Presentation by Steven Brown on use of warranties and indemnities in drafting contractings

1. Warranties and Indemnities- Contract Considerations
Steve Brown
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2. Warranties and Indemnities -
Contract Considerations
 Introduction
 We have the knowledge of terms warranties
and indemnities
 Do we use it in a practical way
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3. What is a contract?
All contracts are
agreements
but I‟ll pick you up
for dinner at 8
o‟clock
not all agreements
are contracts
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4. The Difference Between
Agreements and Contracts?
 Contractsare ALWAYS
Legally enforceable
 Courts will enforce as the
law dictates
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5. Contracts – what are they?
Legal Analysis –
Enforceable forms of agreements
that:
 comprise promises to perform
The breach of which courts will give
remedies
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6. Formalities and terms
Terms of a
contract
conditions
Warranties
indemnities
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7. Formalities and terms
Test for a term being a condition or
warranty:
"the test of essentiality is whether it
appears from the general nature of the
contract considered as a whole, or from
some particular term or terms, that the
promise is of such importance to the
promisee that he would not have
entered into the contract unless he had
been assured of a strict or substantial
performance of the promise, as the
case may be, and this ought to have
been apparent to the promisor."
Tramways Advertising Pty Ltd v Luna Park
(N.S.W) Ltd (1938) (SR) (NSW) 632 at
641-642 per Jordan CJ
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8. Formalities and terms
Warranties
contractual terms
that act as an
assurance.
Damages for
breach not
termination of
contract.
EG „The statutory books of the company are not up to date.‟
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9. Formalities and terms
Warranties
contractual terms
that act as an
assurance.
Damages for
breach not
termination of
contract.
EG „The statutory books of the company are not up to date.‟
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10. Formalities and terms
Indemnities
Are contractual
terms whereby a
party undertakes
expressly to make
good a loss that
arises from a stated
set of events
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11. Formalities and terms
Indemnities EG
„In consideration of payment by the
buyer of the consideration, the
seller shall indemnify, defend and
hold harmless the buyer against
any liability, damage, loss or
expenses (including legal fees and
expenses of litigation) incurred by
or imposed on it in connection with any claims, suits, actions,
demands or judgments (including, but not limited to, actions in the
form of tort, warranty or strict liability) arising directly or indirectly
from or in connection with bringing the statutory books up to date
and in accordance with all applicable legal requirements.‟
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12. Difference Between
Warranties Indemnities
 Damages only  Provide guaranteed
 Must prove loss compensation where a
 Only damages if party
breach of warranty might
can show warranty not give rise to damages
breached resulted in  Compensation could be
reduction of value of damages or some other
asset acquired (loss) remedy
 Onus on party asserting  No clear duty to mitigate
loss
 Duty to mitigate loss
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13. Difference Between
 In the example warranty assuming NO disclosure
had been made, the buyer claiming under the
warranty would have to show
 That the statutory books were not up to date;
AND
 The value of the business was reduced as a
result of this
 Whereas with the example indemnity the buyer
would simply demand repayment of its costs in
updating the statutory books
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14. Risk and (Expected) Return
 Negotiation
 To get obtain
bargain by
minimizing risk of
non performance
 Because risk
inherent in all
commercial
transactions
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15. Because “..in an ideal world
the risk pendulum
would lie perfectly
balanced..
However, in
reality the position
depends upon the
bargaining
position of the two
sides.”
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16. Examples of Inherent Risk
 WR Ruffler Pty Ltd  Codelfa
v Idohold Pty Ltd Constructions Pty
Ltd v State Rail
Authority of New
South Wales
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17. Lawyers Role In Practice
 Assist in the negotiation to
 Identify the inherent risks
 Assist in negotiation the sharing of the risks
 Thereby minimizing the risks occurring
by drafting clauses that are simple and
human for the parties to read and use as
management tools not to be hidden away in
a drawer.
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18. Contracts – what are they?
