1. 5/13/2018
Session 302 Contract Drafting, Part 1 - Addressing Liability Issues: Warranties, Epidemic Failures and Liability Limitations
Jonathan Block, Vice President & General Counsel, Hot Topic, Inc. Neil Ginn, General Counsel, WEG Electric Corp. Steve Jackman, Vice President & Deputy General Counsel, Flextronics Jeff Lewin, Attorney, Sullivan, Hill, Lewin, Rez & Engel
Steve: Start Introduction of Topic and Panel
Neil, Jeff and Jonathan: Each introduce themselves.
Total on this slide: 2-3 minutes

2. Key Issues in Warranty Negotiations
5/13/2018
Key Issues in Warranty Negotiations
Scope
Duration
Remedy
Exclusions/Disclaimers
Steve: Introduce overview and discuss the difference between warranty and acceptance
Jonathan: Discuss the difference between warranty and indemnity
Neil: Tip (below)
Total: 3-4 minutes
Warranty v. Acceptance:
Acceptance: Trigger of the customer’s payment obligation (until the product is accepted, the customer can reject the product and refuse to pay for the product). It is important to limit the reasons for which the customer can reject the product to defects which are covered by the warranty.
 Warranty: Promise that the product will continue to satisfy certain criteria after acceptance.
Warranty v. Indemnity:
Indemnity generally applies only to third party claims (and is often limited to third party claims for personal injury, property damage, death or infringement); warranty applies to first party claims.
Indemnities are generally excepted from contractual limitations of liability, which makes it critical that they be carefully drafted and contain specific remedies and/or limitations; warranties are typically subject to the limitations of liability in an agreement (including both the limitations on the types of damages recoverable and any liability cap); if they are subject to a liability cap, however, there is the potential for a claim that the warranty failed of its essential purpose.
Warranties generally terminate after a specified certain period of time; indemnities often survive expiration of the warranty period and even expiration of the contract.
TIP: If the other side is being difficult, find (i) their contracts on EDGAR or (ii) their terms of PURCHASE/SALE (role reversal) on their website. Also, check ACC member directory.

3. Key Issues in Warranty Negotiations
5/13/2018
Key Issues in Warranty Negotiations
Jonathan: lays out fact pattern for example we will use to illustrate various concepts throughout the presentation.:
Total: 2 mins
Jonathan
The above is a “Hello Kitty” KISS doll. It retails for $ The doll is sold in a retail establishments throughout the US (Block Industries). The doll is manufactured in China by a subsidiary of “SteveNeil, Inc.”. SteveNeil sells the doll to Block for $4.00 (landed cost). Block has to pay a license fee to KISS Industries of $1.50 per unit.
According to SteveNeil’s financials, they are making an operating profit of approximately 8% (40 cents) on each doll. Block industries
In April 2011, Block issued purchase orders for 2.5 million dolls to be delivered beginning in late July 2012 and ending in early October. Time was of the essence because (i) they are expected to be extremely popular for Halloween and (ii) the Kiss tour reaches its “height” in the summer of 2012.
SteveNeil delivered the first 1 million units timely, but was late on the next two installments (250,000 units each, totaling 500,000 units). (They were supposed to be delivered on August 15 and September 1, but were delayed 2 weeks each).
SteveNeil advised Block that it would be two weeks late on the last two orders. One was scheduled to be delivered on September 15, but didn’t arrive until September 30. Block rejected this order. In addition, Block cancelled the last order (which was scheduled to be delivered on October 1, but which SteveNeil said would not be delivered until October 15-20). Block said that the cancellation was because the product was untimely (and seasonal); SteveNeil thinks that Block simply overordered product.

4. Key Issues in Warranty Negotiations
5/13/2018
Key Issues in Warranty Negotiations
Scope
Is the scope of the warranty clearly defined?
Items to consider:
Workmanship
Design/Specifications
Product
Items Provided by Third Parties (Material and Software)
Non-Infringement
Compliance With Laws
Steve: Discuss manufacturing/Product
Jonathan: Discuss software
Neil: Discuss design
Slide Total 6-7 minutes
Steve: Run through items listed (except non-infringement/compliance which are addressed on a later slide) and focus on
Specification. Must be careful to determine what YOU are doing v. what you are relying on the Buyer or subtier suppliers to do. If the Buyer is providing all of the Specifications, then the supplier should not warrant them. If the buyer is providing the IP, then seller should not warrant it. If buyer is specifying the materials, then Supplier should not warrant these
Materials: Risk/reward is easy to frame – the ability to make PPV v. the “independent warranty” of the materials. Often difficult to get the proper duration and coverage from the subtier supplier. The supplier will often limit its remedy to the repair, replacement of the particular component supplier has sold to Flextronics.  In the case of a penny part (e.g., a resistor or capacitor), this warranty remedy is clearly insufficient as the manufacturermight spend hundreds of dollars in freight and labor costs to repair a product whose defect results from a defective component. Can mitigate this in two ways: (i) use of “Seller Sourced Material” (limit warranty to that); (ii) limit damages resulting from breach of warranty attributable to materials.
Jonathan: Software focus
Uptime/Availability of Services
Neil: Design focus
Design Will Function as Specified
Wararnty that Design is Non-Infringing
Steve:
Differences Between Warranting Non-Infringement and Indemnity for Claim for Infringement (“Failure of Essential Purpose”)

