exv10w1






Exhibit 10.1




AMERICAN-BLEND CIGARETTE MANUFACTURING AGREEMENT




EXECUTION COPY



     This American-blend Cigarette Manufacturing Agreement (the “Agreement”) is made and entered
into as of this 26th day of May, 2010 (the “Execution Date”), by and between R. J.
REYNOLDS TOBACCO COMPANY, a North Carolina corporation (hereinafter, “RJRTC”), and BATUS JAPAN,
INC., a Delaware corporation (hereinafter, “BATUS Japan”). RJRTC and BATUS Japan shall be referred
to herein individually as a “Party” and collectively as the “Parties.”



RECITALS




     WHEREAS, RJRTC and BATUS Japan entered into the Original Agreement (as defined below) on July
30, 2004. The Original Agreement (together with all protocols, guidelines and understandings
entered into in connection with the Original Agreement) has now been terminated in its entirety
with effect from midnight on December 31, 2009 (save where any such protocols, guidelines and
understandings are expressly stated in this Agreement to survive termination of the Original
Agreement).



     WHEREAS, BATUS Japan or its Affiliates (as defined below) have the right to distribute, market
and sell certain Cigarettes (as defined below) and other tobacco products in the Territory (as
defined below);



     WHEREAS, BATUS Japan wishes to engage RJRTC to manufacture American-blend Cigarettes which
will be sold in Japan;



     WHEREAS, RJRTC has facilities for, and expertise relating to, the manufacture of
American-blend Cigarettes and other tobacco products; and,



     WHEREAS, RJRTC is willing to manufacture American-blend Cigarettes for BATUS Japan in the
United States pursuant to the terms and conditions set forth in this Agreement.



     NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and
for other good and valuable consideration, the mutuality, receipt and sufficiency of which are
hereby acknowledged, RJRTC and BATUS Japan agree as follows:



SECTION 1

DEFINITIONS




     For purposes of this Agreement, the following terms shall mean:


1.1 “AAA” has the meaning set forth in Sub-Section 7.6(b).





 









 







1.2 “Affiliate” of any Person means another Person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common control with, such first
Person.



1.3 “Agreement” has the meaning set forth in the Preamble above and shall also include any
and all Schedules attached hereto, as may be amended from time to time by mutual written agreement
of the Parties.



1.4 “Antiboycott Laws” means laws and regulations of the U.S.A. that prohibit participation
or cooperation with, agreements to cooperate with and, in some cases, the provision of information
in support of, any international boycott not sanctioned by the U.S.A., such as the Arab League
boycott of Israel, and including but not limited to Section 999 of the U.S.A. Internal Revenue
Code of 1986, and guidelines issued thereunder, and the U.S.A. Export Administration Regulations,
15 C.F.R. Part 760.



1.5 “B.A.T.” means British American Tobacco p.l.c., BATUS Japan’s indirect parent
corporation.



1.6 “B.A.T. Group” means B.A.T. and its Affiliates.



1.7 “B.A.T. Group’s Five Largest Countries” means the five (5) countries in which the
B.A.T. Group has the highest Cigarette production volume for the twelve (12) month period ending on
May 31, 2013 and, for the purposes of this definition, for any country with multiple factories, the
Cigarette production volumes of those factories shall be aggregated so as to provide a single
country total.



1.8 “BATUS Japan Indemnified Party” has the meaning set forth in Sub-Section
6.9(a).



1.9 “BCA” means the Business Combination Agreement, dated as of October 27, 2003, between
R.J. Reynolds Tobacco Holdings, Inc and Brown & Williamson Tobacco Corporation.



1.10 “Bill of Materials” means, for any SKU, a price list of Tobacco Materials and
Non-Tobacco Components in detail sufficient to allow BATUS Japan to exercise its rights under this
Agreement.



1.11 “Capsule Cigarette” means a Cigarette possessing filter elements that incorporate
capsules individually positioned at pre-determined locations within the filter element. As an
example, a Capsule Cigarette is a Cigarette possessing a filter element that can have one or more
segments, and at least one of those segments possesses one or more crushable capsules capable of
releasing encapsulated flavoring agents.



1.12 “Carton” means a container that contains Cigarette Packages and associated materials
including, but not limited to, inserts and onserts (e.g., ten (10) packages of twenty (20)
Cigarettes each).




-2-









 







1.13 “Case” means a shipping container that contains Cartons (e.g., a container which
contains fifty (50) cartons).



1.14 “Cigarette” means: (a) any roll of tobacco wrapped in paper or in any substance not
containing tobacco or (b) any roll of tobacco wrapped in any substance containing tobacco which,
because of its appearance, the type of tobacco used in the filler, or its packaging or labeling, is
likely to be offered to, or purchased by consumers, as a cigarette described in the foregoing
clause (a).



1.15 “Cigarette Package” means the smallest container for Cigarettes that, when filled with
Cigarettes and sealed, is intended for distribution and sale (e.g., packs of twenty (20)
Cigarettes).



1.16 “Confidential Information” means: (a) information or data (whether of a technical or
business nature), including, but not limited to, that relating to research, development, know-how,
inventions, Trade Secrets, engineering, manufacturing, proposals and business plans, marketing
plans and matters, financial matters and arrangements, personnel matters, sales, suppliers or
customers; or (b) proprietary information or data of either Party hereto or of a third Person with
whom such Party has an obligation of confidence (including all such information owned by any
Affiliate of either Party), whether created by a Party individually or through the efforts
contemplated by this Agreement; or (c) any other information or data, not publicly known, of either
Party hereto or of a third Person with whom such Party has an obligation of confidence (including
all such information owned by any Affiliate of either Party); whether any of the foregoing set
forth in clauses (a)-(c) above is observed or in oral, written, graphic or electronic form, and
whether or not marked or otherwise identified as “confidential.”



1.17 “Contract Year” means each successive period during the Term of this Agreement running
from January 1st through December 31st.



1.18 “Damages” has the meaning set forth in Sub-Section 6.8(a).



1.19 “Delivery Grace Period” has the meaning set forth in Sub-Section 2.17(c).



1.20 “Dispute” has the meaning set forth in Sub-Section 7.6.



1.21 “Effective Date” means January 1, 2010.



1.22 “Execution Date” is the date set forth in the Preamble above.



1.23 “Export License” means any license, permit, or other authorization issued by a
Governmental Authority, including but not limited to OFAC (as defined below), permitting the
manufacture, export and/or sale of the Products hereunder.



1.24 “Extension Criteria” has the meaning set forth in Sub-Section 4.4(b).





-3-









 







1.25 “Extension Period” has the meaning set forth in Sub-Section 4.4(c).



1.26 “Extension Response Notice” has the meaning set forth in Sub-Section 4.4(b).



1.27 “Foreign Corrupt Practices Act” means 15 U.S.C. §§ 78dd-1, et seq. and any and all
amendments thereto.



1.28 “Governance Agreement” means the Governance Agreement, dated as of July 30, 2004,
among B.A.T., Brown & Williamson Tobacco Corporation and RAI.



1.29 “Governmental Authority” means any of the following: (a) the government of the U.S.A.
or any other foreign country; (b) the government of any state, province, county, municipality,
city, town, or district of the U.S.A. or any foreign country, or any multi-country district; and
(c) any ministry, agency, department, authority, commission, administration, court, magistrate,
tribunal, arbitrator, instrumentality, or political subdivision of, or within the geographical
jurisdiction of, any government described in the foregoing clauses (a) and (b).



