Key Contracting Principles- Provisions That Work & Some that Don’t

1. Key Contracting Principles-Provisions That Work & Some that Don’t Presented by: Henry A. King Timothy S. Madden Robert J. Stefani J. Grant Coleman

2. Contractual Indemnities: Presented by: Henry King Getting the Other Guy to Pay Your Legal Liability

3. Whether an indemnity provision is applicable involves a two-pronged inquiry: • Is the party asserting a right to indemnification included in the definition of the indemnitee group?; and • Is the claim, loss, liability or expense for which indemnification is sought within the scope of risks covered by the indemnity provision?

4. By broadly defining the “indemnified” group, the scope of persons entitled to indemnity may be increased significantly. • Phillips v. Williams Oil Field Serv.-Gulf Coast Co., 2006 WL 1098923 (W.D.La.) • Corbitt v. Diamond M. Drilling Co., 654 F.2d 329 (5th 1981)

5. If properly drafted, an indemnity may provide reimbursement for both the direct and consequential damages suffered or incurred by an indemnitee. • Cox Communications v. Tommy Bowman Roofing, LLC, 929 So.2d 161 (La.App. 4 Cir. 3/15/06)

6. Imprecise or narrow language in the indemnity provision may result in a court finding that a loss is not encompassed by an indemnity. • Leaming v. Century Vina, Inc., 908 So.2d 21 (La.App. 4 Cir. 6/1/05)

7. When the indemnitee seeks indemnification against the consequences of its own negligence, the indemnity is not enforceable unless such an intention is expressed in unequivocal terms. • Harris v. Argico Chemical Co., 570 So.2d 474 (5th Cir. 1990) • Ranger Ins. Co. v. Shop Rite, Inc., 921 So.2d 1040 (5th Cir. 2006)

8. When the indemnitee seeks indemnification against the consequences of its own negligence, the indemnity provision will be strictly construed. • Dean v. Griffin Crane & Steel, Inc., 935 So.2d 186 (La.App. 1 Cir. 5/5/06)

9. KNOCK FOR KNOCK INDEMNITY

10. The two policy considerations underpinning the use of “knock for knock” or reciprocal indemnity agreements are: • the elimination of the expense of redundant insurance coverage; and • a reduction in unnecessary litigation and its expense. Darty v. Transocean Offshore U.S.A., Inc., 875 So.2d 106 (La.App. 4 Cir. 2004)

11. CONTRACTUAL INDEMNITY VS. ADDITIONAL INSURED STATUS: IS IT A BIG DEAL?

12. Obtaining “addition insured” status is worth the effort. • Suire v. Lafayette City-Parish Consolidated Government, 907 So.2d 37 (La. 4/12/05)

13. ADDITIONAL INSURED STATUS

14. A contract requiring that a party be named as an additional insured can result in an extension of coverage of a CGL policy. • Jessop v. City of Alexandria, 871 So.2d 1140 (La.App. 3 Cir. 3/31/04)

15. While some CGL policies provide exclusions for contractual liability, most policies still provide coverage where the named insured contractually assumes the tort liability of another. • Burlington Resources, Inc. v. United National Ins.Co., 2007 WL 496859 (E.D.La.)

16. WAIVERS OF SUBROGATION

17. A waiver of subrogation provision in a contract precludes an insurer from recovering from an otherwise negligent party in whose favor the waiver has been granted. • The Gray Ins. Co. v. Old Tyme Builders, Inc., 878 So.2d 603 (La.App. 1 Cir. 4/2/04)

18. LOUISIANA OILFIELD ANTI-INDEMNITY ACT (“LOIA”) LA. R.S. 9:2780

19. In Mears v. Commercial General Liability Ins., 926 So.2d 754 (La.App. 3 Cir. 4/5/06), the court held that a contract to perform welding services in connection with the construction of an offshore platform was non-maritime, and, therefore, LOIA invalidated a contract’s defense and indemnity provisions to the extent it sought to protect the indemnitee from the consequences of its own negligence.

20. In Hoda v. Rowan Cos., 419 F.3d 379 (5th Cir. 2005), the court held that an oil and gas services contract requiring the torquing up and down of blow-out preventer stacks from a jack-up drilling rig constituted a maritime contract and that the contract’s indemnity provision was enforceable under general maritime law.