5. Key Issues in Warranty Negotiations Scope
5/13/2018
Key Issues in Warranty Negotiations Scope
Seller warrants to Buyer that all Products will: (a) be free from any defects in workmanship, material and design; (b) conform to applicable specifications, drawings, designs, samples and other requirements specified by Buyer; (c) be fit for their intended purpose and operate as intended; (d) be merchantable; (e) be free and clear of all liens, security interests or other encumbrances; and (f) not infringe or misappropriate any third party's patent or other intellectual property rights.
Steve: Discuss above in connection with manufacturing/product
Jonathan: Discuss above in connection with software
Jeff/Neil: Discuss other warranties which one might be asked to provide
Total: 4 minutes
Software Warranties:
Service Level Warranties (SLA) – that the services will be available 99.95% of the time, or rebates or other remedies are permitted.
Most Favored Nations (MFN) - That the prices paid by the buyer are the most favorable that are offered by the seller.
Integration – that the goods/services offered by the seller will work with buyer’s existing/other systems.
Privacy – That the services of a technology provider conform to laws & standards applicable to handling of personally identifiable information about customers.
Obsolescence – That Seller will continue to provide support for the goods provided by Seller for a stated period of time.
Other Warranties
            (a)       Manufacturing Practices and Standards.  Supplier hereby represents and warrants to Purchaser that it has established standard operating procedures (“SOP”) for the manufacturing and supplying of the Supplied Products and such SOP contain operating standards or procedures consistent with prevailing industry and GMP standards, as designated in Section 4(c).
            (b)       Quality Warranty.  Supplier represents and warrants that all Supplied Products shall be manufactured, packaged, labeled, supplied and delivered hereunder: (i) in a professional, clean, safe and sanitary manner, with all reasonable care and skill; (ii) in accordance with the specifications established by Purchaser, (iii) in accordance with Supplier’s SOP as established by Supplier; and (iv) free from defect, contamination, adulteration or misbranding.  Supplier acknowledges and agrees that Purchaser shall have the right, upon request, to confirm or verify that Supplier is in compliance with the representations, warranties and covenants made to Purchaser in this Section 5(b) to manufacture and supply the Supplied Products in accordance with its established SOP, including, without limitation, the right to review all documentation or materials relating to Suppliers SOP and the right to inspect Supplier’s facility to ensure such compliance with its established SOP.  Supplier hereby acknowledges and agrees that Purchaser’s right to inspect Supplier’s facility under this Section 5(b) to ensure compliance does not in any way limit or otherwise affect its rights under Section 10 below.
            (c)        Supply Chain Security.  Supplier agrees to take such reasonable measures as may be required by Purchaser to ensure the physical integrity and security of all shipments to Purchaser against the unauthorized introduction or harmful or dangerous materials, drugs, contraband, weapons of mass destruction or the introduction of unauthorized personnel in transportation conveyances or containers.  Such measures may include, but are not limited to, physical security of manufacturing, packing and shipping area, restriction access of unauthorized personnel to such areas, personnel screening to the maximum limits of law and regulation in Supplier’s or manufacturer’s country and development, implementation and maintenance of procedures to protect the security and integrity of all shipments (the “Supply Chain Security”).  In the event Purchaser requests any Supply Chain Security, the costs thereof shall be added to the costs set forth on Exhibit A, which cost shall include the labor to implement the Supply Claim Security.
            (d)       Compliance with Laws. 
            (e)       Approvals.  Supplier shall obtain, at its cost, all governmental, administrative and other approvals, licenses, permits and other authorizations and registrations necessary for the operation and conduct of its business, including without limitation the development and/or manufacture and/or supply of nutritional products generally.  Supplier shall obtain all inventory, equipment, employees, facilities and any other item necessary in order to assure that Supplier has, and will have, the ability to perform its obligations hereunder in accordance with the terms and conditions hereof.  Supplier expressly acknowledges the exclusive rights held by Purchaser in and to all governmental, administrative and other approvals, licenses, permits and other authorizations and registrations (collectively, “Approvals”) necessary for the marketing, distribution and sale to the public of  Supplied Products by or on behalf of Purchaser or its affiliates, which Approvals shall be obtained at Purchaser’s cost. 
            (f)        Foreign Corrupt Practices Act.  Under the FCPA, it is a criminal offense for certain persons and entities to make a payment, offer or promise to pay, or authorize a payment, promise or offer of money or anything of value (such as some gifts, entertainment, and the payment of pleasure travel expenses), directly or indirectly, to any Foreign Government Agent for the purpose of influencing an official act or decision or securing any improper advantage in order to obtain, retain or direct business or otherwise to obtain a business benefit.  Foreign Government Agent is defined as any officer, agent or employee of a foreign government (which includes foreign Customs Agents) or any department, agency or instrumentality thereof (including government-owned or controlled commercial enterprises), any foreign political party or official thereof, any candidate for foreign political office, or any officer or employee of a public international organization.  The accounting provisions of the FCPA require Companies to maintain reasonably complete and accurate books and records and to devise and maintain reasonably sufficient systems of internal accounting controls.
It is the policy of the Supplier to comply fully with the requirements of the FCPA, to conduct its worldwide business in accordance with the laws and commercial customs prevailing in each country in which it conducts business, to reflect a high standard of ethics in all its business transactions and to avoid any intervention in the political affairs of any foreign country.
At no time shall Supplier or its Agents engage, directly or indirectly in any way, in making any payment or in offering or promising to make any payment that potentially could be deemed a violation of the FCPA.  Any violation of the FCPA by the Supplier or its Agents is ground for immediate cancellation of the Agreement.

6. Key Issues in Warranty Negotiations
5/13/2018
Key Issues in Warranty Negotiations
Duration
Specific Term
Clear Starting Date
Shipment
Delivery
First Use
Acceptance
Commercial Operations
“Not to Exceed” Start Date
Neil: Leads this slide
Others: Anything to add?
Time: 2-3 minutes
Remember, once the warranty has expired, no duty is owed from the Seller to the Purchaser for breach of warranty
The Warranty period should have a specified duration. We have seen Buyers’ forms that warrant the Product against defects and will conform to specifications but do not specify a duration. This arguably could lead to a perpetual warranty.
Buyers typically want the Product to operate for the specified period, regardless of shelf life. i.e., an electric utility may buy transformers to warehouse until needed – an indeterminable period of time – and expect the Product to perform to specifications when installed.
A Buyer who supplies components to automotive manufacturers will want the Product warranted for as long as the auto maker warrants the vehicle to its customer – a period that doesn’t commence until that vehicle is sold to the retail customer.
Sellers want the warranty period to commence on a date they control or can track, such as date of manufacture, shipment or delivery.
Buyers want the period to commence upon acceptance, first use, commercial operations, or even “substantial completion” of the project where the Product is installed.
Caution: the Shoreham Nuclear Plant was built between 1973 and 1984, but never operated. It was decommissioned in Products warranted for 12 months from commercial operations are still under warranty.

7. Key Issues in Warranty Negotiations Duration Example
5/13/2018
Key Issues in Warranty Negotiations Duration Example
POOR DRAFTING:
Seller warrants the Products against defects in workmanship, material and design for 12 months following installation at the end user’s place of business or 18 months following the date of shipment, whichever is later.
BETTER DRAFTING:
Seller warrants the Products against defects in workmanship, material and design for a period expiring on the earlier of 12 months following installation at the end user’s place of business or 18 months following the date of shipment.
Neil leads this slide
Time: 2-3 minutes
Beware of clauses containing “the later of” or “whichever last occurs” – if either contingency is delayed indefinitely, the period may never end.
It may be worthwhile to consider the effect of inspection on the warranty. If a Buyer inspects the goods prior to accepting delivery, will that affect duration of warranty? We sometimes include the following language to address that:
These warranties survive any delivery, inspection, acceptance or payment of or for the Products by Buyer.