1.30 “Guidelines on Capital Expenditure” means the guidelines set out in Appendix 1 to
Schedule “E”.



1.31 “Guidelines on Inventory” means the guidelines set out in Appendix 9 to Schedule
“E”.



1.32 “INCOTERMS” means the terms for the international transportation of goods published by
the International Chamber of Commerce, as in effect from time to time during the Term of this
Agreement.



1.33 “Incumbent Board” has the meaning set forth in Sub-Section 4.2(d)(iii).



1.34 “Intellectual Property” means information, concepts, ideas, discoveries, inventions
(whether conceived or reduced to practice, and whether or not patentable), Specifications,
requirements, samples of prototypical Cigarettes and Cigarette components, data, codes and
programs, graphics, designs, prints, sketches, drawings and photographs, developments, processes
and methods, know-how, Trade Secrets, patent applications, patents, other intellectual property of
any type (including copyrights, trademarks, and service marks), and enhancements, derivatives, and
improvements thereof.



1.35 “Manufacturing Costs” means the weighted (by production volume) average manufacturing
cost of Cigarettes of factories in the B.A.T. Group’s Five Largest Countries (which, for the
avoidance of doubt: (a) excludes the cost of raw materials; (b) includes labor costs; and (c)
relates to all Cigarettes manufactured in factories in B.A.T. Group’s Five Largest Countries, not
just the Cigarettes manufactured pursuant to this Agreement), as reported in the books and records
of the B.A.T. Group, and using the B.A.T. Group’s standards, for the twelve (12) month period
ending on May, 31 2013.




-4-









 







1.36 “Manufacturing Costs Notice” has the meaning set forth in Sub-Section 4.4(b).



1.37 “Migration Period for Non-Key Brands” has the meaning set forth in Sub-Section
2.2(A)(b)(i).



1.38 “Nanotek Cigarette” means a king size, superslim Cigarette identified as a “Nano”
style.



1.39 “Non-Key Brands” means the following Cigarette brand families: CAPRI, CARLTON, LUCKY
STRIKE, PALL MALL, DUNHILL and JOHN PLAYER SPECIAL.



1.40 “Non-Tobacco Component” means a material that is used in combination with any Tobacco
Material for the manufacture of Cigarettes, including tobacco rod wrapping materials, filter
materials and components, plug wrapping materials, tipping materials, inks, flavor and casing
components, and Packaging.



1.41 “OFAC” means the United States Department of the Treasury, Office of Foreign Assets
Control, or any successor agency, department or unit of the federal government of the U.S.A. with
regulatory authority over export/re-export transactions subject to U.S.A. jurisdiction.



1.42 “On Time/In Full” is the performance metric used in certain circumstances to measure
RJRTC’s performance under this Agreement. On Time/In Full delivery performance is measured at the
Purchase Order SKU order line level by week. To be credited for On Time/In Full delivery of a
specific Purchase Order SKU order line level by week, RJRTC must: (a) deliver one hundred percent
(100%) of the SKU volume ordered; (b) on the firm delivery date established pursuant to the
mechanisms provided in Sub-Section 2.16 of this Agreement for the particular Purchase Order
SKU order line; (c) at the railroad railhead or, if delivery by ship is required by BATUS Japan in
the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit or, if air freight
delivery is required by BATUS Japan in the applicable Purchase Order, at the fuselage of the
aircraft; and (d) with all export and shipping documentation fully and properly completed. For
purposes of Sub-Sections 1.42(b) and (c) above, should RJRTC cause a specific Purchase
Order SKU order line volume level by week to arrive in the Territory not later than the date on
which such SKU volume would have arrived in the Territory if delivered to the railroad railhead or,
if shipment was required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the
U.S.A. port of exit by RJRTC on the firm delivery date established pursuant to the mechanisms
provided in Sub-Section 2.16, then such Purchase Order SKU order line volume by week shall
be deemed delivered on time.



1.43 “On Time/In Full Delivery Percentage” means the percentage of RJRTC’s On Time/In Full
deliveries over the time period stated in Sub-Section 2.17(d)(iv) measured as follows:
[(total number of Purchase Order SKU order lines issued by week during the measurement period by
BATUS Japan and accepted by RJRTC) minus (number of total





-5-









 







Purchase Order SKU order lines not
delivered by RJRTC On Time/In Full)] divided by (total number of Purchase Order SKU order lines
issued by week during the measurement period by BATUS Japan and accepted by RJRTC) times one
hundred (100). Stated formulaically:




	 	 	 

	Total number of Purchase Order SKU order lines
issued by week during the measurement period by
BATUS Japan and accepted by RJRTC (-) Number
of total Purchase Order SKU order lines not delivered
On Time/In Full
	 	x 100 = On Time/In Full Delivery Percentage
	 


	 
	Total number of Purchase Order SKU order lines issued
by week during the measurement period by BATUS
Japan and accepted by RJRTC
	 	 





By way of illustration, if over the applicable measurement period orders for 1,500 total Purchase
Order SKU order lines were issued by BATUS Japan and accepted by RJRTC, and RJRTC has On Time/In
Full delivery of 1,450 of such total Purchase Order SKU order lines, RJRTC’s On Time/In Full
Delivery Percentage for the measurement period would be as follows:




	 	 	 	 	 

	 

	 	1,500 (-) 50	 	x 100 = 96.6%
	 

	 	 

1,500
	 





1.44 “Original Agreement” has the meaning set forth in Sub-Section 2.2(b).



1.45 “Outside the Jurisdiction of the U.S.A.” means all places other than the U.S.A.



1.46 “Packaging” means materials that are used to contain Cigarettes (or containers
enclosing Cigarettes) for the purpose of distribution and sale to customers, including component
materials referred to as foil, innerframes, closures, Cigarette boxes, labels, films, tear tapes,
optional pack inserts and onserts, cartons and cases, including all graphics, holographics and
printed matter on such materials.



1.47 “Person” means any firm, corporation, partnership, limited liability company, joint
venture, trust, unincorporated association or organization, business, enterprise or other entity,
any individual and any Governmental Authority. For purposes of Sub-Section 4.2(d), any
formal or informal group of the foregoing shall constitute a Person.



1.48 “PPI” means the Producer Price Index for Stage of Processing – Finished Goods, as
compiled by the United States Bureau of Labor Statistics (1982 = 100). If the Bureau of Labor
Statistics substantially revises the manner in which the PPI is determined, an adjustment shall be
made in the revised index that will produce results equivalent, as




-6-









 







nearly as possible, to those
that would be obtained if the PPI had not been so revised. If the 1982 average is no longer used
as an index of one hundred (100), or if the PPI is no longer available, then the Parties shall
substitute a mutually acceptable comparable index, based on changes in the cost of production
measured at the finished goods level published by an agency of the federal government of the U.S.A.



1.49 “Principal Party in Interest” means the Person in the U.S.A. listed as such on
Shipper’s Export Declarations or Automated Export System records (and as defined in the U.S.A.
Export Administration Regulations (15 C.F.R. Part 730 et seq.) and the U.S.A. Foreign Trade
Statistics Regulations (15 C.F.R. Part 30)) as the Person that receives the primary benefit,
monetary or otherwise, of the transaction associated with such export shipment.



