivery of the Products to Buyer. PLUS • Title • Non-infringement • Express warranties • Fitness for particular purpose • Adequately contained, packaged and labeled NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

41. III. Warranty Limitations And Disclaimers NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

42. Express Warranties --the express warranty and any disclaimers tending to negate or limit the warranty are construed wherever reasonable as consistent BUT limitation is inoperative to the extent that such construction is unreasonable. --disclaimers narrowly construed to preserve express warranties. --court attacks usually based upon unconscionibility to fraud or lack of agreement to integration clause. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

43. IMPLIED WARRANTIESlimited by: • Specific language, i.e. “Magic Words”: -- merchantability—must mention “merchantability” and be conspicuous if in writing; -- fitness for a particular purpose—must be in writing and be conspicuous; “fitness” need not be mentioned (“There are no warranties which extend beyond the description on the face hereof” is sufficient); and -- title and non infringement—must be specific and conspicuous. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

44. “As is” or similar language (“with all faults”); must be conspicuous. • Buyer’s examination of the goods—if Buyer examines goods or Seller demands the Buyer examine goods and he does not, there are no implied warranties as to anything the Buyer should have found (does not apply to express warranties). NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

45. Custom or Usage—the parties understand there is no implied warranty, there is no implied warranty. • Limitation of Remedy—listed remedies are “exclusive” – “repair or replacement at the Sellers option shall be the sole remedy of the Buyer for breach of warranty;” otherwise remedies are cumulative. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

46. Cumulative Remedies For Buyer: • Repossession; • Cost of cover; • Contract/market differential; • Consequential damages, if Seller had reason to know and incidental damages. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

47. Cumulative Remedies For Seller: Action for full purchase price (specific performance); contract/resale differential; contract/ market differential; lost profits. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

48. BEWARE Exclusive remedy will be enforced unless such remedy “fails of its essential purpose” NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

49. Practical Limitations on Scope • --Time/length (from…?) • --repair/replacement/credit • --whose option? • --exclude abuse/unauthorized repair/handling • --no defect found reimbursement (Buyer and Seller perspectives) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

50. A) Product Warranty: Manufacturer warrants that Products manufactured hereunder will conform to the Specifications for a period of ____(__)days from the date of delivery of the Products to Buyer. If any returned Product fails to conform with the Specifications, then Buyer’s exclusive remedy and Manufacturer’s sole liability under this warranty will be for Manufacturer, at its sole option and expense, to correct, replace or issue a credit for the nonconforming or defective Product. This warranty does not apply to : (i) any first articles, prototypes, pre-production units, test units of a Product; (ii) any Products which have been altered or modified in any way by Buyer or third party; or (iii) any Products which have been subject to misuse, abnormal use or neglect. PRODUCT WARRANTY AND DISCLAIMER NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management