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A contractual obligation to “accept responsibility” for harm to another party — that is, to reimburse, or in legalese, “indemnify” that other party — can have serious financial implications. Even with only an implied indemnity obligation, the extent of liability could be significantly greater than anticipated. Example An English couple contracted with a tour operator for a 15-day vacation package in Sri Lanka, including airfare and hotel. During their stay at the hotel, the wife was raped by a hotel maintenance worker. The UK Supreme Court held that the tour operator was liable for breach of contract: the contract said, in relevant part:

[W]e [the tour operator] will accept responsibility if due to fault on our part, or that of our agents or suppliers, any part of your holiday arrangements booked before your departure from the UK is not as described in the brochure, or not of a reasonable standard, or if you or any member of your party is killed or injured as a result of an activity forming part of those holiday arrangements.

X v. Kuoni Travel Ltd., [2021] UKSC 34, para. 2 (reversing judgment of court of appeal) (emphasis added, citations omitted).

Notably, the supreme court held that the tour operator was directly liable for breach of contract, and that vicarious liability was not relevant. See id. at para. 50.

Drafting lessons for suppliers:

  1. Be very careful when agreeing to accept responsibility for the actions of others — subcontractors, whatever — when asked to agree to language such as “we will indemnify you ….”
  2. Consider trying to cap your aggregate financial exposure for indemnity obligations, the way insurance coverage is subject to policy limits. Keep in mind that liability for indemnity might not ordinarily be subject to foreseeability limitations, nor to a duty to mitigate (although the case law is unclear on this point). See generally Glenn D. West, Consequential Damages Redux …, 70 Bus. Lawyer 971, 975 (Weil.com 2015) (“III. A Basic Primer on Contract Damages”), archived at https://perma.cc/D2HC-Z5XDid. at 998-99: “[I]t bears repeating that there is, in fact, a very clear distinction (whether or not there is an ultimate difference) between a claim for indemnification and a claim for damages for breach of a representation and warranty in an acquisition agreement.”
  3. Consider offering to commit to maintaining a specific level of insurance coverage, with the customer/client as an additional insured, and limit your financial exposure for indemnity to the policy limits of the insurance coverage.

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Background: HP filed a lawsuit against its former CEO, Mark Hurd, who had just joined Oracle after resigning from HP at the request of HP’s board of directors. HP, Hurd, and Oracle settled the lawsuit fairly quickly; paragraph 1 of the settlement agreement stated the following:

Reaffirmation of the Oracle-HP Partnership. Oracle and HP reaffirm their commitment to their longstanding strategic relationship and their mutual desire to continue to support their mutual customers. Oracle will continue to offer its product suite on HP platforms, and HP will continue to support Oracle products (including Oracle Enterprise Linux and Oracle VM) on its hardware in a manner consistent with that partnership as it existed prior to Oracle’s hiring of Hurd.”

Hewlett-Packard Co. v. Oracle Corp., No. H044371, slip op. at 11 (Cal. App. June 14, 2021) (emphasis added).

But: Six months after the Hurd lawsuit settlement, Oracle announced that it would discontinue developing new releases of its products for HP’s Itanium servers. Oracle’s stated reason was that the Intel-HP microprocessor on which the server was based was reaching the end of its life. Industry observers noted that Microsoft had recently made a similar move, and also conjectured that Oracle’s decision could hurt HP.

And then: HP filed another lawsuit against Oracle, alleging that Oracle’s announcement was a breach of the Hurd lawsuit’s settlement agreement. A California trial judge agreed with HP’s interpretation of the “reaffirmation” clause quoted above; a jury awarded HP just over $3 billion for breach of contract.

Now: This week, in a 94-page opinion affirming the judgment below, an appeals court held:

Simply put, the reaffirmation clause creates an obligation to continue with an expressly identified course of dealing (offering and supporting Oracle’s products on HP’s existing platforms as long as they are sold by HP) no different from the course of dealing that had defined their strategic partnership for years prior to Oracle’s hiring of Hurd.

Id., slip op. at 44 (emphasis added).

For various reasons that I won’t go into here, it seems to me that on the merits, Oracle had the better argument. (Not least: It’s standard contract law that a contract of indefinite duration can be terminated at will by either party, as long as the terminating party gives reasonable advance notice; the appeals court gave merely a passing nod to that principle, see id. at 32, without providing even close to a satisfying explanation why the principle didn’t apply.)

Drafting lesson: With 20-20 hindsight, Oracle would have been well-served to include a pro forma clause — akin to a “management rights” clause in a collective-bargaining agreement between a company and a union — to the effect that Oracle retained the right to make business decisions in its discretion.

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See Sara Randazzo, Amazon Faced 75,000 Arbitration Demands. Now It Says: Fine, Sue Us.

(Hat tip: Mark Kantor)

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Catching up on reading, here’s an opinion from a Texas appeals court — possibly driven by a desire to preserve an arbitration award — about the point at which an exchange of emails and attachments will become a binding contract: A customer referenced its own “attached” T&Cs in a purchase order that it emailed to a vendor, but it didn’t actually attach its T&Cs. As a result, the customer found itself bound by the vendor’s T&Cs, which were attached to the vendor’s own emails to the customer. See ETC Intrastate Procurement Co., LLC v. JSW Steel (USA), Inc., No. 14-19-00915-CV, slip op. at 12-13 (Tex. App.—Houston [14th Dist.] Mar. 16, 2021) (affirming, as modified, confirmation of arbitration award in favor of vendor).