21. The Pitfalls of Terms of Art and Boilerplate Forms in Contract Drafting Presented by: Timothy S. Madden

22. THE MISUSE OF TERMS OF ART CAN LEAD YOU TO THE COURTHOUSE • AVOIDING THE PITFALLS OF INCONSISTENT CONTRACT PROVISIONS • MISUSE OF FORMS AND BOILERPLATE PROVISIONS IN CONTRACT DRAFTING

23. LOUISIANA CIVIL CODE ON CONTRACT INTERPRETATION • 2045: Interpretation of a contract is the determination of the common intent of the parties. • 2047: The words of a contract must be given their generally prevailing meaning… • 2048: Words susceptible of different meanings must be interpreted in the meaning that best conforms to the object of the contract. • 2053: A doubtful provision must be interpreted in light of the nature of the contract, equity, usages…

24. WHAT DO WORDS MEAN? “When I use a word,” Humpty Dumpty said, in a rather scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many things.” “The question is,” said Humpty Dumpty, “which is to be master – that’s all.” Through the Looking Glass(and What Alice Found There) - Lewis Carroll

25. Louisiana Civil Code article 2047 - The words of a contract must be given their generally prevailing meaning. - Words of art and technical meaning must be given their technical meaning when the contract involves a technical matter. • In other words, words must be ascribed their generally prevailing meaning unless the words have acquired a technical meaning in a particular context. • Words of art and technical meaning often appear to be ordinary.

26. LICENSOR v. LICENSEEACCOUNTING TERMS OF ART INRED • Licensee shall purchase the Products from Licensor (or its manufacturing licensee) for a price of Twenty-Seven and One-Half Percent (27.5%) more than Licensor’s or its manufacturing licensee’s cost to produce the Products where Licensor’s (or its manufacturing licensee) cost to produce the Products shall include capital depreciation of the buildings, machinery and equipment acquired for the manufacturing of the Products (the depreciation expense for capitalized expenditures to be determined in accordance with generally accepted accounting principles using the straight-line method of depreciation and the mid-point of the permissible depreciable lives of such capitalized expenditures), plant office expense, supervision and rent as well as Licensor’s labor, wages, fringe benefits, operating supplies, electricity, gas, water, utilities, plant engineering, material management, freight, royalties, raw materials, taxes (except income or other similar taxes based upon income), sanitation, hazardous waste disposal, sewer, security and any other expenses or costsassociated with the production of the Products or the operation of Licensor’s or its manufacturing licensee’s manufacturing facility to manufacture the Products.

27. LICENSOR v. LICENSEE (cont.) • The parties’ differing interpretations of this contract provision led to a protracted dispute and litigation for more than 6 years that resulted in the entry of a $16 million judgment against the Licensor, and the ultimate bankruptcy filing by the Licensor. • “Products”, “Licensor” and “Licensee” are the only capitalized and defined terms. However, this provision is filled with words of art and technical meaning. • The parties’ attempt to define “cost to produce” included terms of art that were not defined and included a circular definition.

28. LICENSOR v. LICENSEE (cont.) • Licensor argued, unsuccessfully, that generally accepted accounting principles was not a term of art or technical term because it was not capitalized. • Licensor failed to recognize the difference between the terms “expense” and “expenditure”. • As a result, Licensor failed to distinguish between out of pocket expenditures and non-cash expenses such as depreciation, amortization of research and development expenses and amortization of good will. • Licensor’s failure to recognize the difference in treatment, under GAAP of Cost of Goods Sold; Selling, General & Administrative Expenses; and Other Expenses would result in a “double-dip” for Licensor. • The term “mid-point of depreciable lives” resulted in 2 disputes: • How to calculate the mid-point? • Is the depreciable life of an item determined based on IRS or GAAP guidelines? • All of the Licensor’s arguments were rejected by the court.

29. Aminoil – ACCOUNTING TERMS (cont.) • Aminoil USA, Inc. v. OKC Corporation, 629 F.Supp. 647 (E.D. La. 1986) Lessor (Aminoil) brought declaratory judgment action against lessee (OKC) as to Aminoil’s net profits interest pursuant to farmout of Aminoil’s interest in mineral lease. • Farmout agreement provided: “OKC shall maintain a net profits account in accordance with the terms of this (farmout) agreement and good accounting practices…” • The purpose of this provision was to require OKC to maintain a net profits account in order to determine when “net profits” was achieved by OKC. Aminoil’s interest in production under the farmout agreement converted to a substantially more profitable net profits interest once income from production exceeded the costs and expenses of exploration and production.