8. Key Issues in Warranty Negotiations
5/13/2018
Key Issues in Warranty Negotiations
Remedy
Remedy should be specifically defined
Repair or replacement
Credit or refund
Termination of Agreement
Parties should consider whether the remedy provided is the “sole and exclusive” remedy or whether remedies are cumulative.
Consider effect of insurance
Jonathan: Leads this slide [makes comment to the effect that this slide must have been drafted by sellers because there is no way he wants to define remedies]
Steve and Jonathan: Debate (Jonathan is pushing for broad warranty remedies; Steve is holding tight to narrow remedies). Use KISS Kitty example
Time: 6 minutes
Steve wants to limit to repair, replacement or credit. Jonathan wants to make sure that he can get incidental costs (cost of shipping defective goods from his numerous stores to Steve’s factory). Jonathan is also concerned that if there is a mass defect (like lead in the product and his customers all return their products), that he will be out a significant amount in lost profits, and wants to recover those as well. Even though Jonathan offers replacement products to his customers, his business is seasonal and he is worried that no one will want a KISS doll after Halloween. There is no insurance available in this case. So, he is not content with just “repair, replace or refund,” but also wants SOME lost profits.
Depending on the product, “Repair, replace or refund” may not be enough of a remedy if it cannot be done in a timely manner. Block sells a lot of seasonal merchandise. If KISS dolls are defective and cannot be sold, it is not really a sufficient remedy that I could terminate the order. I want lost profits!!!!
Conversely, perfume is considered a hazardous substance and must be shipped and disposed of in a particular manner. If a vendor were to send perfume that was somehow defective (mislabeled, packaging off, etc.) we would expect the vendor to pay for the proper disposal of the perfume, which likely would cost several times over the cost of the product.
Other Issues:
[Customer’s] exclusive remedy and [Seller’s] entire liability shall be as follows: The correction of errors in the [products] that cause breach of warranty, of if [Seller] is unable to provide such correction, [Customer] shall be entitled to receive a refund of the fees paid for the non-conforming portion of the [products].
If any [product] is, or in [Seller’s] opinion is likely to be, subject to an infringement claim, [Seller] may, at its sole option and expense (a) procure the right for [Customer] to continue using the [product], (b) replace the [product] with a non-infringing equivalent, (c) modify it to make the [product] non-infringing provided that the modified version is functionally equivalent to the infringing [product], or (d) accept return of the [product] and refund to [Customer] the fees paid for such [product] less a reasonable amount for [Customer’s] use of the [product] up to the time of return.
Consider whether there should be a defined period of time to remedy the defect?

9. 5/13/2018
Key Issues in Warranty Negotiations Exclusive or Non-Exclusive Remedies
Exclusive Remedy. In the event of a breach of warranty, Seller shall, at its option and at its expense (and as Buyer’s sole and exclusive remedy for breach of any warranty), repair, replace or (if the Product cannot be repaired or replaced) issue a credit for Product found defective during the warranty period. In addition, Seller will pass on to Buyer all manufacturers’ Materials warranties to the extent that they are transferable, but will not independently warrant any Materials. THE SOLE REMEDY UNDER THIS WARRANTY SHALL BE THE REPAIR, REPLACEMENT OR CREDIT FOR DEFECTIVE PRODUCTS AS STATED ABOVE.
Remedies Not Exclusive.  No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy will be cumulative and will be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.  The election of any one or more remedies will not constitute a waiver of the right to pursue other available remedies.
Jeff: Leads slide, and discusses case.
Total: 3 minutes
If agreement is silent, then remedies cumulative under both Common Law and the UCC.
How does termination fit in with this exclusive remedy? Jeff will talk about the missing termination language
UCC 2-719
(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,
(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.
(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
Exclusive Remedy.  The liability of Seller to Buyer arising out of, connected with, or resulting from the manufacture, sale, design, possession, use or handling of any Product or Parts thereof or therefor or furnishing of services, whether in contract, warranty, tort (including, without limitation, negligence, but excluding willful misconduct or gross negligence) or otherwise, shall be as set forth in this Agreement and shall not in any event exceed the purchase price (or in the absence of a purchase price, the fair market value) of the Product or Part, service or other thing giving rise to Buyer’s claim.  The foregoing shall constitute the sole remedy of Buyer and the sole liability of Seller.  In no event shall Seller be liable for incidental, punitive, special, indirect or consequential damages, including but not limited to, damage to, or loss of use, revenue or profit with respect to any Product or Part thereof.  THE WARRANTIES AND GUARANTEES SET FORTH HEREIN ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES AND GUARANTEES WHETHER WRITTEN, STATUTORY, ORAL, OR IMPLIED (INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY IMPLIED WARRANTY ARISING FROM COURSE OF DEALING, COURSE OF PERFORMANCE, OR USAGE OF TRADE). 

10. Key Issues in Warranty Negotiations Exclusions/Disclaimers
5/13/2018
Key Issues in Warranty Negotiations
Exclusions/Disclaimers
Did the seller expressly disclaim all express warranties on which buyer could rely?
Did the seller expressly and adequately disclaim all implied warranties?
Jonathan: Leads this slide
Total: 3-4 mins
Seller should disclaim all warranties implied by law (under the UCC, they run 4 years; in Iraq, there is a 25 year warranty, in Egypt, there is a 10 year implied warranty) as well as express warranties (– UCC § “Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty ”) made by other people (e.g., sales persons) and any other warranty not contained in the paragraph. Seller should also disclaim all implied warranties (Title & Infringement (UCC § 2-312), Merchantability (UCC § 2-314), Fitness for Particular Use (UCC § 2-315))
Seller should disclaim all items over which it has no control (e.g., if it did not provide the design, the design should be disclaimed. Same with the software, etc.
Express Warranties
Under New York law, software licensing contract containing disclaimer of all warranties was not procedurally unconscionable to licensee that used it to bill city's early intervention program to cover licensee's therapeutic services to children suffering from autism spectrum disorders and other disabilities; contract was struck between two organizations without any deceptive or high-pressured tactics alleged to have been employed, there was no allegation that any “fine print” was utilized, disclaimer of all warranties occurred in capital letters and was titled “LIMITED WARRANTY AND DISCLAIMER OF WARRANTY,” and licensee's failure to memorialize its specific needs in the contract did not point to any procedural unconscionability. Shema Kolainu-Hear our Voices v. Providersoft, 832 F.Supp.2d 194 (S.D.N.Y. 2010).
Third Party Issues
3rd Party Beneficiaries - A seller's warranty whether express or implied extends to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured by breach of the warranty. (UCC §2-318)
Integration with 3rd Party Products & Services
Shareholders. Shareholders of public company that files agreement as an exhibit may rely on warranties in the agreement. (Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) Statements found in a agreement’s “representations and warranties” section may support a securities fraud action against a corporation that filed the agreement as an exhibit to its securities filings.)
[Customer ] understands that the [products/services] may connect to and/or interface with other software programs, web sites, databases or devices. [Seller] makes no representations or warranties with respect to such interfaces, and shall not be responsible for any inaccuracies, errors, mistakes, or information contained therein.
Notes:
UCC § Exclusion or Modification of Warranties.
(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence (Section 2-202) negation or limitation is inoperative to the extent that such construction is unreasonable.
(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof."
(3) Notwithstanding subsection (2)
(a) unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and
(b) when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and
(c) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.
(4) Remedies for breach of warranty can be limited in accordance with the provisions of this Article on liquidation or limitation of damages and on contractual modification of remedy (Sections and 2-719).
In light of the Glazer decision and the Titan Report, public companies need to give greater consideration to the disclosure of material acquisition agreements as exhibits to public filings. In that regard, public companies should carefully consider whether to file disclosure schedules or reports as exhibits to public filings (subject to confidentiality concerns). In addition, public companies may want to consider whether to include general disclaimers both in the acquisition agreements and in the public filings made with the SEC. Such disclaimers could address:
(1) that the representations and warranties in the acquisition agreement address the contractual allocation of risk between the parties and not to establish facts;
(2) that the representations and warranties are qualified by a confidential disclosure schedule that may contain some nonpublic information that is not material under applicable securities laws;
(3) that the acquisition agreement may have different standards of materiality from the securities laws;
(4) that certain facts may have changed since the date of the acquisition agreement; and
(5) that only parties to the acquisition agreement or other intended beneficiaries referenced therein may enforce the agreement.