1.50 “Product” or “Products” means American-blend Cigarettes manufactured for BATUS Japan
(or its Affiliates) pursuant to this Agreement which are intended to be distributed or sold in the
Territory.



1.51 “Product Base Prices” means the price for each SKU (per one thousand (1,000)
Cigarettes) chargeable by RJRTC for Products subject to Purchase Orders issued by BATUS Japan
between the Effective Date and the end of Contract Year 2010. The Product Base Prices (per one
thousand (1,000) Cigarettes) are listed on the attached Schedule “F”. The Product Base
Prices are calculated by adding (or subtracting) all of the costing elements identified on
Schedule “F”.



1.52 “Prohibited Countries” means countries subject to Trade Restrictions (as defined
below) and for which no Governmental Authority licenses or authorizations permitting manufacture or
export of Products are obtained. For the purposes of this Agreement, Prohibited Countries shall
not include Restricted Countries.



1.53 “Purchase Order” means a purchase order issued by BATUS Japan on its behalf (or on
behalf of its Affiliate, RFEBV) to RJRTC containing the following information about an order for
Products pursuant to this Agreement: (a) identity of Products by SKU, with each SKU ordered entered
on a separate order line; (b) quantity of Products by SKU; (c) delivery instructions and required
delivery date(s) for the Products at the railroad railhead or, if delivery by ship is required by
BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit or, if
air freight delivery is required by BATUS Japan in the applicable Purchase Order, at the fuselage
of the aircraft (with each Purchase Order typically providing for multiple deliveries of Product by
SKU at scheduled intervals); (d) shipping instructions to the Territory; (e) consignee
identification; (f) contact personnel; (g) Case mark requirements; (h) matters including “bill to”
and “sold to” (which may be BATUS Japan or RFEBV); and (i) such other requirements as BATUS Japan
may specify or RJRTC may reasonably require.



1.54 “RAI” means Reynolds American Inc., RJRTC’s indirect parent corporation.



1.55 “RAI Voting Power” has the meaning set forth in Sub-Section 4.2(d)(ii).





-7-









 







1.56 “Receiving Party” has the meaning set forth in Sub-Section 5.1.



1.57 “Restricted Countries” means those countries in the Territory that from time to time
are subject to Trade Restrictions and for which Products are manufactured for export under this
Agreement by RJRTC pursuant to licenses or other authorizations duly issued and in effect by the
applicable Governmental Authority whether within or outside the U.S.A, including but not limited to
OFAC, and to which the additional provisions of Schedule “B” shall apply. These additional
provisions shall prevail only to the extent that they are inconsistent with the other provisions of
this Agreement.



1.58 “Restricted Parties” means Persons who have been denied export privileges or who are
otherwise restricted under the U.S.A. Export Administration Regulations or with respect to whom
transactions, including but not limited to export and financial transactions, are restricted,
pursuant to applicable Trade Restrictions (as defined below) in force from time to time.



1.59 “RFEBV” means BATUS Japan’s Affiliate, Rothmans Far East, B.V.



1.60 “RJRTC Indemnified Party” has the meaning set forth in Sub-Section 6.8(a).



1.61 “SKU” means a stock keeping unit designation referring to a particular Cigarette brand
style.



1.62 “Specifications” means specifications and standards set by BATUS Japan and pursuant to
which RJRTC is manufacturing and packaging Products for BATUS Japan as of the Execution Date, as
contained in whichever medium such specifications and standards may be held for each SKU, and as
they may be amended from time to time in accordance with this Agreement.



1.63 “Surplus Equipment” means such surplus equipment owned by RJRTC which is used by RJRTC
in relation to the manufacture and/or packaging of Products.



1.64 “Term” means the period in which this Agreement is in effect, in accordance with
Section 4.



1.65 “Termination Migration Period” has the meaning set forth in Sub-Section
4.2A(a).



1.66 “Territory” means Japan, the political jurisdiction outside the U.S.A. where BATUS
Japan and RFEBV distribute and sell the Products and any other jurisdictions that the Parties may
mutually agree upon in writing from time to time. The Territory subject to this Agreement is
listed on the attached Schedule “A”, as may be amended from time to time by mutual written
agreement of the Parties.





-8-









 







1.67 “Tobacco Material” means any type or form of tobacco, including tobacco in whole leaf,
strip, stem or blended cut filler form, reconstituted tobacco, and including tobacco by-products,
and tobacco in any type of processed form, whether or not in blended form.



1.68 “Trademark” means any trademark: (a) that at any time is used on or in connection with
a Product and (b) that is owned, licensed or controlled by BATUS Japan or an Affiliate of BATUS
Japan.



1.69 “Trade Restrictions” mean restrictions on trade and dealings with certain countries,
Persons or entities, including but not limited to restrictions on exports, imports, sales, and
supplies of products, transshipments, and financial transactions imposed pursuant to export
controls, trade sanctions and other trade and investment regulations of the U.S.A. and/or any other
Governmental Authority outside the U.S.A. in force from time to time.



1.70 “Trade Secret” means information and data, including, without limitation,
Specifications, that: (a) derive independent economic value, actual or potential, from not being
generally known to the public or other Persons who can obtain economic value from their disclosure
and use and (b) are the subject of efforts that are reasonable under the circumstances to maintain
their secrecy.



1.71 “TSRA” means the U.S.A. Trade Sanctions Reform and Export Enhancement Act of 2000
(Title IX of Pub. L. 106-387).



1.72 “TTB” means The Alcohol & Tobacco Tax and Trade Bureau, an agency of the U.S.A.
Department of the Treasury.



1.73 “U.S.A.” means the fifty (50) States of the U.S.A., including offshore areas within
their jurisdiction pursuant to Section 3 of the Submerged Lands Act (43 U.S.C. § 1311), the
District of Columbia, Puerto Rico, and all territories, dependencies, and possessions of the
U.S.A., including foreign trade zones established pursuant to 19 U.S.C. §§ 81A-81U, and also
including the outer continental shelf, as defined in Section 2(a) of the Outer Continental Shelf
Lands Act (43 U.S.C. § 1331(a)).



1.74 “Workout Period” has the meanings set forth in Sub-Sections 2.17(d)(i), (ii) and
(iii).



1.75 Other Terms shall have the defined meanings stated elsewhere in this Agreement.





-9-











 





SECTION 2

RESPONSIBILITIES OF THE PARTIES



2.1 Appointment of RJRTC for Manufacture. Commencing on the Effective Date and until such
time that this Agreement is terminated or expires pursuant to its terms and provisions, BATUS Japan
hereby appoints RJRTC to be BATUS Japan’s exclusive manufacturer of all of BATUS Japan’s
requirements for American-blend Cigarettes intended to be distributed and sold in the Territory,
except: (a) any Cigarettes bearing the brand names CARTIER, VOGUE, DUNHILL or STATE EXPRESS 555,
regardless of blend (except, in relation to DUNHILL only, for any SKU which bears the DUNHILL name
and which was manufactured by RJRTC for BATUS Japan immediately prior to the Execution Date); (b)
any Nanotek Cigarettes bearing the brand name KENT, regardless of blend and (c) from such time as
RJRTC ceases to be the manufacturer of Cigarettes bearing each particular Non-Key Brand name in
accordance with Sub-Section 2.2A, any Cigarettes bearing such Non-Key Brand names. All
waivers previously granted by RJRTC to BATUS Japan providing for the manufacture of Nanotek
Cigarettes bearing the brand name KENT in other than RJRTC facilities and remaining in force as of
the Execution Date shall become permanent, as of the Execution Date. All waivers previously
granted by RJRTC to BATUS Japan providing for the manufacture of Nanotek Cigarettes bearing the
brand name KOOL in other than RJRTC facilities and remaining in force as of the Execution Date
shall remain in force on their existing terms and conditions.



