As aerospace and defense programs become increasingly reliant on complex, multitiered supply chains and emerging technologies, disputes over intellectual property, supply, pricing, and performance are on the rise. To better understand the litigation landscape we spoke with Michelle Pector, a partner in our Houston office. Michelle is a seasoned trial lawyer and trusted counselor who serves as co-chair of the firm’s aerospace and defense industry team and leader of the energy litigation practice.
Given the complexity of multitiered supply chains in aerospace and defense, what types of disputes are you seeing most often around technology development and implementation?
Intellectual property disputes are common when clear boundaries are not defined regarding who owns the intellectual property developed through a collaboration, transaction, or contract. When intellectual property is developed jointly before ownership agreements are reached, the resulting IP disputes can interfere with rights to use the technology, cause delay in implementation and commercialization, or impact the ability to modify the technology.
Commercial Disputes over Incompatible Components or Integration Delays. Given that certain components required for technological developments in the aerospace and defense industry can be highly customized, in circumstances where there is misalignment on the specifications for the components that impacts integration with other aspects of the technology, disputes can arise regarding who was at fault for the misalignment and who is responsible for the redesign costs and commercial delays.
Supply and Pricing Disputes. When the fast-paced nature of technology development and supply chain needs exceed the pace of business and contract negotiations, situations can arise when there is a disconnect between the volume of supply agreed upon, which may lead to disputes over excess supply that is not purchased or insufficient supply that falls short of customer expectations for delivery. Market changes and evolving regulations can also cause disputes over pricing, particularly when unforeseen costs such as tariffs were not accounted for when negotiating pricing.
Performance or Warranty Breaches. Reliability of components is critical for the technological developments of aerospace and defense customers. When situations arise where components fail to meet the performance standards agreed upon and the defects discovered are not promptly cured by the supplier, commercial disputes over breach of contract, breach of warranty, and related business torts commonly arise.
Aerospace and defense programs increasingly depend on emerging technologies. What litigation trends are you seeing in risk allocation clauses—like liability caps, IP indemnities, and export control warranties—and what is your advice to lawyers who draft and negotiate services and licensing agreements in aerospace and defense industry?
Warranties, indemnity, limitation of liability, and insurance provisions continue to be key clauses to balance risk allocation. Force majeure clauses are also commonly being included to mitigate supply chain disruptions, cybersecurity risks, pandemic risks, government shutdowns, and unanticipated regulatory changes.
Confirm what state law will govern the contract you are negotiating to ensure that each of these provisions are drafted with the requisite language and timeframe triggers to be enforceable under the applicable state law. Indemnity clauses in particular can vary from state to state, and assessing anti-indemnity statutes that may apply when drafting these provisions will go a long way in providing protections when litigation arises or finding loopholes to enforceability.
From your litigation experience, what are the most effective contractual mechanisms or governance structures that companies can put in place upfront to reduce the likelihood of costly disputes over technology projects in this sector?
Clearly drafted termination provisions that permit termination for convenience when clients need maximum flexibility to terminate or require termination for cause when clients need supply chain certainty. Vague language should be avoided. When provisions are drafted to precisely identify what will trigger termination for cause they are easier to enforce. The same is true for force majeure clauses.
Additionally, incorporation of enforceable indemnity and additional insured provisions provide important protections to balance the risks of unanticipated third-party disputes. Limitations on liability caps are also effective to mitigate potential damages when disputes arise and to temper runaway damage demands. Reasonable limitations and shared risks are typically more straightforward to negotiate, when the parties agree to carve out intentional acts and omissions such as gross negligence, willful misconduct, fraud, breaches of confidentiality, and IP infringement.