11. Key Issues in Warranty Negotiations Disclaimer Example
5/13/2018
Key Issues in Warranty Negotiations Disclaimer Example
THIS WARRANTY IS THE SOLE WARRANTY GIVEN BY SELLER AND IS IN LIEU OF ANY OTHER WARRANTIES EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT, TITLE, COMPLIANCE WITH ROHS, WEEE AND REACH (AND OTHER SIMILAR APPLICABLE LEGISLATION), AND FITNESS FOR A PARTICULAR PURPOSE, EACH OF WHICH IS SPECIFICALLY DISCLAIMED.
Jeff: will lead this slide
Total: 2 minutes
Jeff to talk about CONSPICUOUSNESS
This is a product agreement

12. Key Issues in Warranty Negotiations
5/13/2018
Key Issues in Warranty Negotiations
Exclusions
Seller makes no warranty with respect to (i) the third party materials and software included in the Product, (ii) the specifications and/or the Product design; (iii) Product that has been abused, damaged, altered, handled/repaired by a third party, or misused or mishandled (including any use contrary to Seller’s instructions); (iv) prototypes and pre-production units; (v) defects resulting from tooling, designs or instructions produced or supplied by Buyer; or (vi) defects resulting from normal wear and tear. Buyer shall be liable for expenses incurred by Seller arising out of or related to the foregoing exclusions.
Neil can lead this (manufacturing based)
Total: 2 minutes
Be very specific. What is it that is warranted, and what isn’t. Warrant the work that you do, not what you can’t control. Here, the exclusions include the typical wear and tear, misuse, abuse, and third-party alterations or modifications. Additionally, this example excludes things the seller doesn’t control such as design and the Materials, which is defined as materials or components supplied by others, and for which the seller will pass through any warranties of the manufacturer of such Materials. At WEG, we specifically warrant materials, because we source them ourselves.

13. 5/13/2018
Key Issues in Warranty Negotiations Disclaimer Example (Software Agreement)
EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, THE SERVICES, SUPPORT, TRAINING, AND ANY OTHER SERVICES ARE PROVIDED “AS IS” AND “AS-AVAILABLE,” WITH ALL FAULTS, AND WITHOUT WARRANTIES OF ANY KIND.
THE SERVICES MAY BE USED TO ACCESS AND TRANSFER INFORMATION, INCLUDING CONFIDENTIAL INFORMATION, OVER THE INTERNET. BUYER ACKNOWLEDGES AND AGREES THAT SELLER AND ITS VENDORS AND LICENSORS DO NOT OPERATE OR CONTROL THE INTERNET AND THAT (A) VIRUSES, WORMS, TROJAN HORSES, OR OTHER UNDESIRABLE DATA OR SOFTWARE; OR (B) UNAUTHORIZED THIRD PARTIES (e.g., HACKERS) MAY ATTEMPT TO OBTAIN ACCESS TO AND DAMAGE BUYER’S DATA, WEBSITES, COMPUTERS, OR NETWORKS. SELLER WILL NOT BE LIABLE FOR ANY SUCH ACTIVITIES NOR WILL SUCH ACTIVITIES CONSTITUTE A BREACH BY SELLER OF ITS OBLIGATIONS UNDER THIS AGREEMENT.
Jonathan leads
Total: 1-2 minutes
In addition to many of the clauses used in the previous two slides, here are a couple of others which are important for software agreement.
Jonathan:
The two missing sections (which we probably should mention) are
SELLER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, QUIET ENJOYMENT, QUALITY OF INFORMATION, AND TITLE/NON-INFRINGEMENT.
Seller does not supply and is not responsible for any Third Party Services or Third Party Materials, which may be subject to their own licenses, end-user agreements, privacy and security policies, and terms of use. ALL THIRD PARTY MATERIALS ARE PROVIDED AS-IS, WITHOUT WARRANTIES OF ANY KIND

14. Other Considerations In Drafting a Warranty Clause
5/13/2018
Other Considerations In Drafting a Warranty Clause
Is the warranty clause the only clause in the agreement addressing product defects?
Quality clauses
Epidemic Failure
Compliance with laws
Is the limitation of liability clause
intended to affect the warranty?
Steve can take the lead on this
Total: 4 minutes
Crafting a warranty which is self contained (provides a sole and exclusive remedy) is a good idea. However, sometimes, the drafters intent can be derailed if there are other clauses which include obligations similar to the warranty obligations (e.g,. That the product be manufactured to spec and/or conform to the spec), but fall outside of the purview of the warranty clause.
In certain quality-type clauses, we tend to agree to the language, but then provide something like “THE parties acknowledge that Buyer’s sole remedy for a breach of this section shall be to terminate the AGREEMENT FOR CONVENIENCE AND BUYER SHALL BE LIABLE FOR MATERIALS TO THE EXTENT PROVIDED IN SECTION 6, In no event shall Buyer be entitled to damages as a result of a breach of this Section.”
Typical obligations include
Supplier will maintain a Quality Management System and provide the following manufacturing & quality documents and records as reasonably requested by the Buyer:
Supplier shall have ESD safe handling procedures in place to prevent damage to Components and finished assemblies.
Supplier shall have temperature and humidity controlled storage and production environment for SMT related Components, to prevent damage to Components and finished assemblies.
Supplier shall have a training system to ensure all employee are adequately trained and certified to her/his job.
Supplier electronic assembly workmanship shall meet or exceed IPC Standard IPC-A-610D.
SMT yield before touch up shall be ≥ 99%.
Finished Product Defects, as measured at OQC, shall be ≤ 500 DPPM as related to normal production output, all categories.
THE SECOND BULLET POINT INVOLVES THE LAW ON “FAILURE OF ESSENTIAL PURPOSE”.