2.2 RJRTC’s Manufacture of Product.




     (a) Provision of Products and place of manufacture.



          RJRTC shall provide the Products to BATUS Japan, subject to and in accordance with the terms
and conditions of this Agreement. RJRTC shall manufacture Products in the U.S.A. at its facilities
in North Carolina and shall not transfer production of Products subject to this Agreement to any
other facility without BATUS Japan’s prior written consent.




     (b) Products manufactured between Effective Date and Execution Date.



          The Parties acknowledge and agree that American-blend Cigarettes manufactured by RJRTC for
BATUS Japan (or its Affiliates) between the Effective Date and the Execution Date pursuant to the
Contract Manufacturing Agreement, dated as of July 30, 2004, by and between RJRTC and BATUS Japan
(the “Original Agreement”), shall be deemed to be “Products” manufactured pursuant to this
Agreement, as such term is defined in Sub-Section 1.50. For the avoidance of doubt, a
purchase order issued by BATUS Japan (or its Affiliates) to RJRTC pursuant to the Original
Agreement relating to American-blend Cigarettes manufactured between the Effective Date and the
Execution Date shall be deemed to be a “Purchase Order” issued pursuant to this Agreement as such
term is defined in Sub-Section 1.53. The price reconciliation referred to in
Sub-Section





-10-









 







3.1(a) shall apply to Products manufactured pursuant to Purchase Orders issued by
BATUS Japan between the Effective Date and the Execution Date.



2.2A Transfer of manufacturing arrangements for Non-Key Brands.




     (a) Transfer of manufacturing arrangements by May 31, 2011.



          (i) All waivers previously granted by RJRTC to BATUS Japan providing for the manufacture of
Cigarettes bearing the Non-Key Brand names in other than RJRTC facilities and remaining in force as
of the Execution Date shall become permanent, as of the Execution Date.




          (ii) No later than May 31, 2011 the manufacturing of Cigarettes bearing the Non-Key Brand
names shall be transferred from RJRTC to such facilities and such Persons as BATUS Japan may
specify in accordance with this Sub-Section 2.2A.




     (b) Migration period.



          (i) Commencing on the Execution Date the Parties shall work together in good faith to transfer
the manufacturing arrangements in accordance with Sub-Section 2.2A(a)(ii) (the period
commencing on the Execution Date and ending on the date on which RJRTC ceases to be the
manufacturer of Cigarettes bearing the Non-Key Brand names being the “Migration Period for Non-Key
Brands”). During the Migration Period for Non-Key Brands: (a) as soon as reasonably practicable,
BATUS Japan shall submit to RJRTC a draft migration plan to assist in the orderly transfer of the
relevant manufacturing arrangements, which the Parties shall discuss and seek to agree as soon as
reasonably practicable thereafter; (b) RJRTC shall provide to BATUS Japan all reasonable assistance
and co-operation to transfer production including enabling BATUS Japan to carry out consumer
product and other relevant tests; and (c) by no later than July 31, 2010, RJRTC shall provide to
BATUS Japan all blend recipes, Bills of Materials and Specifications and will identify other
Intellectual Property relating to the Non-Key Brand families. Until RJRTC ceases to be the
manufacturer of Cigarettes bearing a particular Non-Key Brand name (it being understood that RJRTC
may cease to be the manufacturer of Cigarettes bearing the different Non-Key Brand names at
different times) BATUS Japan shall continue to order Products in the relevant Non-Key Brand family
exclusively from RJRTC, but shall be allowed to have test Products in that Non-Key Brand family
manufactured by alternative sources for purposes of qualifying such alternative manufacturers.




          (ii) Once RJRTC ceases to be the manufacturer of Cigarettes bearing a particular Non-Key Brand
name BATUS Japan may have any and all Product SKUs in the relevant Non-Key Brand family
manufactured by any other Person, and RJRTC’s exclusive manufacturing rights stated in
Sub-Section 2.1 with respect to any Cigarettes bearing such Non-Key Brand name will
terminate. Except to the extent terminated earlier under the prior sentence, RJRTC’s exclusive
manufacturing rights stated in Sub-






-11-









 







Section 2.1 will terminate with respect to all Cigarettes bearing Non-Key Brand names
on May 31, 2011.




     (c) Application of Section 4.3.



          Upon RJRTC ceasing to be the manufacturer of Cigarettes bearing each Non-Key Brand name in
accordance with Sub-Section 2.2A the provisions of Sub-Section 4.3 shall apply to
that Non-Key Brand.




     (d) Surplus Equipment.



          Upon RJRTC ceasing to be the manufacturer of Cigarettes bearing a Non-Key Brand name in
accordance with Sub-Section 2.2A, the Parties shall discuss in good faith the possible
acquisition by BATUS Japan, on such terms as the Parties may agree, of any Surplus Equipment used
in relation to the manufacturing and/or packaging of Cigarettes bearing such Non-Key Brand name.
Prior to RJRTC ceasing to be the manufacturer of Cigarettes bearing each Non-Key Brand name, RJRTC
shall provide BATUS Japan with details of all Surplus Equipment used in relation to the
manufacturing and/or packaging of Cigarettes bearing the relevant Non-Key Brand name.




     (e) Costs.



          For the avoidance of doubt, except as provided in Sub-Sections 2.2A(d) and 4.3(b)and
except for unavoidable costs incurred by RJRTC in relation to writing off inventory of raw
materials used exclusively in the manufacture and/or packaging of Cigarettes bearing the Non-Key
Brand names, RJRTC shall not be entitled to charge BATUS Japan any fees or seek any costs from
BATUS Japan in relation to the transfer of manufacturing arrangements contemplated by this
Section 2.2A, as long as the manufacturing of Cigarettes bearing the Non-Key Brand names
has been transferred from RJRTC by May 31, 2011 (as contemplated by Sub-Section 2.2A) If
such manufacturing arrangements have not been transferred by May 31, 2011 and RJRTC has fulfilled
its transition obligations (as contained in this Sub-Section 2.2A), BATUS Japan shall be
responsible for any additional costs incurred by RJRTC which result from the failure to transfer
such manufacturing arrangements by May 31, 2011 (subject to RJRTC taking all commercially
reasonable steps to mitigate any such additional costs).



2.3 Specifications.




     (a) Original.



          RJRTC is in possession of the Specifications for all Products to be produced by RJRTC for
BATUS Japan pursuant to this Agreement as of the Execution Date.









-12-









 








     (b) Specification Changes Proposed by BATUS Japan.



          (i) In accordance with the procedures stated below in clauses (ii) through (iv), RJRTC shall
comply with BATUS Japan’s reasonable instructions in meeting any new Specifications (RJRTC’s costs
of evaluating and implementing any such changes shall be borne by BATUS Japan, subject to BATUS
Japan’s prior written approval of the budget for expenditure of such costs, which approval shall
not be unreasonably withheld). If such budgets include required capital expenditures which RJRTC
requests BATUS Japan to fund, a separate mutually acceptable agreement, to be in accordance with
the Guidelines on Capital Expenditure, will be negotiated between the Parties.




