Contract Negotiations between U.S. and French Entities

“What are the main differences between French and American approaches in the art of negotiating commercial contracts?” Last 13th,October 2016, in New York Law School, Céline Bondard, Principal at Bondard Law Firm in Paris and Olivera Medenica, Principal at Medenica Law PLLC in New York discussed, among other topics, the rights and obligations of the contracting parties and whether and in what circumstances U.S. or French law applies. Please view our presentation in the powerpoint below.

You can also access to the complete lecture in this video http://nyls.mediasite.com/mediasite/Play/2a2939d7ea384cd5bdac97fd08e47d381d

French American Bar Association (New York and Paris Chapters)

New York Law School

October 13, 2016

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I. Introduction

Hypothetical – ACME/SARL Joint Venture

ACME, Inc. is a New York based word of mouth marketing company with a proprietary software that it licenses out to its clients.  ACME, Inc. has been in preliminary discussions with SAMI Sarl for a potential joint venture.  SAMI Sarl owns a patent to an interactive touch screen technology that tracks a user’s facial expression to deliver ad content.

ACME and SAMI decide to enter into a joint venture agreement to market a social media platform incorporating SAMI’s new technology.  ACME and SAMI intend to market this new product to corporate clients in the U.S. and Europe.  Before doing so, however, ACME and SAMI have decided to get their lawyers to hash out the essential terms of their deal.

United States – Negotiating Tips and Strategies – How do you respond?

• “I’m out of here!”: Party feigns backing out of the deal before you are ready to complete the agreement, hoping this will bring the other party to a concession.
• “We’re going to make lots of $$”: Party forecasts future sales growth, accelerated from historic averages.
• “My hands are tied, the BOSS says no”: Party says they cannot make a final decision until a higher authority gives them the go ahead, but will not reveal the identity of the decision maker.
• “This is nonsense, you can do better”: Party applies a lot of pressure by saying just that and imposing a sense of urgency.
• Re-trading the deal: Party attempts to re-open points from the negotiation that have already been finalized.
• Two against one: Two parties on the other side are negotiating against one.
• The walkout: One party walks out of the negotiation to show disinterest.
• Miserly Style: One party is just a mean negotiator who doesn’t care if your side gets nothing.

France – Negotiating Tips and Strategies

• Same points may apply as well.
• When negotiating with public entities, you may want to keep the negotiation concentrated on “deal breakers” and not discuss smaller points.
• The duration of the negotiation itself may be quite long (internal company processes).
• You want to start with a position that is not going to be too far off, so that you can find a middle ground.
• The stakes may not be as high as in the U.S. because litigation is less costly (for instance, limited discovery process). You may want to reconsider some points that are not deal-breakers and /or verify how they are interpreted by French courts.

France – the Parties’ Obligations to Negotiate in Good Faith

• One of the major novelty of the contract reform is the introduction of good faith during the negotiation of contracts, and not just during the performance of contracts. New article 1112 Civil Code.
• Up until October 1st, 2016, the courts considered that, during the negotiation phase, parties are free to negotiate, but bound to not abuse of this right. Therefore it is under this criterion of abuse of right, that a party could enforce the contracting party’s liability during a negotiation.
• Now, parties can now be obliged to disclose some information during the negotiation to ensure the contracting party to be fully aware of the legally binding effects of the agreement.
• However, there is still an uncertainty about the interpretation by the Courts of the good faith criterion expected in the party’s behaviors during the negotiation.
• The reform has also introduced a statutory protection for the confidential information disclosed during the negotiation. New article 1112-2 of the Civil Code.
• Starting October 1st 2016, the receiving party of such information during the negotiation, in case of use or disclose of these information, will be liable under Article 1112-2 and could pay damages to the disclosing party, even in the absence of a non disclosure agreement.
• No common law or statutory obligation to negotiate in good faith, but it can and often is imposed by contract;
• Expectation and reliance damages are a real possibility in Delaware for breaches of agreements to negotiate in good faith;
• When a party agrees to negotiate a deal in good faith that obligation, even at preliminary stages, is enforceable;
• Material non-disclosure may lead to misrepresentation, and potential legal implications.
• CASE: SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013) (holding that damages can be awarded if not negotiating in good faith).

