Beware the Fine Print: Old Maxim with Modern Application in the Renewable Energy Industry
In the international, fast paced, ever-changing renewable energy industry, market participants typically focus on essential business terms: price, build quality, delivery dates, delivery destination, etc. and may overlook, at their peril, what they consider to be standard form contractual language. Supposedly benign contractual headings that usually appear on the last pages of a contract, such as “Choice of Law,” “Dispute Resolution,” or “Remedies,” are sometimes passed over with little consideration of what the provisions mean or how they may place you and your company at risk in the event of a dispute. Your contract may be solid on the essential business terms, but what law will be applied in interpreting the contract and the parties’ conduct? Should a dispute arise and the parties are unable to negotiate a resolution, in what country or city, if any, have you agreed to have the dispute heard? What are the procedures and/or time frames in the agreed upon forum for a resolution? What will it cost to litigate a dispute in that venue, including travel and related expenses of getting witnesses and professionals to the location to deal with hearings? Have you waived the right to seek certain types of damages, such as compensatory or consequential damages, that will limit your recovery even if you win?
The fine print under the “benign” headings listed above implicate some or all of the foregoing considerations. The unwary could find themselves unexpectedly and unnecessarily at risk if they have not, at the very least, considered the practical impact of these types of provisions at the outset of the contractual relationship and manage that relationship going forward. Accordingly, the scope of this short article is to generally explain these types of provisions and describe some of the different ways contracting parties can protect themselves. Obviously, each situation and negotiation has its own set of dynamics and one party may have more leverage than the other when negotiating contractual terms. However, that disparity doesn’t mean you need to place yourself and your company unnecessarily at risk because you, or those you work with, may not have fully considered the implications of such provisions.
“Choice of Law” Provisions
As the name indicates, and subject to an actual review of the terms in any contract you are dealing with, these provisions express an agreement between the parties as to what jurisdiction’s laws will be applied in the event of a dispute. Ordinarily, parties located in the United States choose the location of one or the other’s principal place of business or incorporation as the law governing interpretation of the contract and the parties’ respective rights and obligations.
In the international context, it is not uncommon for the non-U.S. based contracting party to suggest their country of origin as the applicable law or that the parties agree that the United Nations Convention on Contracts for the International Sale of Goods – usually referred to as “CISG” and which is comparable to the Uniform Commercial Code in the United States – govern the interpretation and enforcement of the contract. Ideally, a United States based company would want to have its home jurisdiction used as the law for a review of the parties’ rights and obligations. In the alternative, if the foreign entity is unwilling to agree to the U.S. based company’s home forum’s laws, CISG is preferred, provided you confirm that the country where the foreign company is based has ratified CISG. Ninety-one countries have ratified CISG, including the United States and China. However, Hong Kong, India, Taiwan and the United Kingdom have yet to adopt CISG.
The least desirable, generally speaking, is to accept the laws of the country of the foreign-based entity as the governing law. Corporate best practices would require the retention of and review by a legal expert in the foreign jurisdiction, (with the likely delays, expenses and language barriers associated therewith), before such a provision could be meaningfully reviewed.
“Dispute Resolution” Provisions
These types of provisions address where and how a dispute between the contracting parties will be litigated. In domestic commercial transactions, it is customary for contracting parties to specify that in the event of a dispute the parties agree to submit the dispute to binding arbitration before the American Arbitration Association (“AAA”). The AAA has published procedures and a fee structure that allows parties to evaluate the time and expense of arbitrating a dispute. Notably, while arbitration typically involves less expense on discovery and a ruling can be obtained sooner from a private mediator or mediation panel (depending on the amount in dispute) than traditional state or federal court litigation, you should be aware that absent fraud, an arbitrator(s) rulings are binding with little or no appeal rights. In short, arbitration is more streamlined. But make sure you understand that your ability to have another court review the findings and rulings of the arbitrator or panel will, in all likelihood, be limited.
On the international stage, it is common for the foreign-based entity to suggest an alternative dispute resolution venue, such as the China International Economic and Trade Arbitration Commission (“CIETAC”) and to designate the place for the arbitration such as Shanghai or Hong Kong. Generally speaking, U.S. based entities are placed at a distinct disadvantage if they agree to arbitrate a dispute with a foreign private dispute resolution commission such as CIETAC.
The disadvantages are due to logistics. In the event of a dispute, a party needs to evaluate the cost and expense of presenting testimony of witnesses, submission of documents, translation of documents (or key provisions of such documents), as well as the cost and expense of having attorneys, damages experts and the like travel to and from the foreign jurisdiction to present the parties’ claims and defenses. Depending upon other provisions in the contract, these type of expenses can be prohibitive and eclipse any meaningful recovery on the merits of the underlying claim. Accordingly, wherever and whenever possible, the location of the arbitration entity and the location of the arbitration itself should ideally be neutral and equidistant between the location of the parties’ offices, witnesses, documents, and the like so as to place both parties on similar playing fields.
“Limitation of Liability or Remedies” Provisions
LOR provisions set forth what damages the parties agree a non-breaching party may recover in the event of a breach. It is customary that such provisions include a waiver and a release of the right to seek compensatory or consequential damages and limit recovery to direct damages or some form of liquidated damages in the event damages may be difficult to quantify and the parties agree upon a method for calculating a measure of damages. It is important to realize that a LOR provision that includes a waiver of consequential or compensatory damages will usually prevent the non-breaching party from recovering its lost profits in most jurisdictions. Therefore, it is important to review such provisions at the outset of the agreement so that any related, downstream contracts dependent upon the delivery of a product or service protect the non-breaching party from claims by third parties. For example, assume you are purchaser under a contract that requires delivery of solar panels at a set price and delivery date for a solar project in the United States. For whatever reason, the foreign based manufacturer is unable or unwilling to perform. Absent some form of comparable provision with the downstream third party, the non-breaching party faces potential exposure for its inability to supply or install the panels and complete the project on time.
It is also important to review these types of provisions when the non-breaching party begins to suspect the other party will not be able to perform its obligations and needs to find an alternative source for the product or service. Assuming the substituting party charges more for the product or service, such increased costs are typically recoverable as direct damages provided that the non-breaching party has established reasonable efforts to mitigate its damages. While there are a myriad of factors (that impact upon but cannot be addressed here) on mitigation obligations, to preserve direct damages claims against the breaching party, reasonable efforts should be made to obtain quotes from potential substituting entities so that in the event of a damages claim, the non-breaching party can document its efforts to mitigate and support its direct damages claims.