          (ii) The Parties shall conduct trials, as appropriate, in order to evaluate the effect of
changes in Specifications upon Products, Product pricing and RJRTC’s manufacturing environments
(the costs associated with such trials shall be borne by BATUS Japan, subject to BATUS Japan’s
prior written approval of the budget for expenditure of such costs, which approval shall not be
unreasonably withheld).




          (iii) BATUS Japan shall provide written approval for changed Specifications of all Products
upon completion of activities, including those set forth in the foregoing clauses (i) and (ii).
BATUS Japan shall not be responsible for accepting any quantity of Products for which BATUS Japan
has not provided such final approval, unless BATUS Japan has otherwise agreed in writing.




          (iv) RJRTC shall accept and acknowledge all changed Specifications for which BATUS Japan has
provided final approval and provided to RJRTC, provided that RJRTC has determined that it can meet
those Specifications.




     (c) Specification Changes Proposed by RJRTC.



          (i) RJRTC shall inform BATUS Japan of changes in RJRTC’s manufacturing operations proposed at
any time during the Term which are anticipated to have an effect upon or require modifications to
Specifications or an effect upon RJRTC’s ability to produce the projected volumes of Products
anticipated to be ordered by BATUS Japan (RJRTC’s costs of evaluating and implementing any such
changes shall be borne by RJRTC, subject to RJRTC’s prior written approval of the budget for
expenditure of such costs, which approval shall not be unreasonably withheld). RJRTC shall provide
sufficient advance notice of such proposed changes in manufacturing operations so as to allow BATUS
Japan commercially reasonable time to evaluate and test the effects of the associated Specification
changes on the Products and the Products’ consumer acceptability in the Territory.




          (ii) The Parties shall conduct trials, as appropriate, in order to evaluate the effect of the
foregoing changes in Specifications upon Products, Product pricing and RJRTC’s manufacturing
environments and the Products’ consumer acceptability in the Territory (the costs associated with
such trials shall be borne by RJRTC, including the






-13-









 







costs of sampling and consumer testing as determined necessary by BATUS Japan in the Territory,
subject to RJRTC’s prior written approval of the budget for expenditure of such costs, which
approval shall not be unreasonably withheld). The trial, sampling and consumer testing methodology
will be determined by mutual agreement of the Parties in accordance with BATUS Japan’s standard
Consumer Product Testing Protocols attached hereto as Schedule “C.”




          (iii) BATUS Japan shall provide written approval for changed Specifications of all Products
upon completion of activities, including those set forth in the foregoing clauses (i) and (ii).
BATUS Japan shall not be responsible for accepting any quantity of Products for which BATUS Japan
has not provided such final approval, unless BATUS Japan has otherwise agreed in writing.




          (iv) RJRTC shall accept and acknowledge all changed Specifications for which BATUS Japan has
provided final approval and provided to RJRTC.




          (v) The Parties acknowledge that, in order to meet its obligations under this Agreement, RJRTC
will, from time to time, carry out Specification maintenance activities to ensure that actual
Product data remains in conformity with Specifications. RJRTC shall notify BATUS Japan in advance
of any such maintenance activities; however, the foregoing clauses (i) to (iv) and Sub-Section
2.3(d) shall not apply to any such maintenance activities.




     (d) Changes to Product pricing following agreed Specification changes.



          (i) The following provisions of this Sub-Section 2.3(d) shall apply irrespective of
whether a Specification change is proposed by BATUS Japan (in accordance with Sub-Section
2.3(b)) or RJRTC (in accordance with Sub-Section 2.3(c)).




          (ii) Any mutually agreed Specification changes shall result in an increase or decrease, as the
case may be, to the then applicable Product Base Price (as determined in accordance with
Sub-Sections 3.1(a) and 3.1(b)) for the relevant SKU(s) in accordance with the following:
(a) in relation to the relevant SKU(s), for each changing Non-Tobacco Component or change in
respect of Tobacco Materials, RJRTC shall provide to BATUS Japan details of its incremental cost or
benefit per one thousand (1,000) Cigarettes based on the most recent Bill of Materials applying
pre-Specification change and a pro-forma Bill of Materials incorporating the Specification
change(s); (b) RJRTC shall also provide to BATUS Japan details of any incremental labor cost or
benefit per one thousand (1,000) Cigarettes; (c) to enable BATUS Japan to validate the incremental
cost or benefit per one thousand (1,000) Cigarettes of the relevant SKU(s), on request by BATUS
Japan, RJRTC shall promptly provide BATUS Japan with a then current priced Bill of Materials
together with other information that BATUS Japan may reasonably request for the relevant SKU(s);
(d) validated and agreed incremental costs or benefits shall increase or decrease, as the case may
be, the then applicable Product Base Price (as determined in accordance with Sub-Sections
3.1(a) and 3.1(b)) for the relevant SKU(s); and (e) subsequent changes to Specifications of a
SKU which has already been






-14-









 







the subject of a Specification change under this Sub-Section 2.3 will be treated as a
new and separate Specification change.




          (iii) The Parties acknowledge that the Product Base Prices established in Schedule “F”
do not reflect or incorporate any pricing changes resulting from Specification changes proposed,
agreed or implemented since the Effective Date and any such proposed, agreed or implemented
Specification changes are subject to the provisions of this Sub-Section 2.3 (to the extent
that the matters within such provisions have not already been complied with).



2.4 Contact Personnel. Promptly after the Execution Date, each Party shall designate
primary contact individuals for purposes of this Agreement. Those individuals shall have
responsibility for communicating and receiving information regarding all matters that are relevant
pursuant to the Parties’ relationship with one another in accordance with this Agreement. Each
Party shall promptly notify the other upon the occurrence of a change in the identity of any
contact individual of that Party.



2.5 Monthly Video Conferences; Periodic Meetings. Representatives of RJRTC and BATUS Japan
shall conduct monthly video conferences to discuss with one another the Products, quality control
procedures, and any other matters relating to the Parties’ activities involving the supply of
Products to BATUS Japan by RJRTC. All issues identified by either Party during such conferences
shall be immediately evaluated, addressed and remedied as soon as commercially reasonable.
Further, BATUS Japan and RJRTC shall arrange for other periodic meetings at mutually agreeable
times as needed to facilitate each Party’s continued performance under the Agreement.



2.6 Visits at Facilities and Inspection. Representatives of BATUS Japan may, upon
reasonable notice and at times reasonably acceptable to RJRTC, visit RJRTC’s facilities at which
the Products are manufactured. BATUS Japan shall bear its own expenses with regard to any such
visits, unless otherwise agreed upon in writing by the Parties. If requested by BATUS Japan, RJRTC
shall cause appropriate individuals working on the activities relating to this Agreement to be
available for meetings at the location of the facilities where such individuals are employed at
times reasonably convenient to each Party. BATUS Japan’s inspection rights shall include the
inspection of the inventory of Products maintained by RJRTC, RJRTC’s manufacturing facilities and
processes relating to the Products, RJRTC’s quality control procedures relating to the Products,
and all materials used in the manufacturing and packaging of the Products.