Here’s how it played out:

  • The customer emailed a request for quotation (“RFQ”) to the vendor. The RFQ stated that the customer’s standard terms and conditions (“T&Cs”) were attached — but in fact the T&Cs weren’t attached.
  • The customer’s (unattached) T&Cs included a boilerplate rejection of the vendor’s T&Cs. As we’ll see, however, the court didn’t give effect to that rejection.
  • The vendor responded with a sales quotation, which said that the vendor’s own T&Cs were attached — which they were. Unsurprisingly, the vendor’s T&Cs likewise included a boilerplate rejection of the customer’s T&Cs.
  • The customer eventually emailed the vendor a purchase order, which stated that the customer’s standard T&Cs were attached — but again, the customer’s T&Cs weren’t actually attached.
  • Here’s where it gets a bit weird: The vendor emailed the customer an order confirmation, which stated in part that the customer’s standard T&Cs would apply to the order — but yet again, the customer’s T&Cs weren’t attached to the vendor’s order-confirmation email.
  • Three weeks later, the customer belatedly emailed the customer’s standard T&Cs to the vendor.
  • The customer allegedly didn’t pay all of what it owed the vendor, so the vendor sought arbitration under its T&Cs (and was eventually awarded damages for breach).
  • During the arbitration and afterwards, the customer objected to arbitration, claiming that its T&Cs, which didn’t have an arbitration provision, were the ones that governed; the customer argued that its purchase order was a counteroffer and so the contract was not formed until the vendor sent its order confirmation, which supposedly had the effect of accepting the customer’s counteroffer.
  • The trial judge remarked that he had ordered arbitration because the case was too complicated for a jury to understand. (The appeals court dismissed that remark as “immaterial.”)

Both the trial court and the appeals court seem to have relied on the customer’s failure to actually attach its referenced T&Cs to its emails; the appeals court held, in essence, that because the customer failed to actually attach its referenced T&Cs, the customer thereby accepted the vendor’s previously-attached T&Cs. See id., slip op. at 12-13.

(This was thus a different kind of Battle of the Forms than would have been the case if each party had successfully rejected the other’s T&Cs; such a situation would have been governed by UCC § 2-207(2) and the Dropout Rule in § 2-207(3).)

Lesson: When contracting by email, be sure to attach — or at least provide a link to — your own T&Cs.

Editorial comment: The court seems to have used a hypertechnical approach here to try to preserve arbitration. On the facts, it seems quite clear that the parties agreed that the customer’s T&Cs would apply, and those T&Cs didn’t include an arbitration provision. Alternatively, the court could have held that the customer’s failure to attach its T&Cs was a clerical mistake, and consequently the customer had effectively rejected the vendor’s T&Cs, and thus the Dropout Rule in § 2-207(3) would have applied — which would have knocked out the arbitration provision.

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If you’re going to do business with an Idaho company, then (1) don’t expect a court to enforce your forum-selection provision for either litigation or arbitration outside of Idaho, and so (2) if you get into a dispute, you’d better win a race to the courthouse in the agreed forum. We see this in an Idaho supreme court opinion this month where, with some head-scratching mental gymnastics, the supreme court held that a contract’s choice of California law required arbitration in Idaho — this, even though the contract also expressly required arbitration to be in California:

We hold that California law requires an examination of the public policy of the forum in which suit is brought, and that the forum selection clauses at issue violate the strong public policy of the State of Idaho.

We affirm the district court’s ruling that claims arising from the parties’ purchase agreement and LLC agreement must be arbitrated in Idaho.

Off-Spec Solutions, LLC v. Transp. Investors, LLC, No. 47940 (Idaho May 19, 2021) (emphasis and extra paragraphing added).

Look, it’d be one thing if the Idaho courts had relied on Idaho law to get to that result. The courts would have had a straightforward basis for doing so, namely Idaho’s forum-selection statute, which says in part:

(1) Every stipulation or condition in a contract, by which any party thereto is restricted from enforcing his rights under the contract in Idaho tribunals, or which limits the time within which he may thus enforce his rights, is void as it is against the public policy of Idaho.

Nothing in this section shall affect contract provisions relating to arbitration so long as the contract does not require arbitration to be conducted outside the state of Idaho.

Idaho Code § 29-110, quoted in Off-Spec Solutions, slip op. at 7 (extra paragraphing added).

But it’s just bizarre to assert that California’s law implicitly requires an Idaho court to concern itself with Idaho’s public policy. (The losing party had the better side of that argument; see id., slip op. at 6-7.)

Incidentally, this isn’t the first time the Idaho supreme court has engaged in such self-serving contortions: In an earlier case, the contract in suit expressly required arbitration in Dallas, but the state supreme court held that the agreement’s choice of Texas law required arbitration in Idaho. See T3 Enterprises, Inc. v. Safeguard Bus. Sys., Inc., 435 P.3d 518, 528-30 (Idaho 2019), cited in Off-Spec Solutions, slip op. at 7-8.

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