II. Important clauses to negotiate

-Term and termination;

-IP ownership and maintenance;

-Assignment and sublicenses;

-Indemnification provisions;

-Liability provisions

-Warranties and representations;

-Governing law and jurisdiction;

-Alternative dispute resolutions.

United States – Term & Termination Provisions

• Term and termination provisions can create a problem if they are ambiguous or the termination clause favors one party.
• Consider the following types of terms: fixed period of time, perpetual but with an early termination provision, including a possibility of extension, options, right of first negotiation, right of first refusal.
• Consider material breach provisions, addressing each party’s breach.
• For each type of provision: define the length, who is supposed to act, and how they are supposed to act.
• Does the clause need to be mutual? What are the parties’ respective leverage in terminating the contract? What happens once the renewal kicks in?  What are the terms of the contract then?
• Consider the Statute of Frauds (N.Y. Gen. Obl. Law §5-701) and anticipatory breach arguments.
• CASE: MasterCard v. FIFA, 239 Fed. Appx. 625 (2d Cir. 2007);
• Jones Apparel Grp., Inc. v. Polo Ralph Lauren Corp., 3 Misc. 3d 1107(A), 787 N.Y.S.2d 678 (Sup. Ct. 2004), aff’d, 16 A.D.3d 279, 791 N.Y.S.2d 409 (2005).

Termination with fault

• Principle: one shall provide the other party an opportunity to cure in case of breach (New article 1126). The Civil Code gathers the legal actions allowing a contract’s termination due to a fault under a unique Section while codifying French case law, starting with Article 1217.
• Termination often takes place 15 to 30 days after the breaching party has been told of its faults
• Exception: unless the fault has been so significant that you can consider terminating the contract immediately and without notice (Cass. Civ1. 13 oct. 1998 Tocqueville; n°96-21.485).
• This unilateral termination, triggered by a formal notice, is made under the demanding party’s risks. In the event of litigation, if the court find that the misconduct of the contracting party was not serious enough, the demanding party will have to support the liabilities and costs of the termination. You shall have to prove the severity of the breach so it’s best (i) to have a detailed contract; (ii) to have kept evidence of such significant breach.

Termination without fault

• New Article 1210 and 1211 of the Civil Code prohibit perpetual undertakings and require that where a contract is concluded for an indefinite duration, a party may put an end to it by complying with the notice period that is specified in the contract, or, if no such provision is specified, by applying a reasonable notice.
• The notion of “reasonable notice”: it is important, notwithstanding what the contract says, that the party terminating the contract considers what would be a reasonable notice when drafting the contract.
• Criteria for a reasonable notice may be, notably: initial duration of the contract; financial stakes and economic dependency between the parties. Illustration of possible timeframe for a reasonable notice: 7 years of contractual relationship. Appellate court determined that a reasonable notice would be a 3 months notice period. (CA Lyon, 12 mars 2015, N° 14/03861)

U.S. – IP Ownership and Maintenance

• Problems arise where there is a lack of clarity and a failure to plan for the worse.
• Clearly state who is the owner of the IP (consider work for hire doctrine, assignments, exclusive licenses).
• Spell out who is responsible for prosecuting and maintaining the licensed property.
• Delineate what happens to improvements on the licensed IP.
• Address what happens in the event of infringement.
• Be careful not to forget goodwill, trademark quality controls, and other similar provisions.
• CASE: Eva’s Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788 (May, 7th Cir. 2011).

Notion of “Work for hire”

• In the U.S., if a work is made for hire, the employer is considered the author even if an employee actually created the work. The employer can be a firm, an organization, or an individual.
• Section 101 of the Copyright Act (Title 17) defines a “work made for hire” in two parts: (a) a work prepared by an employee within the scope of his or her employment, OR (b) a work specially ordered or commissioned for use in the specifically listed categories of section 101, AND it must be agreed to in writing that it is a “work made for hire”.