30. Aminoil – ACCOUNTING TERMS (cont.) • The farm-out agreement further provided that “against net profits should be charged the following”: 1.) an amount equal to the costs to OKC of all direct labor, transportation and other services necessary for exploring, developing, operating and maintaining the subject lease… 2.) an amount equal to the expenses of litigation, liens, judgments and liquidated liabilities and claims incurred and paid by OKC on account of its ownership interest in the subject lease…” • Terms of art and issues in dispute: • “Cost” and “expenses” – ordinary terms or terms of art? • OKC argued that under the generally prevailing meaning of the term “cost,” the $30 million interest deduction at issue represented a “cost” to OKC of labor, transportation and other services necessary for exploration and production under the farm-out agreement. • Likewise, OKC argued that its litigation with Aminoil resulted from its ownership interest in the subject lease and should also be charged against net profits under the farm-out agreement.

31. Aminoil – ACCOUNTING TERMS (cont.) • The court disagreed with OKC’s arguments and deferred to Aminoil’s expert accountants, as well as the Court’s own appointed independent accountant, who testified that the accounting provisions in the farm-out agreement had specialized usage and meaning within the oil and gas accounting field. These usages and meaning mandated analysis of the provisions in light of generally accepted accounting and auditing principles. • Experts: • Generally accepted accounting and auditing principles are consistently interpreted to exclude interest unless interest is specifically designated as a chargeable item. • Likewise, under accounting practices in the oil and gas industry, “expenses of litigation” never includes legal expenses related to a dispute between the contracting parties. • Citing La. Civ. Code art. 2047, the Court adopted the findings of the expert accountants who interpreted the terms of the farm-out agreement in light of accepted accounting principles in the oil and gas industry rather than the “generally prevailing meaning” of the terms urged by OKC. OKC was, therefore, not permitted to charge interest deductions and legal expenses (arising from disputes between the parties) to net profits account under the farm-out agreement.

32. Other examples… “Completion” v. “to complete”. Woolf & Magee v. Hughes, 95-863 (La.App. 3 Cir. 12/6/95) 666 So.2d 1128. • Hughes contracted to guaranty payment, on behalf of a third party, for Woolf & Magees’ (W&M’s) services in connection with the construction of an oil well. In the contract, Hughes agreed to guaranty: “The daywork charges of Woolf & Magee to complete the [well]”. • Hughes sought to limit his guaranty payment for the entirety of W&M’s services by arguing that the phrase “to complete” was synonmous with the oil and gas industry term “completion”. (“Completion” refers to the “completion phase” of well operations.) In other words, Hughes argued that his obligation terminated once W&M reached the “completion phase” of operations and did not extend until work on the well was actually completed. • Court held that the word “completion” is a technical term in the oil field industry and that if the parties, both experienced in the oil field business, intended to refer to the “completion phase” of well operations, they would have used the technical term “completion” rather than the ordinary words “to complete”.

33. Other examples (cont.) “Drainage lines”. Patterson v. City of New Orleans, 96-0367 (La.App. 4 Cir. 12/18/96) 686 So.2d 87. • Consolidated cases involving personal injury claims that allegedly occurred due to slick conditions resulting from the seepage of water into the Press Drive underpass in New Orleans. The seepage occurred because a system of perforated pipes known as a “filter bed” had been installed under the roadway of the underpass. • The New Orleans Sewerage & Water Board (S&WB) had contracted with the City of New Orleans to maintain and repair “subsurface drainage”, which the contract defined as “all drainage lines less than 36” in diameter. The S&WB argued that it could not be held responsible for the dangerous conditions caused in the overpass because the term “drainage lines” in its contract with the City was a technical term that referred only to a particular type and placement of pipe which did not include the “filter bed” pipes at issue.

34. “Drainage lines” (cont.) • Court: “Drainage line” is a technical term that refers to solid pipe that carries water from one place to another. The perforated pipes of the filter bed, though connected to the S&WB’s drainage lines, do not constitute “drainage lines.” • Significance: Contract between the City and S&WB contained definitions, but no definition of the precise term of art at issue. Carefully drafted and comprehensive definitions are the key to avoiding the pitfalls presented by terms of art in contract drafting.

35. DEFINITIONS ARE THE KEY • Besides the obvious meticulous scrutiny required in all aspects of contract drafting, the use of a carefully drafted definitions section is the key to avoiding the pitfalls of terms of art. • Always capitalize terms of art. This forces the parties to consider the effect of their usage of a particular term and may shift the focus of contract negotiations. While this may draw out negotiations, it is more cost effective than litigating the meaning of the terms in court. • BE CONSISTENT!!! It is imperative that the definitions used in a contract are consistent with each other. The result can be disaster. • Example: Failure to draft consistent definitions in a contract can negate indemnity agreement. While not terms of art, the definitions used in the following provision were not consistent and could result in the invalidity of certain aspects of the indemnities negotiated by the parties.