Further, if requested by BATUS Japan at any time during the Term, BATUS Japan shall have the right
to station not more than four (4) employees of BATUS Japan or any of its Affiliates on site at the
facilities at which RJRTC manufactures the Products subject to this Agreement. These employees,
when escorted by RJRTC personnel, shall be allowed to observe the production of Products and shall
function as intermediaries between BATUS Japan and RJRTC to facilitate the timely production,
inventory management, quality and shipment of Products subject to Purchase Orders issued by BATUS
Japan under this Agreement. RJRTC shall provide these employees offices from which to






-15-









 







operate, telephone, computer, fax and copier services, and shall provide access to all facility
common areas including parking spaces, restroom facilities, meeting rooms and cafeteria facilities.
BATUS Japan shall reimburse RJRTC for the costs of telephone, computer, fax and copier services
actually used by BATUS Japan’s personnel.



BATUS Japan shall be responsible for ensuring that its representatives abide by all of RJRTC’s
rules and regulations with regard to safety, security, personnel matters, computer use and computer
network use while at RJRTC’s facilities. BATUS Japan shall inform its representatives that have
access to RJRTC’s premises of their obligations under this Agreement and shall require its
representatives to enter into a confidentiality agreement with RJRTC in a form to be mutually
agreed by the Parties. BATUS Japan shall be responsible for ensuring that all of its visitors to
RJRTC’s facilities are received and logged through RJRTC’s reception area, in accordance with
RJRTC’s usual practice. BATUS Japan shall also be responsible for ensuring that its
representatives and visitors refrain from actions and conduct that materially interfere with
RJRTC’s business and operations and shall instruct its representatives and visitors not to conduct
unauthorized activities on RJRTC’s facilities.



2.7 Revised Forecast. Promptly after the Execution Date, BATUS Japan shall provide RJRTC
with a revised forecast (by SKU) that provides a projection for volumes for the various Products
that BATUS Japan may require RJRTC to manufacture and supply during the period immediately
following the Execution Date through the end of Contract Year 2011.



2.8 Subsequent Annual Forecasts. Beginning with Contract Year 2012, and for each
successive Contract Year, BATUS Japan shall provide RJRTC with a forecast (by SKU) that provides a
projection for volumes for the various Products that BATUS Japan may require RJRTC to provide
during each successive Contract Year. A preliminary forecast for each successive Contract Year
shall be provided to RJRTC at least by July 1st and a confirmed forecast shall be
provided by October 1st of each preceding Contract Year. Any and all forecasts supplied
are non-binding and will be supplied for purposes including general planning of capacities and
inventories.



2.9 Periodic Forecasts. Promptly after providing its revised forecast in accordance with
Sub-Section 2.7, BATUS Japan shall begin providing RJRTC on a monthly basis rolling
eighteen (18) month forecasts (by SKU) that provide projections for volumes of the various Products
for which BATUS Japan expects to place Purchase Orders during the period covered by such periodic
forecasts. Any and all forecasts supplied are non-binding and will be supplied for purposes
including general planning of capacities and inventories.



2.10 Purchase/Supply of Materials.




     (a) Subject to Sub-Sections 2.10(b) and 4.4(e), RJRTC shall use raw materials
(including, but not limited to, Tobacco Materials, Non-Tobacco Components, and Packaging materials)
that are obtained from sources and suppliers selected by RJRTC,



-16-









 




which sources and suppliers must be approved by BATUS Japan, such approval not to be withheld,
conditioned or delayed unless BATUS Japan can reasonably demonstrate that RJRTC’s selected
source(s) or supplier(s) do not at the time of selection meet the applicable Specifications.
Unless otherwise agreed upon in writing, RJRTC shall be solely responsible for ordering, receiving,
storing, maintaining, using, paying for (including the payment of all import duties, fees and
internal revenue taxes, if applicable) and disposing of all raw materials.




     (b) BATUS Japan may from time to time (a) direct RJRTC to purchase particular raw materials
(including but not limited to, Tobacco Materials, Non-Tobacco Components, and Packaging materials)
from specific sources and/or suppliers, including BATUS Japan or any of its Affiliates (in which
case, for the avoidance of doubt, RJRTC shall remain solely responsible for ordering, receiving,
storing, maintaining, using, paying for (including the payment of all import duties, fees and
internal revenue taxes, if applicable) and disposing of any such raw materials) or (b) supply
particular raw materials to RJRTC, and, save where RJRTC can demonstrate that purchasing the
relevant raw materials from the specified source and/or supplier or receiving them from BATUS Japan
would be contrary to any relevant law or regulation or would adversely affect it as a result of any
contractual arrangement RJRTC may already have in place with other suppliers, RJRTC shall purchase
the relevant raw materials from the source and/or supplier specified by BATUS Japan or receive them
from BATUS Japan (as the case may be). A change of source or supplier in accordance with the above
shall be treated as a Specification change proposed by BATUS Japan and the provisions of
Sub-Sections 2.3(b) and (d) shall apply (including in relation to resultant pricing changes
to reflect any lower raw material costs and/or any change in labor costs due to machinability of
the raw materials). To assist BATUS Japan source raw materials on more advantageous trade terms,
on request by BATUS Japan, RJRTC shall promptly provide BATUS Japan a then current priced Bill of
Materials for the particular Product(s) in question.


2.11 Inventory. The Parties shall communicate in order to ensure that RJRTC possesses an
inventory of raw materials sufficient to promptly fill Purchase Orders that BATUS Japan may place.
The Parties shall communicate such that each Party possesses knowledge regarding the level of
inventory of Products that RJRTC possesses. The Parties shall follow the Guidelines on Inventory
in relation to the levels of inventory for all required raw materials that RJRTC will be
responsible for having on hand to fulfill BATUS Japan’s forecasted Purchase Orders.



2.12 Sharing of Information. The Parties shall cooperate with one another (and relevant
third Persons) in order to ensure that each Party is provided with relevant information regarding
the physical and chemical properties (including toxicological information) of raw materials,
equipment, process conditions, processes or treatment conditions that RJRTC may employ when
producing Products for BATUS Japan. If requested by BATUS Japan, RJRTC shall provide samples of
raw materials, at the times and in the amounts requested, to BATUS Japan or an Affiliate designee
for testing and evaluation. Any change to raw material, type of equipment (routine/preventive
maintenance and ordinary wear and tear excepted), processes, process conditions, or






-17-









 







treatment conditions that RJRTC may employ when producing Products for BATUS Japan must be approved
by BATUS Japan prior to implementation of the change by RJRTC.



2.13 Cigarette Packaging, Carton and Case Markings.




     (a) Markings. Every Cigarette Package, Carton and Case produced by RJRTC for BATUS
Japan shall bear such markings as required by: (i) the applicable laws and regulations of the
U.S.A. for exported Products; (ii) the applicable laws and regulations of the relevant Territory;
and (iii) the Specifications.



     (b) Limitations. Except as set forth in Sub-Section 2.13(a) or otherwise
agreed between the Parties in writing, RJRTC shall not be obligated to produce (and BATUS Japan
shall not be obligated to accept as conforming) Products with markings on the Packaging, Carton or
Case identifying RJRTC or an Affiliate of RJRTC as the manufacturing source of the Products.