15. Do We Need an Epidemic Failure Clause?
5/13/2018
Do We Need an Epidemic Failure Clause?
Steve can take the lead on this
3-4 minutes
EPIDEMIC FAILURE
Most of our customers seek epidemic failure coverage even though they do not necessarily understand why they need it. Flextronics’ warranty provides a remedy for all defective product returned during the warranty period. There are two reasons why customer’s generally request an epidemic failure clause:
The customer wants a remedy in addition to “repair, replacement or credit,” such as reimbursement for amounts spent to recall the product, time spent debugging the product, etc. (Seller’s warranty remedy is limited to repair, replacement or credit).
The customer wants to extend the time period for returning defective product under the warranty (e.g., if the warranty is one year, and there are significant defects in the 11th month, the customer wants to extend the warranty if the epidemic failure threshold is triggered).
Sellers are generally much more comfortable extending the warranty period than exposing itself to additional liability. If Seller agrees to an epidemic failure clause, then it needs to tightly control the trigger. The epidemic failure clause must not cover any defect that the warranty does not cover (e.g., it must be coextensive with the warranty). In addition, the epidemic failure remedy must be capped, and (when combined with the warranty remedy) must be the sole and exclusive remedy for the epidemic failure.
Remember that the customers’ focus is to quickly curtail the epidemic failure. Some customers, therefore, choose to broadly define epidemic failure (regardless of fault) and require Flextronics to remedy the epidemic failure, and then later determine the allocation of fault. Flextronics must ensure that it is only liable for epidemic failures attributable to a warranty defect.

16. Five Things to Consider When Drafting a Limitation of Liability Clause
5/13/2018
Five Things to Consider When Drafting a Limitation of Liability Clause
Should there be a LOL and, if so, should anything be excluded from the LOL?
Do we need to define “consequential damages” and “direct damages”
If I can’t get the cap I would like to get, would subcaps be a good alternative?
Are liquidated damages a good idea?
How can I make sure that the cap is enforceable?
Jeff: Can show slide
1 minute slide

17. Limitations of Liability
5/13/2018
Limitations of Liability #1
Should there be a limitation of liability in the first place, and if so, should anything be excluded from the limitation of liability?
8minute slide
Steve: High level introduction. There are two types of limitations (exclusions of damages and dollar caps). If the parties are OK with limiting these, then should determine whether ther are any circumstances in which a party would want to recover indirect/consequential damages. Typically, confidentiality is excluded (because most damages would be consequential). In addition, indemnity is often excluded from the dollar cap, and to make sure that the indemnified party is covered for all amounts required to be paid to the other party, “amounts required to be paid to the other party” are often defined as direct damages under the indemnity even if they may be indirect/consequential under the underlying lawsuit.
Start with a role play: SteveNeil sells Hello Kitty Kiss Dolls, and wants wants to limit damages; Block does not. They agree to exclude from all limitations indemnity and confidentiality. What about warranty? Late delivery? Epidemic failure? Block is concerned about timely delivery and potential lead contamination. SteveNeil wants to make sure it doesn’t get sued by KISS for IP infringement. How should insurance play into this? *
Jonathan understands that SteveNeil might be late, but wants to really hold SteveNeil’s feet to the fire if SteveNeil INTENTIONALLY FAILS TO PERFORM. (NOTE: JEFF POPS IN HERE AND SAYS THAT, intentional failure to perform does NOT vitiate a cap).
For the purpose of this Agreement, Seller’s Intentional Failure to Perform shall mean Seller’s intentional failure to manufacture the Product in order to manufacture product for another customer instead of Buyer, where Supplier’s failure to perform has not been excused (e.g., as a result of Buyer’s breach of contract).
NOTE: Under New York law, for purposes of public policy prohibiting contractual attempts to escape liability for damages for willfully negligent conduct, “willful misconduct” does not include the voluntary and intentional failure or refusal to perform a contract for economic reasons. In re CCT COMMUNICATIONS, INC., 464 B.R. 97 (S.D.N.Y 2011)
___
Following the second late delivery during the contract term, Seller shall pay to Buyer up to $10,000 per day of “line down” charges (equal to the damages Buyer suffered as a result of the delay), but not in excess of the Line Down Maximum Amount.
If the “line down” is due, in whole or in part, to the act of a third party supplier(s) (other than Seller), the Line Down Maximum is $10,000 per incident with a maximum of $100,000 per year.
If the “line down” is due to an act of Seller or Seller’s internal production facilities, the Line Down Maximum is $50,000 per incident with a maximum of $350,000 per year, unless the line down is due to Seller’s Intentional Failure to Perform, in which case the $2,000,000 cap in 25.7(b)(3) shall apply. If the line down is due to Supplier’s Intentional Failure to Perform, the above mentioned remedy would be effective upon the first line down occurrence.

18. Sample Limitation of Liability Clause
5/13/2018
Sample Limitation of Liability Clause
THE TOTAL LIABILITY OF SELLER TO BUYER OR ANY THIRD PARTY ARISING OUT OF THIS AGREEMENT AND ANY SERVICES RENDERED UNDER THIS AGREEMENT FOR ANY AND ALL CLAIMS OR TYPES OF DAMAGES WILL NOT EXCEED 25% OF THE TOTAL FEES PAID HEREUNDER BY BUYER DURING THE PRIOR 12 MONTHS.
Hello Kitty: Buy 2.5 million $4M for a total contract value of $10M. Jonathan will consider cap of $10M (TTM revenue). But, Steve/Neil’s profit is $1,000,000 (2.5M x .40).
Software agreements (Neil and Jonathan)

