Commercial

8 Terms Aerospace Transactions Should Include

By Michael Ehrenstein | July 21, 2017

Michael Ehrenstein, founding partner of Ehrenstein Charbonneau Calderin in Miami.

Michael Ehrenstein, founding partner of Ehrenstein Charbonneau Calderin in Miami, Florida.

 

I am both stunned and grateful.

Stunned that so many leaders in the aerospace industry omit even the simplest protections available in commercial documentation of transactions; and grateful because the lack of them often yields disputes that must be litigated — and, therefore, require my engagement as a trial lawyer.

To be clear, most aerospace companies know their business well. They know how to negotiate and document business terms, such as the price, quantity, quality and time for delivery of goods and the manner in which the goods are delivered. These same companies, however, often fail to include powerful and basic terms governing legal issues that frequently arise in such transactions.

In 27 years of practice as an attorney, I have litigated all manner of aerospace disputes and have garnered millions of dollars in attorney's fees fighting in court over matters that could have been avoided by the inclusion of simple language.

In the hope that you might avoid such unfortunate and unnecessary expenses, here is a short list of uncomplicated but critical terms you might want to consider in the documentation of such transactions.

  1. Choice of law. Very often, aerospace transactions involve parties in different states and different countries. The laws applicable to these transactions can vary significantly across jurisdictions. Litigating a dispute over aerospace transactions becomes far more complicated and expensive when the parties fail to clearly identify and agree upon what body of law will govern the transaction. A simple sentence reflecting the parties' agreement to apply the substantive law of a selected jurisdiction can eliminate this area of conflict, simplifying the resolution of any dispute that might arise and decreasing the cost of the resolution. Before selecting the applicable law, the parties should carefully review the differences between the laws to ensure they are choosing the most advantageous body of law to advance their respective interests in the event of a dispute.
  2. Choice of forum. In general terms, forum selection clauses choose between adjudication in court or by arbitration. In making this selection, the parties should carefully consider the time, cost, reliability and reviewability of decisions associated with their choice. Arbitration has long been viewed as a more cost-effective alternative to litigation. Arbitration, however, can be far more expensive than litigation, because the parties must pay for the professional time of their arbitrators, and less reliable, because arbitration rulings are subjected to very limited review. Conversely, a judge, whose salary is paid by the taxpayers, will make decisions guided by a well-developed body of procedure and evidence, and those decisions are reviewable on appeal. Where the parties prefer arbitration, the parties should agree which arbitration organization, such as the American Arbitration Association, should preside over the dispute. Further, because arbitration is a creature of contract, the parties should think through whether they wish specific procedural and evidentiary rules to apply.
  3. Choice of venue. Venue is the location where a dispute is resolved. For the same reasons as the choice of law and choice of forum selection, the parties should consider including a choice of venue clause. Without such a selection, the parties can spend significant time and money fighting over the proper location for adjudication of a dispute. Without such agreement, the parties can even find themselves litigating a single dispute in two or more locations, sometimes with bizarre and inconsistent results.
  4. Waiver of implied warranties. The Uniform Commercial Code provides that in transactions involving the sale of goods, the transaction includes implied warranties of merchantability (that the item can pass in the trade) and fitness for a particular purpose (that the item is for its intended use). Disputes concerning the quality of goods delivered often include claims for breach of these implied warranties. However, the Uniform Commercial Code expressly recognizes that the parties may waive these implied warranties through appropriate language in their transaction documents. Sellers of aerospace goods should consider including such waivers to narrow their scope of potential liability. Conversely, buyers of aerospace goods should be careful about negotiating away the implied warranties without adequate additional commercial protection in price or other terms.
  5. Non-conforming goods. The Uniform Commercial Code establishes some guidelines about inspection, acceptance, rejection and revocation of goods. Much depends upon what is deemed "reasonable" under the circumstances or in the trade. Certainly, the reasonable time for inspection and rejection of non-conforming agricultural products that might spoil would be different than the reasonable time for inspection and rejection of a shipped set of landing gears, which won't spoil but the need to have assurance of adequate documentation is imperative. Rather than subject themselves to the vagaries of judicial interpretations of reasonableness, the parties might simply include language in their commercial documentation limiting the time for inspection, rejection, or revocation of acceptance.
  6. Limitation of liability. The law generally permits parties to agree to limit the liability of one party to another. For example, parties can agree that they will not be liable to each other except for intentional gross misconduct, eliminating liability for all unintentional acts which cause harm. Including a limitation of liability clause in the commercial documentation of an aerospace goods or services transaction can gut the economic value and incentive to fully litigate certain claims.
  7. Limitation of damages. Similarly, the law permits parties to limit claims only to losses directly suffered under their agreement and to exclude losses suffered "as a consequence" of a breach of the agreement. These consequential damages typically include claims for lost profits, which often become the economic driver of litigation. Eliminating consequential damages from the menu may reduce the incentive to litigate.
  8. Merger and integration, and non-modification of all terms. Many litigated cases revolve around an argument that all terms and representations of a deal are not included within the four corners of the parties' agreement. Either certain representations were made before the agreement was entered, which were not included in the written documents, or, as is often the case, the terms of the deal changed after the written documents were prepared. Such arguments consume enormous amounts time and resources, usually unnecessarily so. In general, such arguments could be avoided by the inclusion of a merger and integration clause, stating all terms and conditions are included in the final written agreement and that no oral representations not included can be relied upon, and a non­modification clause, stating that no waiver or modification of the terms of the written agreement can occur without a writing signed by the party to be charged.

Benjamin Franklin once famously said that an ounce of prevention is worth a pound of cure. That statement applies to aerospace transactions.

Michael Ehrenstein is a founding partner of Ehrenstein Charbonneau Calderin in Miami, Florida. 

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