2.14 Revenue Stamps. [Intentionally Left Blank].



2.15 Purchase Orders and Production Schedules. BATUS Japan shall place with RJRTC from
time to time such Purchase Orders for Products that BATUS Japan (or RFEBV) desires to order.
Unless an alternative schedule is determined necessary by BATUS Japan, BATUS Japan will place one
(1) Purchase Order per week which will contain a binding order (by SKU) for a future one (1) week
period, and non-binding forecasted orders for the succeeding eight (8) week period. Each Purchase
Order will designate delivery dates for Products ordered by SKU. BATUS Japan shall provide (or
reference) to RJRTC the Specifications for each of the Products ordered pursuant to a Purchase
Order. RJRTC shall schedule production of Products based on forecasts provided by BATUS Japan and
Purchase Orders placed by BATUS Japan. Each Purchase Order which requires normal ocean freight
shipment shall contain instructions for each delivery that specify mode of transport to the
Territory and a requested delivery date of the Products at the railroad railhead or, if delivery by
ship is required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A.
port of exit that shall not typically be less than fourteen (14) calendar days from RJRTC’s receipt
of the Purchase Order.



Purchase Orders which require delivery by air freight shipment may contain requested delivery dates
at the fuselage of the aircraft that are typically not less than fourteen (14) calendar days from
RJRTC’s receipt of the applicable Purchase Order.



The Parties acknowledge that there may be occasions when a weekly Purchase Order materially
deviates from forecasted orders and, as a result, RJRTC is required to make adjustments to its
production schedule in order to meet the requested delivery date. In such circumstances RJRTC
shall be entitled to quantify the cost impact on it production schedule and RJRTC and BATUS Japan
will work together in good faith to mitigate any






-18-









 







such impact. Subject to the foregoing obligation to mitigate, RJRTC shall be entitled to
reimbursement for any incremental cost impact.



2.16 Production Activities. RJRTC shall acknowledge receipt of each Purchase Order within
three (3) business days of RJRTC’s receipt of such Purchase Order. RJRTC shall promptly inform
BATUS Japan of RJRTC’s schedule for production and delivery of ordered Products at the railroad
railhead or, if delivery by ship is required by BATUS Japan in the applicable Purchase Order, at
the ship’s rail at the U.S.A. port of exit or, if air freight delivery is required by BATUS Japan
in the applicable Purchase Order, at the fuselage of the aircraft. If RJRTC determines that it
cannot fill any portion of the Purchase Order by the requested delivery date(s), BATUS Japan shall
be notified in writing within three (3) business days of RJRTC’s receipt of the Purchase Order.
RJRTC’s notice shall include a proposed alternative delivery date(s) for the Products (or any
portion thereof) subject to the Purchase Order. In such cases, the Parties will negotiate a
revised delivery date(s) agreeable to both Parties and shall confirm such final agreed delivery
date(s) in writing. If an alternative delivery date(s) acceptable to BATUS Japan cannot be agreed
using normal transport as defined in Sub-Section 2.17(a), RJRTC will be obligated to fill
the Purchase Order (or the applicable portion of the Purchase Order) on a date that is acceptable
to BATUS Japan pursuant to the air freight remedy specified in Sub-Section 2.17(c). If no
notice is given by RJRTC in accordance with this Sub-Section 2.16, the original delivery
date(s) stated in the Purchase Order shall become a firm delivery date(s) by which RJRTC must
deliver the Products subject to the Purchase Order at the railroad railhead or, if delivery by ship
is required by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port
of exit or, if air freight delivery is required by BATUS Japan in the applicable Purchase Order, at
the fuselage of the aircraft. RJRTC shall produce and deliver to BATUS Japan the amount of ordered
Products within the time period set forth in the applicable Purchase Order (unless modified as
stated above), and such Products shall meet BATUS Japan’s Specifications.



Notwithstanding the foregoing of this Sub-Section 2.16, RJRTC shall have the right to
accept or reject, in whole or in part, any Purchase Order placed by BATUS Japan, in the event that:
(a) the Purchase Order would require RJRTC to possess materials in inventory for production of
Products in excess of the inventory levels specified in the Guidelines on Inventory and RJRTC does
not otherwise possess inventory levels sufficient to fulfill the Purchase Order (RJRTC’s right of
rejection shall apply only to the extent that such inventory levels are unavailable and the
remainder of the Purchase Order shall be filled); (b) RJRTC is not prepared to manufacture Product
due to a change in Specifications by BATUS Japan, if such changes have not been previously agreed
to by the Parties, (c) the production of Product would be, in RJRTC’s good faith belief based on
credible evidence, in violation of the law of a relevant Governmental Authority, or (d) a Force
Majeure event, as defined in Sub-Section 7.4, has occurred.










-19-









 







2.17 Delivery and Shipment; Remedies for Failure to Deliver by Agreed Delivery Dates.




     (a) Shipping Instructions. Following the manufacture of Products, and subject to
obtaining all required Export Licenses in accordance with Schedule “B” (if any), RJRTC
shall effect delivery of all Products at the railroad railhead or, if delivery by ship is required
by BATUS Japan in the applicable Purchase Order, at the ship’s rail at the U.S.A. port of exit or,
if air freight delivery is required by BATUS Japan in the applicable Purchase Order, at the
fuselage of the aircraft, by the delivery date(s) required in BATUS Japan’s Purchase Orders or the
agreed firm delivery date(s) (if modified pursuant to Sub-Section 2.16). RJRTC shall ship
Products on a first in/first out basis as determined by the date of manufacture and deliver
Products in the manner prescribed in any instructions that BATUS Japan furnishes; provided, that
all Products must be shipped using shipping terms that require RJRTC to control the Products until
delivered to a location Outside the Jurisdiction of the U.S.A.; and for avoidance of doubt, risk of
loss to Products shall pass to BATUS Japan once the Products pass Outside the Jurisdiction of the
U.S.A.. With respect to all shipping, export and other documents prepared by or for third Persons,
INCOTERMS 2000 shipping terms may be used to the extent required (e.g., FOB named vessel at U.S.A.
port of shipment). As between the Parties, use of such INCOTERMS 2000 shipping terms shall not
alter the express provisions of this Agreement. Products shall be shipped by reputable commercial
common carriers selected and contracted by RJRTC (with the prior agreement of BATUS Japan) for
shipping the Products Outside the Jurisdiction of the U.S.A. RJRTC shall arrange for shipment and
delivery through its freight forwarder and prepare all necessary shipping documentation relating to
the Products, contact BATUS Japan for routing instructions, and be responsible for arranging
loading. Such shipping documentation shall comply with all U.S.A. legal requirements, as well as
the legal requirements of the country of destination (including requirements relating to
inspections and certificates of origin). RJRTC shall be listed as shipper of the Products on
corresponding export bills of lading, as well as the Principal Party in Interest for export
declaration reporting purposes. BATUS Japan will assist RJRTC in obtaining copies of all documents
evidencing proof of export of Products within sixty (60) calendar days of the passage of risk of
loss. If BATUS Japan is unable to provide such proof of export, BATUS Japan will reimburse RJRTC
for any excise taxes assessed by a Governmental Authority and paid by RJRTC as a result of such
transactions. RJRTC will provide documentary evidence of such payment and will assist BATUS Japan
in any effort made to contest the assessment of such excise taxes.