France – IP Ownership and Maintenance. IP (and software) protection in France

• Article L 111-1 of the French IP Code: in France, every right that is not detailed in writing will be retained by the author of the work.
• Article L. 131-3 of the French IP Code: IP clauses have to be precisely negotiated and detailed.
• The creation of an original work is due to the unique mind of its author, even if the author is an employee à he remains the sole author and proprietor of his work, unless his employment contract specifies otherwise.
• At the same time, L113-9 French IP Code provides that, in the context of software development, where the work has been made during the course of employment and under the employer’s instructions, ownership is detained by the employer by law.

United States – Assignments and Sublicenses

• Problems arise where there is lack of planning as to what is permissible.
• Licensor will typically require a clause forbidding assignment and sublicenses.
• Variation is to require express written consent.
• Consent will “not be unreasonably withheld.”
• Licensor wants to maintain control over assignment and sublicense.
• In some instances, licensor will want the right to assign
• CASE: AT&T v. NASCAR, 494 F.3d 1356 (11th Cir. 2007).
• à Similar in France.

United States – Indemnification Provisions

• Problems arise with poorly thought out and drafted clauses.
• Purpose is to allow one party to take financial responsibility for certain liabilities incurred by the other party.
• Need to define circumstances where financial responsibility arises.
• Need to define when the duty to defend arises.
• Need to define how notice is to take place.
• If acceptance of settlement needs the indemnifying party’s acceptance, need to define how such acceptance needs to be given.
• Make sure the indemnification relates to third party claims.
• To the extent possible, make the obligations mutual.

Indemnification: Bad Example

“Each Party shall indemnify and hold the other harmless from any and all claims, actions, damages and liabilities (including reasonable attorney’s fees) arising directly and approximately out of the indemnifying Party’s negligence, or willful, wanton, or reckless conduct resulting in death or bodily injury or damage to any real or tangible personal property.”

Indemnification: Good Example

“Each party (“Indemnifying Party”) will indemnify and defend the other party, and its respective officers, directors, employees, agents, heirs successors in interest, and affiliated entities (each an “Indemnified Party”) from and against any and all liabilities, losses, damages, claims, and expenses, including reasonable legal fees, that may be incurred or suffered by an Indemnified Party arising out of third party claims related to the Indemnifying Party’s (a) obligations under this License; (b) material breach of this License; (c) untrue representations and warranties in this License, unless that liability, loss, damage, claim or expense is attributable to the Indemnified Party’s gross negligence or willful misconduct.  This Section survives License termination.”

France – Indemnification Provisions

• Similar in France.
• Under French Law, indemnification provisions result from the “warranty against eviction” concept of general Contract Law. Article 1626, 1627 and 1628 of the Civil Code (unchanged by the reform).
• The warranty against eviction is an intrinsic warranty in every contract that protects a party from being dispossessed from the good or service performed by the contracting party.
• However a “non-eviction warranty” term can be negotiated in contracts, preventing the debtor of the warranty from being liable for the harm caused by a third party (and not by his facts or acts) to his creditor in the enjoyment of the good or the service.

U.S. – Liability provisions

• U.S law allows parties negotiating a contract to minimize their liability for direct damages by enforcing a liability cap.
• Clause must be incorporated into a contract at the time the contract is made.
• It can be a specific dollar amount (e.g. $200), but it also can be an amount paid for products or services (e.g. the wholesale cost or twice the subscription fee).
• It also can be an amount paid for products or services (e.g. the wholesale cost or twice the subscription fee).

Exceptions to limitation, e.g.:

• Indemnification obligations of a party for third-party claims brought against the other party, including intellectual property infringement claims
• Liabilities of a party that arise from a breach of its confidentiality or data security obligations
• Liabilities of a party that arise from a breach of its obligations to comply with laws
• Liabilities of a party that arise from its fraud
• CASE: Food Safety Net Services v. Eco Safe Systems USA, Inc., 147 Cal.Rptr.3d 634 (Cal. Ct. App. 2012).

France – Liability Provisions – Where cap of liability is not enforceable

• Bodily injuries, death and any damage caused by gross negligence or willful misconduct: are always subject to indemnification under French law.
• New Articles 1240 and 1241 of the French Civil Code (principles unchanged by the reform).
• Any mitigation (cap of liability) regarding these damages is never enforceable under French case law.