19. Sample Limitation of Liability Clause (Negotiated)
5/13/2018
Sample Limitation of Liability Clause (Negotiated)
EXCEPT AS TO LIABILITIES ARISING FROM (I) BREACH OF THE EXPRESS WARRANTY SET FORTH IN SECTION X; (II) BREACH OF THE CONFIDENTIALITY OBLIGATIONS SET FORTH IN SECTION Y; OR A CLAIM FOR INDEMNITY UNDER SECTION Z (AND EXCEPT FOR AMOUNTS DUE FROM BUYER FOR PRODUCT DELIVERED TO BUYER), THE TOTAL LIABILITY OF EITHER PARTY TO THE OTHER SELLER TO BUYER OR ANY THIRD PARTY ARISING OUT OF THIS AGREEMENT AND ANY SERVICES RENDERED UNDER THIS AGREEMENT FOR ANY AND ALL CLAIMS OR TYPES OF DAMAGES WILL NOT EXCEED 25% OF THREE TIMES THE TOTAL FEES PAID INCURRED HEREUNDER BY BUYER DURING THE PRIOR 12 MONTHS.
NEIL/JONATHAN start
3 minutes
For SaaS, makes sense to have multiple of revenue, but for product it might make sense to have percentage of revenue.
Discuss other common exceptions?
“Paid” acts as a statute of limitations. Also, you might have stopped “paying” them…
NOTE: Except breach of warranty (this avoids the failure of essential purpose issue where if warranty liability is capped and the cap is less than the LOL)

20. Limitations of Liability
5/13/2018
Limitations of Liability #2
Do we need to define “consequential damages” or “direct damages” (or any other types of damages to be included or excluded)?
Jeff:
30 seconds

21. Limitation of Liability Reviewing Types of Damages
5/13/2018
Limitation of Liability
Reviewing Types of Damages
Direct (General): Losses that flow directly and necessarily from a breach of contract, or that are a natural result of a breach and that are equivalent to the benefit of the plaintiff’s contractual bargain. Indirect (Consequential, Special or Incidental): Losses which do not arise directly and inevitably from any similar breach of any similar agreement, but are instead “secondary” or “derivative” losses arising from the particular consequences.
Jeff takes the lead on this, and gives some examples.
2-3 mins
JEFF: Please check and double check the definitions, and make sure that they are OK. Please come up with definitions for Direct/Indirect
Direct damages example:  In one case the buyer expected to pay $23,445 for a piece of equipment. The seller could not honor the deal. The buyer had to purchase the equipment from another seller at a price of $47,500. The court held that the difference ($24,055), characterized as lost profits, measured the buyer’s direct damages.  If a contract accounts for a particular type of damage it may be treated as direct rather than indirect. 
Indirect damages examples:  Lost profits on other contracts resulting from the breach, lost sales, incidental damages and most other damages are consequential damages.
UCC 2-715
(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.
(2) Consequential damages resulting from the seller's breach include
(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting from any breach of warranty.
The California Supreme Court reviewed the proper measure of damages for breach of contract in Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960: “Damages awarded to an injured party for breach of contract ‘seek to approximate the agreed-upon performance.’ The goal is to put the plaintiff ‘in as good a position as he or she would have occupied’ if the defendant had not breached the contract. In other words, the plaintiff is entitled to damages that are equivalent to the benefit of the plaintiff's contractual bargain.
“The injured party's damages cannot, however, exceed what it would have received if the contract had been fully performed on both sides. This limitation of damages for breach of a contract ‘serves to encourage contractual relations and commercial activity by enabling parties to estimate in advance the financial risks of their enterprise.’
There are two types of contractual damages: “general damages (sometimes called direct damages) and special damages (sometimes called consequential damages).” General damages are described as “those that flow directly and necessarily from a breach of contract, or that are a natural result of a breach. Because general damages are a natural and necessary consequence of a contract breach, they are often said to be within the contemplation of the parties, meaning that because their occurrence is sufficiently predictable the parties at the time of contracting are ‘deemed’ to have contemplated them.
Special damages “are those losses that do not arise directly and inevitably from any similar breach of any similar agreement. Instead, they are secondary or derivative losses arising from circumstances that are particular to the contract or to the parties. Special damages are recoverable if the special or particular circumstances from which they arise were actually communicated to or known by the breaching party (a subjective test) or were matters of which the breaching party should have been aware at the time of contracting (an objective test). Special damages ‘will not be presumed from the mere breach’ but represent loss that ‘occurred by reason of injuries following from’ the breach. Special damages are among the losses that are foreseeable and proximately caused by the breach of a contract.
The court observed that “[g]eneral damages for breach of a contract ‘are based on the value of the performance itself, not on the value of some consequence that performance may produce.’ Profits “ ‘ “which are the direct and immediate fruits of the contract” ’ are ‘ “part and parcel of the contract itself, entering into and constituting a portion of its very elements; something stipulated for, the right to the enjoyment of which is just as clear and plain as to the fulfillment of any other stipulation.” ’ Thus, “[u]nearned profits can sometimes be used as the measure of general damages for breach of contract.”
Whether lost profits are a suitable measure of general damages for breach of contract will depend on the facts of the case.
Drafting Lesson:  Because different jurisdictions use different definitions of direct and indirect damages, characterizing the types of damages to be limited or excluded may merely invite a dispute; instead, specify the damages that will and will not be recoverable in event of breach.
Consequential: Losses resulting from the general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise.
Incidental: Charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after Buyer’s breach, in connection with the return or resale of the goods, or otherwise resulting from the breach.
Special : Losses arising from the “special circumstance” of the case; must be specifically pleaded (not presumed).

22. Sample Limitation of Damages Clause
5/13/2018
Sample Limitation of Damages Clause
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR
ANY INDIRECT, CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR SPECIAL DAMAGES, OR ANY DAMAGES WHATSOEVER RESULTING FROM LOSS OF USE, DATA OR PROFITS;
lost profits, LOST REVENUE OR damages resulting from value added to the Product by CUSTOMER;
COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCT BY CUSTOMER; OR
THE VALUE OF THE INTERNAL TIME OF CUSTOMER’S EMPLOYEES TO REMEDY A BREACH
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE SALE OF PRODUCTS, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING THE POSSIBILITY OF NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF THE PARTY HAS BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE, AND EVEN IF ANY OF THE LIMITED REMEDIES IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE.
Jeff: Leads slide
Steve: can talk about (d)
Time: 4 minutes
Economic Loss Rule?
Some courts have held lost profits to be direct, so best to DEFINE THE SPECIFIC DAMAGES YOU WANT TO ELIMINATE.