Practical Analysis – Contracts are:
1. Risk Minimization tools
2. Checklists or Rule Books
Attempting to ensure performance
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19. Contracts – as risk
management tools
Buying an apple To construct a project
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20. Contracts - As Checklists or
Rule Books
 Who is to do what? - That is what has to be
performed.
 When are the servicesgoods to be supplied–
when are they to be paid for?
 How are the servicesgoods to be supplied.
 Consequences of good or poor performance.
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21. Why have a Contract instead of
an Agreement
Risk
Formality &
Legality
least formal to most formal form
form of Agreement oral contract of written
contract
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22. Why we need to understand
how courts interpret contracts
 Maple Flack Co Ltd v Universal
Furniture Products (Wembley) Ltd
 16th installment of 200 defective not
enough to terminate contract for failure
to perform
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23. How courts interpret contracts
 Courts use rules of construction as
pointers to discover the presumed
intention of the parties to a contract.
 The rules are not slavishly applied.
 The rules are used to produce as
reasonable and just result as possible.
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24. Rules of Contract Construction
 The object of construing a contract is to ascertain what the mutual
intentions of the parties were as to who is to do what, how and when
from the words they used to express the obligations each assumed
by entering into the contract.
 The intention of the parties is the meaning of the words they have
used. There is at common law no intention independent of that
meaning.
 The intention of the parties must be ascertained from the words used,
in light of the surrounding circumstances and the object of the
contract, in so far as the object has been agreed or proved.
 Courts construe the objective intention of the parties not the parties
actual intention.
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25. AS 4360 - Risk Evaluation
Evaluated list of legal requirements compared to
business units functions
Risk
Yes
acceptable Accept
Identify Unacceptable No
residual risk
treatment
Reduce Reduce Transfer in Avoid
options Likelihood Consequence full or in part
cl 4.5.1
Assess
treatment Consider feasibility, costs and benefits, and levels of risk
options
cl 4.5.2 Recommend Treatment Strategy
Choose treatment strategy
cl 4.5.3 Prepare systems to embed plans to reduce, transfer, avoid risk
Implement Reduce Reduce Transfer in Avoid
treatment Likelihood Consequence full or in part
plans
Yes Cl 4.6
cl 4.5.4 Risk
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acceptable ?
Retain

26. Drafting for Performance
1. Understand the legal aspects.
2. Identify potential risks by drafting a contract as a
checklist .
3. Take practical steps to eliminate/minimise those risks.
By taking these actions you can then draft to:
 Reduce the likelihood of an event;
 Reduce the consequences of an event;
 Transfer in full or in part the consequences of an
event (Negotiate a price to accept the risk); and/or
 Avoid the event.
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27. Drafting for Performance
Reduce the likelihood of the event of
non- performance.
 Due Diligence
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28. Drafting for Performance
Reduce the consequences of an
event [of non- performance] by
drafting the following clause:
 Warranties
 Indemnities
 Liquidated Damages
 Restraints of Trade
 Post employment of key personnel
 Exclusion clauses
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29. Drafting for Performance
Transfer in full or in part the
consequences of an event
Firm Price A price which is not variable for any reason
Fixed Price A price, the final value of which is fixed by reference to
some variable parameter such as inflation, currency
exchange rate, or maintainable profits of the
businesses
Earnout/ A price based on the post acquisition profits of the
Workout Price business so that the seller shares in the on going
growth of the businesses
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30. Drafting for Performance
Avoid the event [of non performance]
 Don‟t proceed with the contract if the
terms cannot be agreed upon
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31. Drafting for Performance
 Use standard forms and established
precedents where possible
 Always ascertain if what the parties are
seeking to achieve is achievable
 List the items to be performed (draft a
checklist)
 Obtaining performance is the key
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32. Drafting for Performance
 Know what the parties want;
 Do their calculations;
 Think long term; think strategically;
 Recognise the risks of both action and inaction;
 Be prepared to constantly measure performance
against the established bench marks;
 Review the process to ensure continual improvement;
 Invest the time and the resources to do it right and
 Analyze the risks of non performance eg use of
AS4360
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33. Questions?
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