Where liability is never admitted by French courts

• Indirect damages are never compensated as a principle under French law. Articles 1218, 1231-4 and 1231-5 of the Civil Code.
• To assist the courts in determining what would be considered as “direct” or “indirect” damages in a specific instance, it is best to contractually “pre-qualify” different types of damages such as lost profits, lost revenues, damages data or business interruption to make sure the judge shall for instance not consider any such damage is direct and therefore subject to compensation.
• Illustration: in a gas station, the default of a storage tank delivered by a oil company, has a direct causal link to the loss of fuel, the operating deficit, the bank charges, and the receivership. All those damages must be compensated. (Cass. Com. 14 septembre 2010; n°09-69.036).

United States – Warranties and Representations

• Express and Implied warranties.
• Underlying conditions or facts as they are being presented in terms of the contract.
• Sets out parties’ rights in case of goods or services provided are not accordant with their description.
• The UCC provides that courts may imply a warranty of merchantability when (1) the seller is the merchant of such goods, and (2) the buyer uses the goods for the ordinary purposes for which goods are sold. §2-314. Similar language is adopted by the CISG in Article 35.
• The UCC provides that there is a implied warranty of fitness for a particular purpose where the seller knows of the particular purpose for which the goods are required and the buyer is relying on the seller’s judgment to select the goods. §2-315. Similar language is adopted by the CISG in Article 35.
• Consider potential causes of action: Fraud, Fraud and Deceit, Negligent Misrepresentation Causing Harm, Words Negligently Spoken, Breach of Contract, Promissory Estoppel and other causes of action.

Warranties relating to IP :

(a)  the IP is subsisting and is not invalid or unenforceable;

(b)  licensor has not previously assigned, transferred, conveyed, or otherwise encumbered such right, title, and interest (other than encumbrances listed on an attached schedule);

(c)  licensor is the sole and exclusive owner of the IP, and not other person or entity has or shall have any claim of ownership with respect to the IP;

(d)  the licensed IP does not infringe any rights owned or possessed by any third party; and

(e)  there are no claims, judgments, or settlements to be paid by the licensor, or pending claims or litigation relating to the IP.

France – Warranties and Representations

• A clause limiting the warranty due to a party shall be interpreted all the more strictly by French Courts (in favor of the warrantor) if the other party can demonstrate that:
• (a) pre-contractual negotiations have lasted for long and
• (b) have provided the contractual partner the opportunity to familiarize itself with the customer’s activity and needs.
• Furthermore, several, types of warranties are cannot be disclaimed.

Warranty For Hidden Defects

• Warranty for hidden defects under which a seller is bound to a warranty on account of the latent defects of the thing sold which renders it unfit (i) for the use for which it was intended, or which (ii) so impairs that use that the buyer (a) would not have acquired it, or (b) would only have given a lesser price for it, had he known of these defects.
• Article 1641 of the Civil Code (unchanged by the reform).
• French exception to the warranty for hidden defects: in case of contractual relations between two professionals of the same field, clauses limiting warranty shall be admitted.

Warranty Of Conformity (for consumers)

• Warranty of conformity to the documentation’s specifications and to the administrative and legal regulations. Article L.211-1 of the Consumer Code applies.
• Conformity is evaluated according to the contract established by the parties.
• In case of issue, the consumer is:
• (i) subject to a time limitation of 2 years from the delivery of the object of the contract
• (ii) entitled to choose between the repair or the replacement of the object of the contract

Warranty Of Delivery (between professionals)

• For contracts concluded between professionals, the vendor is held by a warranty of delivery.
• Article 1603 of the Civil Code (unchanged by the reform) : « The seller is bound to two principal obligations, that of delivering the thing and that of warranting the thing he sells ».
• A consumer is able to trigger the vendor’s warranty of delivery, in case of a failure to the warranty of conformity.

United States – Governing law and jurisdiction

• While drafting governing law and jurisdiction clauses consider:
• What law will govern the commercial relationship?
• It is a particularly important issue in an international context, where a contract may be connected with several places.
• Look into what law is more favorable.
• “This Agreement is governed by and shall be construed in accordance with the laws of [STATE].”
• How will any arising disputes be handled?
• The clause states that the parties have agreed to the courts of a named country taking jurisdiction over any disputes that may arise.
• Be specific – not a court in the US, but in New York etc.