23. Limitation of Liability
5/13/2018
Limitation of Liability #3
If I can’t get a meaningful cap, could I effectively limit my liability through subcaps?
Neil (?) leads and turns to others
2 mins
Might be easier to accept all liablities….and subcap
Contracts should generally contain an “overall cap on liability” expressed as (i) a fixed dollar amount or (ii) a percentage of the amounts paid by the customer during the preceding (12-month) period. (“Amounts paid” is often better than “trailing 12 month revenue” because it excluded disputed invoices). Often, it is necessary to craft a limitation that works in the beginning of the period (where there is no revenue) as well as years later. One way to accomplish this is to give the customer a “greater/lesser” option of a fixed dollar amount or an “amount paid”.
Often, the buyer will seek a cap which is out of proportion for the level of business. Sometimes this is prompted by “corporate policy” or the negotiator’s desire to “look good” by getting a high cap in the agreement. In order to close the deal, one should consider using subcaps. It is easier to agree to a $25 or $50 million cap (rather than a $5 million cap) if we are relatively sure we will never hit the cap. In the EMS business, the two most common breaches of the agreement are (i) delivering defective product and (ii) late delivery. To limit one’s exposure for these (and other) specifically identifiable risks, consider accepting a high limitation of liability, but using subcaps to mitigate the risk.
Flextronics is often asked/required to include simple clauses like “Compliance with Laws” and quality-related obligations which seem innocuous at first glance. However, these types of clauses can often lead to liability. For example, a seemingly innocuous statement in the quality section that “The Products will comply with the Workmanship Specifications” is actually problematic because (unlike the warranty section where breaches are limited to the explicit remedies provided), the remedy for breach of the quality section is not so limited (but subject to the broad contractual remedies/limitation of liability). If our bargaining power is not strong enough to resist these types of clauses or to limit the customer’s remedy for breach of these clauses to the standard warranty remedy, a cap can be used to alleviate some of this risk.

24. Sample Limitation of Liability Clause Subcaps
5/13/2018
Sample Limitation of Liability Clause Subcaps
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN CONTAINED:
IN NO EVENT SHALL SELLER’S LIABILITY FOR ANY CLAIM ARISING OUT OF OR RELATING TO ANY ALLEGED FAILURE TO TIMELY DELIVER PRODUCT EXCEED $1,000,000 PER OCCURRENCE;
IN NO EVENT SHALL SELLER’S LIABILITY FOR ANY CLAIM ARISING OUT OF OR RELATING TO ANY EPIDEMIC FAILURE (INCLUDING ANY REMEDY PROVIDED IN SECTION W) EXCEED $2,500,000;
IN NO EVENT SHALL SELLER’S LIABILITY FOR ANY CLAIM ARISING OUT OF OR RELATING TO ANY ALLEGED BREACH OF ITS QUALITY OR COMPLIANCE OBLIGATIONS IN SECTIONS X, Y, AND Z EXCEED $2,000,000 PER OCCURRENCE OR $3,000,000 IN ANY TWELVE-MONTH PERIOD; AND
IN NO EVENT SHALL A PARTY’S LIABILITY FOR ANY CLAIM FOR INDEMNI-FICATION FOR INTELLECTUAL PROPERTY INFRINGEMENT UNDER SECTION A EXCEED $10,000,000 UNLESS SUCH INFRINGEMENT WAS WILLFUL, IN WHICH CASE A PARTY’S LIABILITY SHALL NOT EXCEED $30,000,000.
Steve leads
2-3 mins
Sometimes, easier to take a HIGH dollar overall cap (or no cap at all), but then limit specific items (which can occur frequently). This way, the buyer can say that there is “no cap” or a “high cap,” but the seller limits those items for which it is really concerned

25. Limitation of Liability
5/13/2018
Limitation of Liability #4
Are liquidated damages a good idea?
Steve
2-3 mins
Tradeoff between limiting liability overall v. providing a road map to the other side (which might make it more likely that the buyer will enforce the L-D clause)
There are two schools of thoughts concerning the use of liquidated damages in the case of late delivery. The “business people” generally dislike liquidated damages because they provide an easy and obvious remedy for the customer for late deliveries which might not cause the customer any actual damage (and, accordingly, claims which the customer might not choose to otherwise pursue if it had to prove its damages). Business people may also think that a liquidated damages remedy might cause the parties to dwell on “pointing fingers” as to the cause of the late delivery in order to provide for/defend against the applicability of the liquidated damages clause which tends to distract the parties from their long-term relationship. Attorneys, however, often prefer the inclusion of a pre-negotiated measure of damages to the uncertainty of having a third party determine a party’s damages. Where liquidated damages are the “sole remedy” for a delayed delivery, liquidated damages can be a very effective limitation of liability. The parties should consider the following when drafting a late-delivery damages clause:
Ensure that you know the customer’s motivations for the liquidated damage clause. Some customers understand that Flextronics has no reason to intentionally delay a delivery (since it continues to hold materials and doesn’t get paid for the product). If the customer’s concern is that Flextronics will place another customer’s (more profitable) order ahead of its (which Flextronics will not and should not do), this can be easily addressed in the language.
Consider limiting damages to cases where the customer has specifically advised the manufacturer that the order is subject to liquidated damages;
Consider limiting damages to the lesser of the liquidated damages or the amounts actually paid to the customer’s customers;
Consider limiting damages to circumstances where the delay is caused solely by the manufacturer (e.g., not where the delay is attributable to the vendor’s failure to timely deliver Components to the manufacturer);
Damages should be limited to a certain percentage of the sales price (e.g., 1% for delays between 7-15 days, 2% for delays between days and 3% for delays greater than 25 days)
If the business is new to the manufacturer (e.g., customer had a prior supplier) determine what the current on time delivery (“OTD”) rate is first, and use that as a benchmark (e.g., if the current OTD rate is 98%, the manufacturer should not be penalized if its OTD rate is 98.5%, even if it is not at 100%).
Dollar Tree Stores, Inc. v. Toyama Partners LLC, 2012 WL (N.D. Cal)
A provision in a contract liquidating the damages for breach of the contract is valid unless the party seeking to invalidate the provision establishes that it was unreasonable under the circumstances existing at the time the contract was made.  The question whether a provision is an enforceable liquidated damages provision or an unenforceable penalty is a question of law to be decided by the judge, not a jury.
A 17 year commercial lease provided that the landlord would pay the tenant $2,500 per day as liquidated damages for the landlord’s failure so satisfy any of nine specified delivery conditions by a date certain and that the tenant’s sole and exclusive  remedies for failure to deliver the premises by the date certain was either to charge liquidated damages or to cancel the lease.  Another section of the commercial lease provided that in the event of default by landlord Tenant shall have all remedies specified in the lease in addition to any other remedies available to Tenant at law or in equity.
Landlord failed to deliver the premises by the specified date and became unable ever to deliver the premises.  Tenant sued landlord for $10 MM in liquidated damages.
The Judge ruled that the liquidated damages provision was unenforceable because it imposed the same penalty for at least nine different types of breach of varying degrees of magnitude and because it imposed that penalty indefinitely.  By imposing potentially unlimited damages, the liquidated damages provision bore no rational relationship to the actual damages that could be expected to flow from the different types of breaches.
Tenant asked the Judge to sever the sole and exclusive remedy provision from the rest of the contract and allow it to seek actual damages.  Landlord asked the Judge to sever the liquidated damages clause from the cancellation clause and require the Tenant to cancel the lease as its sole remedy.  Clearer drafting would have left this decision to the parties rather than the Judge.

