Genera Energy Inc. realizes that managing and mitigating risk are key objectives to any contractual relationship. The parties should try to identify potential risks that are specific to the relationship and negotiate the risk allocation accordingly. The term “Risk” in this context generally means exposure to potential injury or loss resulting from the performance of the agreement. This can be in the form of defective or delayed performance, an accident, or a claim made by a third-party. When assessing the risk involved in a relationship , the parties should evaluate several situations: i) what could go wrong, ii) what are possible results and consequences of the actions, and iii) what is the likelihood of such an occurrence. There are four contractual clauses that should be evaluated when minimizing risks.
1. Indemnification Clauses. The indemnification clause is one of the most important provisions in an agreement for allocating risk. Generally, indemnification means shifting the risk of financial loss to the party responsible for that loss. To “indemnify” the other party, one party will be designated to reimburse and typically be required to defend claims brought by a third party against the other party being indemnified. When reviewing a contract, it is important to understand what actions you may be indemnifying for the other party. Caution should be taken when a provision attempts to indemnify a party for their own negligent behavior or willful misconduct. Many states will not uphold such indemnification provisions. Likewise, most states will limit the scope of liability that parties can allocate by contract with Anti-Indemnity statutes. In Tennessee, for example, T.C.A. 60-624 clearly abolishes indemnity agreements in construction contracts.
2. Insurance Clauses. The insurance clause will provide the sufficient financial resources to cover a party’s indemnification responsibilities. It may be important to require a certificate of insurance be attached to the agreement as proof of coverage. Depending on the situation, some contracting parties can negotiate to name the other party as an additional insured. This can enable the other party to make a claim directly with the insurance company. Finally, it is necessary to ensure that the certificates are kept current.
3. Warranties. A warranty provision is generally a promise to the other party as to the quality of the goods or services being provided under the agreement. When an agreement is for the sale of goods, it is important to review your state’s UCC statutes. Generally, there are express warranties which will be expressly agreed to by the parties in the agreement and implied warranties. Implied warranties will be automatically applied to the agreement unless expressly disclaimed. Finally, there are many times warranty periods added into the agreement to limit the risk. At Genera Energy Inc., it is important for supply agreements to specify specific warranty periods because of the unique nature of the biomass being supplied and the risk of quality loss over long periods of storage.
4. Limitation of Liabilities. Generally, damages or remedies are intended to compensate an injured party caused by breach of the contract. A limitation of liabilities provision will attempt to place a limit on the amount of damages that a party can recover in the event of breach. This clause can limit the amount of damages that are recoverable as well as the types of damages. There are many types of damages in the law that a party may claim in the case of breach of contract including: i) direct damages ii) consequential damages and iii) special damages. Many times a party will want to exclude consequential and special damages from recovery. These types of damages are difficult to foresee and calculate.
Because biomass supply and bioenergy are in a rapidly growing and unique industry, Genera Energy Inc. strives to attempt to anticipate situations that may arise that can be appropriately handled upfront so as not to delay or impede either party. We do realize that most transactions involve risk. Appropriate negotiation and allocation of risk spelled out in the contracts can provide the parties a clear picture of responsibilities under the agreement. Through careful review and drafting, the parties can anticipate and proactively address future disputes and minimize future risks, thus ensuring success in the relationship.
By Julie Anderson, Legal Business Analyst
* This blog is for educational purposes only as well as to give you general information and a general understanding of the law. It is not to provide specific legal advice. The blog should not be used as a substitute for legal advice from a licensed professional attorney in your state.