United States – Additional Considerations – UCC and CISG Application

• UCC applies to the sales of goods, and will apply by default unless the parties expressly opt out.
• CISG applies to the sale of goods between two CISG member countries, and will apply by default unless the parties expressly opt out and choose another law.
• An agreement by parties to an international transaction that any or all of their rights and obligations are to be determined by the law of this State or of another State or country is effective, whether or not the transaction bears a relation to the State or country designated. §1-301
• Once the parties recognize that CISG applies to their transaction, they must decide in the drafting phase if they want the contract to be governed by CISG.
• The most common mistake parties make is assuming that a standard choice of law clause that does not mention CISG is sufficient to opt out of CISG.
• CASE: Easom Automation Systems, Inc. v. Thyssenkrupp Fabco, Corp., 2007 U.S. Dist. LEXIS 72461 (E.D. Mich. 2007).

• Things to consider when serving process on a defendant outside the US:
• The 1965 Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (Hague Convention),
• Applies only to the signatories of the Convention (France is among them),
• Article 1 of the Convention states that it “shall apply in all cases, in civil or commercial matters, where there is occasion to transmit a judicial or extrajudicial document for service abroad”
• Hague convention applies only where defendant’s address is known,
• Generally, initiating papers such as the summons and complaint must be translated into the official language of the foreign country.

France – Governing law and jurisdiction

• Standard clause when negotiating for a contract that will be executed in France would be to plan for French law and quite often the competent courts of Paris, France.
• When you negotiate, the governing law and jurisdiction would be the first point of negotiation, as this will then drive how to negotiate other clauses: if French law is applicable, then all the points mentioned previously under French law will then be applicable.
• Other clauses would be important or not on a case by case basis: taking in consideration the fact that litigation is generally less costly in France than in the U.S., there may be clauses that you may want to negotiate less harshly (for instance, where to host source code).

United States – Alternative Dispute Resolutions

• Litigation, arbitration or mediation.
• Consider that some courts now require mandatory mediation, or a party may request mediation.
• If seeking to include an arbitration clause, consider the venue and the applicable procedural rules.
• Consider addressing motion practice.
• Consider addressing the number of arbitrators to be on the panel and how they are to be chosen.
• Consider form language provided by ADR venues (JAMS, AAA).
• Address attorneys’ fees and costs.

France – Alternative Dispute Resolution

• Same applies in France: litigation, arbitration or mediation.
• If seeking to include an arbitration clause in France under French law, also consider the venue and the applicable procedural rules, number of arbitrators, fees and costs.
• Popular arbitration forums in Paris are: Chambre de commerce internationale (CCI); Centre de Médiation et d’Arbitrage de Paris (CMAP); l’Association française de l’arbitrage (AFA).

United States – Some Contract Defenses

• Non-disclosure
• Lack of consideration
• Fraud/misrepresentation
• Unconscionability
• Duress
• Unilateral/Mutual Mistake
• Frustration

France – Some Contract Defenses

• Similar defenses applies.
• In France, there is also a doctrine called “the doctrine of unforeseeability”. When the circumstances surrounding the contract have changed, rendering the agreement excessively expensive for one party, the current reform officially allows contract revision by the courts, under specific conditions.
• New Art 1195: the doctrine of unforeseeability applies when :
  • there is a unforeseeable changing of circumstances;
  • rendering the agreement excessively expensive for one party ;
  • and the demanding party must have not previously agreed to support this economical risk.

• If all those conditions are fulfilled:
• (i) the party can ask the courts to renegotiate the contract and even to modify the terms of the contract;
• (ii) in case of a failure of the negotiation, the concerned party may ask the courts to order the termination of contract.
• There is still uncertainty as to whether, in case of demand of modification of the contract, the judge would be allowed to choose between such modification or termination.

III. Conclusion: Doing Business – In the U.S. vs France

• A U.S. perspective.
• Doing business in France

Thank you!

Céline Bondard, principal

Bondard Law Firm

www.bondard-partners.com

Olivera Medenica, principal

Medenica Law, PLLC

www.medenicalaw.com