26. Sample Limitation of Liability Clause Liquidated Damages
5/13/2018
Sample Limitation of Liability Clause Liquidated Damages
On-time delivery is critical under this Frame Agreement. The parties acknowledge that Seller’s delay will cause damages to Buyer which damages would be difficult to prove. Accordingly, should Seller fail to deliver product on the mutually agreed written delivery date (and the delivery is not excused as a Force Majeure or otherwise hereunder), and as Buyer’s sole and exclusive remedy for any such failure to timely deliver Products, Seller shall be required to pay liquidated damages equal to one percent (1%) of the price of the delayed Product for each calendar day of delay up to a maximum of fifteen percent (15%) of the price of the delayed Product.
Neil
Sample
1-2 mins

27. Limitation of Liability
5/13/2018
Limitation of Liability #5
How can I make sure that the cap is enforceable?
Jeff/Neil
6 mins
Exception to the Enforceability of Disclaimers and Limitations
Fraud, Willful Misconduct, Gross Negligence or Reckless Indifference. Evidence of fraud in the inducement, willful misconduct, gross negligence or reckless indifference will likely vitiate any disclaimer of warranty, limitation of liability or limitation of damages. The degree of evidence required is limited: anything that “smacks” or that has “a trace, vestige, or suggestion” of wrongdoing may be sufficient. For two recent cases which apply this principle and reach different results, see MyPlayCity, Inc. v. Conduit Ltd., 2011 WL (S.D.N.Y. 2011) and Smithkline Beecham Corp. v. Abbott Laboratories, 2011 WL (N.D. Cal. 2011). Under New York law, the gross negligence exception to waiver of liability applies even to contracts between sophisticated commercial parties, although a more exacting standard of gross negligence must be satisfied; in these circumstances, the defendant's conduct must amount to intentional wrongdoing, willful conduct that is fraudulent, malicious or prompted by one acting in bad faith, or conduct constituting gross negligence or reckless indifference to the rights of others. Baidu v. Register.com, 760 F.Supp.2d 312 (S.D.N.Y. 2011). Supply company's limitation-of-liability provision in a contract with a cooling system company was enforceable where it was not procedurally unconscionable. Therefore, the cooling system company's recovery under the contract was limited to the purchase price of the equipment purchased from the supply company. The cooling system company had a meaningful choice as to the terms of the contract, had the choice of doing business with a different supplier, had a history of doing business with the supplier and were familiar with the terms and conditions of the agreements, and was a sophisticated purchaser of cooling products. Co-Aventura v. The Weitz Co., 2009 WL (S.D.Fl). Limitation of liability provision in contract between parties could not exempt manufacturer from liability for intentional, conspiratorial misconduct. All Business Solutions v. Nationsline, 629 F.Supp.2d 553 (W.D.Va. 2009)
Disclaimers Not Conspicuous. Because disclaimers and limitations are disfavored, they must be brought to the attention of the purchaser and not hidden. Disclaimers can be made conspicuous by placing them at the beginning or end of the contract, putting them in a box or frame, labeling them with a clear and descriptive caption, using a font that is larger or a different color than the font used in the rest of the contract, using bold font or upper case letters or requiring the purchaser to initial the clause on a line or in a box near the clauses.
Unconscionability. Limitations on consequential damages may be unconscionable. In some states substantive unconscionability occurs if the terms of the contract are one-sided or oppressive. Procedural unconscionability occurs if the seller employed overreaching or sharp practices and the buyer was ignorant or inexperienced. In determining whether a limitation on damages is unconscionable, a court may look to the circumstances surrounding the agreement; the alternatives, if any, that were available to the parties at the time of making the contract; the inability of one party to bargain freely; whether the contract is illegal or against public policy; and whether the contract is oppressive. Courts are especially likely to uphold liability limits for consequential damages in commercial transactions with sophisticated parties. Courts may also uphold the exclusion of damages for consequential economic loss, such as lost profits, downtime, and claims of third parties where there is evidence that the buyer was on notice of the limitation. See, e.g., Berge Helene Ltd. v. GE Oil & Gas, Inc., 830 F. Supp. 2d 235 (S.D. Tex. 2011). Several factors contribute to the determination of whether a contract clause is procedurally unconscionable under New York law; these include the size and commercial setting of the transaction, whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was disparity in bargaining power. Shema Kolainu-Hear our Voices v. Providersoft, 832 F.Supp.2d 194 (S.D.N.Y. 2010).
Failure of Essential Purpose. If a buyer can establish that a limited or exclusive remedy provided in the contract “fails of its essential purpose,” then the buyer may disregard that term of the contract and pursue remedies to which the buyer otherwise might not have recourse. The “failure of essential purpose” exception to the general right of sellers to limit liability under the U.C.C. “applies most obviously to situations where the limitation of remedy involves repair or replacement that cannot return the goods to their warranted condition. In such cases, a limited or exclusive remedy fails its essential purpose if the seller is unwilling or unable to repair the defective goods within a reasonable period of time. Limited remedies have also been found to fail their essential purpose where the limited remedy would cause plaintiff to lose the “substantial value of their bargain.” For two recent cases which discuss this concept and reach different results, see Beausoleil v. Peterbilt Motors Co., 2010 WL (E.D. Va. 2010) and Viking Yacht Co., Inc. v. Composite One LLC, 385 Fed. Appx.195 (3rd Cir. 2010).
Inconsistent Language. If the contract or a related document, such as a transmittal letter or brochure, contains language that is inconsistent with the disclaimer or limitation, it is likely not to be enforced, especially if the contract does not contain an integration clause.

28. Indemnification Standard Indemnities
Third Party Claims for Personal Injury, Death or Property Damage Arising Out of a Breach of the Warranty Section (Breach of the Agreement?)
Third Party Claims That the Manufacturing Process Infringes Any Intellectual Property Rights
Never Sign Up for a Backdoor Indemnity: “Manufacturer Indemnifies Customer for all Breaches of the Agreement” – it Undoes Every Other Cap in the Agreement, Including Limitation of Remedies for Breaches of Warranty and is Not Limited to Third Party Claims.
Seek to Cap Dollar Amount – Especially Important if Asked to Extend Indemnities Beyond Industry Standard
Interplay Between Limitation of Liability and Cap
LYNNE LEADS
Is the indemnifying party strong or solvent?