36. DEFINITIONS (cont.) • “Express negligence” rule: Contractual indemnity agreements protecting an indemnitee from its own negligence are enforceable under maritime law provided the language is clear and unambiguous. Hardy v. Gulf Oil Corp., 949 F.2d 826, 834 (5th Cir. 1992). • Master Services Agreement provides in part: • Contractor agrees to release, protect, defend, indemnify and hold COMPANY and COMPANY’S AFFILIATES …harmless from and against any and all claims, demands and causes of action of every kind and character arising in connection with the presence of personnel or the placement of property of a CONTRACTOR INDEMNITEE and/or its GROUP on a COMPANY RIG, or the performance of work or providing of products by a CONTRACTOR INDEMNITEE and/or its GROUP on a COMPANY RIG, on account of personal or bodily injury to or death of personnel of a CONTRACTOR INDEMNITEE and/or its GROUP,… regardless of the CAUSE (including any CAUSE of CONTRACTOR GROUP and/or COMPANY GROUP or any other person or entity) of such injury, death, damage…

37. BOILERPLATE CONTRACTS/CLAUSES • Preprinted contracts or contract provisions that are often printed in small type-face and are utilized repeatedly without change in the text. • Boilerplate provisions are enforceable - BE CAREFUL WHAT YOU ASK FOR. • Review all boilerplate provisions anew with each use of the contract to ensure that the boilerplate provisions are applicable to the contract at issue as intended by the parties. • Beware of “cutting and pasting” boilerplate forms and provisions from different contracts.

38. Warranties & Remedies Presented by: Robert Stefani

39. WARRANTIES

40. Sale • Obligations of Seller • Deliver the thing sold • Warrant: - Peaceful possession - Absence of hidden defects - Fit for intended use

41. Redhibition • Warranty against redhibitory defects or vices • Useless or so inconvenient; presumed buyer would not have purchased • Usefulness or value diminished; presumed buyer would have purchased at lesser price • Exclusion or limitation of warranty by agreement • Clear & unambiguous; brought to buyer’s attention • Buyer not bound if seller declared thing had quality he knew it did not have • Buyer subrogated to seller’s rights in warranty against others even when warranty excluded • Seller liable for redhibitory defect has action against the manufacturer if defect existed at time of delivery • Berney v. Roundrtee Olds-Cadillac, Inc., 763 So.2d 799 (La.App.2 Cir. 6/21/00)

42. Redhibition (cont.) • Fit for ordinary use • When seller knows or has reason to know of intended use or purpose and buyer relying on seller’s skill or judgment in selecting, must be fit for buyer’s intended use or his particular purpose • Kind and quality specified

43. Eviction • Eviction = loss of, or danger of losing, all or part of the thing because of third person’s right existing at time of sale • Covers encumbrances not declared at time of sale • Apparent servitudes and natural and legal nonapparent servitudes need not be declared • May transfer whatever rights he may then have without warranting existence of such rights • “quitclaim deed” or “assignment of rights without warranty”

44. Eviction (cont.) • Modification or exclusion of warranty against eviction • Warranty implied • Parties may increase or limit warranty • Parties may suppress or exclude warranty • Even if warranty excluded, seller must return purchase price unless: -Buyer was aware of danger of eviction; -Buyer declared he was buying at his peril and risk; or -Obligation to return purchase price expressly excluded • In any event, seller liable for eviction occasioned by own act -Agreement to the contrary is null • Buyer subrogated to seller’s rights in warranty against others, even when warranty excluded

45. Eviction (cont.) • Warranty against eviction extends to proceeds from thing sold • Examples: fruits and products • Buyer threatened with eviction must give timely notice to seller • Calling upon seller to defend amounts to notice • Warranty may be forfeited upon failure to give timely notice

46. Conventional Obligations or Contracts • Contracts have effect of law between parties and must be performed in good faith • Party may demand security be given • When ability to perform endangered • Demand in writing • Upon failure to give security, party may withhold or discontinue performance • May include real security, personal security, or assurance that obligor has secured or will secure means of performance

47. REMEDIES

48. Conventional Obligations or Contracts • Obligee has right to: • Enforce performance by obligor • Enforce performance by causing it to be rendered by another at obligor’s expense • Recover damages • Failure to perform, defective performance, or delayed performance

49. Specific Performance • Upon failure to perform, court shall grant specific performance plus damages for delay if obligee demands • If specific performance impracticable, court may award damages • Obligor may be restrained from doing anything in violation of obligation not to do

50. Putting in Default • Damages for delay in performance owed from time obligor put in default • Other damages owed from time obligor failed to perform • Putting in default • Arrival of term • Written request for performance • Oral request for performance; two witnesses • Filing suit • Contractual provision