     (b) Transport. RJRTC shall be responsible for proper packing of the Products for
shipment in accordance with BATUS Japan’s directions. Such packing shall be adequate for normal
transport conditions for export so as to prevent damage and/or deterioration of Products prior to
reaching their ultimate destination. BATUS Japan shall pay all costs (including insurance costs)
relating to the ocean shipment or air freight shipment (if requested by BATUS Japan in the
applicable Purchase Order) of the Products. Shipping charges and associated insurance costs for
freight from the railroad railhead or the ship’s rail at the U.S.A. port of exit to the port of
export and ocean freight



-20-









 




or air freight shipping charges and associated insurance costs shall be paid by BATUS Japan.




     (c) Air Freight Remedy for Failure to Deliver Products Meeting the Applicable
Specifications Within the Delivery Grace Period.  In accordance with the procedures stated in
Sub-Section 2.16, final agreed firm delivery dates for Products at the railroad railhead
(or, if delivery by ship is required by BATUS Japan in the applicable Purchase Order, at the ship’s
rail at the U.S.A. port of exit or, if air freight delivery is required by BATUS Japan in the
applicable Purchase Order, at the fuselage of the aircraft) shall be established for Products
supplied under each Purchase Order issued by BATUS Japan. Absent delays caused by BATUS Japan’s
failure to fulfill its obligations under this Agreement or an intervening Force Majeure event as
defined in Sub-Section 7.4, RJRTC shall be responsible for delivery of Products meeting the
applicable Specifications by the final agreed firm delivery dates. Should RJRTC be unable to
deliver some or all of the Products by any such firm delivery date, RJRTC must remedy its delay so
as to deliver those Products at the railroad railhead or ship’s rail at the U.S.A. port of exit by
the next subsequently scheduled delivery date (the “Delivery Grace Period”). If RJRTC cannot meet
its delivery requirements within the Delivery Grace Period, RJRTC shall be required to arrange for
air freight shipment of those Products to BATUS Japan. In such circumstances, BATUS Japan shall be
responsible for payment of only such shipping and insurance costs as would have been incurred had
RJRTC been able to deliver the Products by the agreed firm delivery date using normal ocean freight
shipment. RJRTC shall be responsible for payment of the difference between those costs and the air
freight shipping and insurance costs actually incurred.



     (d) Material Breach of Contract for Failure to Deliver Products Meeting the Applicable
Specifications by the Agreed Delivery Dates.



          (i) Termination of RJRTC’s Exclusive Manufacturing Rights With Respect to Specific Product
SKU’s.




               (1) [Intentionally Left Blank].



               (2) BATUS Japan shall be entitled (but not required) to terminate RJRTC’s exclusive
manufacturing rights with respect to any particular Product SKU(s) for cause without allowing the
cure period provided for other material breaches of contract as provided in Sub-Section
4.2(c)(iv) if during any twelve (12) month period: (A) RJRTC fails to deliver any particular
Product SKU(s) meeting the applicable Specifications within the Delivery Grace Period with respect
to two (2) deliveries of such Product SKU(s); and (B) as a result of RJRTC’s failure, pursuant to
the remedies available under Sub-Section 3.4, BATUS Japan rejects and RJRTC is required to
replace both of such Product SKU deliveries.



               (3) General Conditions for Partial Termination Under Sub-Section 2.17(d)(i). After
any such partial termination becomes effective under this Sub-Section 2.17(d)(i) BATUS
Japan may have the affected Product SKU(s) manufactured by



-21-









 




any other Person, free from RJRTC’s exclusive manufacturing rights stated in Sub-Section
2.1.



BATUS Japan must invoke its partial termination rights under this  Sub-Section 2.17(d)(i) by
written notice to RJRTC within ten (10) business days of the accrual of such right or such right of
partial termination shall be waived with respect to the applicable material breach. If BATUS Japan
invokes its partial termination rights, after notice of partial termination is given, termination
of RJRTC’s exclusive manufacturing rights with respect to the affected SKU(s) shall become
effective not less than three (3) months, nor more than twelve (12) months, from the date of BATUS
Japan’s notice as designated by BATUS Japan in such notice (the “Workout Period”). During such
Workout Period, BATUS Japan shall continue to order the affected SKU(s) exclusively from RJRTC, but
shall be allowed to have test Products manufactured by alternative sources for purposes of
qualifying such alternative manufacturers. If the right of partial termination is waived by BATUS
Japan, the applicable twelve (12) month assessment period shall restart and run anew from the day
such waiver becomes effective as if no previous breaches had occurred with respect to such Product
SKU for purposes of this Sub-Section 2.17(d)(i).



Upon the
effective date of any partial termination under this Sub-Section 2.17(d)(i), RJRTC
shall honor and fulfill any then-outstanding Purchase Orders for the terminated SKU(s). Further,
RJRTC shall prepare and provide to BATUS Japan an accounting of its inventories of finished
Products and unique Non-Tobacco Components relating to the terminated SKU(s). BATUS Japan shall be
required to purchase a portion of such finished Products equating to a thirty (30) calendar days’
inventory based on BATUS Japan’s most recent monthly periodic forecast provided under
Sub-Section 2.9. BATUS Japan shall also purchase RJRTC’s inventory of such unique
Non-Tobacco Components up to the agreed inventory levels established under Sub-Section
2.11.




          (ii) Termination of RJRTC’s Exclusive Manufacturing Rights With Respect to All Product
SKUs in a Cigarette Brand Family for Persistent Failure to Meet Specifications.
Notwithstanding any other remedy available to BATUS Japan under this Agreement, BATUS Japan shall
be entitled (but not required) to terminate RJRTC’s exclusive manufacturing rights with respect to
all Product SKUs in a particular Cigarette brand family for cause without allowing the cure period
provided for other material breaches of contract as provided in Sub-Section 4.2(c)(iv) if:
(1) it is finally determined that RJRTC has delivered any particular Product SKU within such
Cigarette brand family that does not meet the required Specifications; (2) during the twelve (12)
month period following the determination of the Parties as to such breach, twenty-five percent
(25%) or more of the total volume of the affected Product SKU manufactured by RJRTC under this
Agreement failed to meet the required Specifications; and (3) as a result of RJRTC’s failure,
pursuant to the remedies available under Sub-Section 3.4, BATUS Japan rejects and RJRTC is
required to replace the volume of the affected Product which failed to meet the required
Specifications.







-22-









 







After the effective date of such partial termination BATUS Japan may have any and all Product SKUs
in that Cigarette brand family manufactured by any other Person, free from RJRTC’s exclusive
manufacturing rights stated in Sub-Section 2.1.



BATUS Japan must invoke its partial termination rights under this Sub-Section 2.17(d)(ii)
by written notice to RJRTC within thirty (30) calendar days of the accrual of such right or such
right of partial termination shall be waived with respect to the applicable material breach.
Further, after notice of partial termination is given, termination of RJRTC’s exclusive
manufacturing rights with respect to the affected Cigarette brand family shall become effective not
less than three (3) months, nor more than twelve (12) months, from the date of BATUS Japan’s notice
as designated by BATUS Japan in such notice (the “Workout Period”). During such Workout Period,
BATUS Japan shall continue to order Products in the affected Cigarette brand family exclusively
from RJRTC, but shall be allowed to have test Products in that Cigarette brand family manufactured
by alternative sources for purposes of qualifying such alternative manufacturers.




          (iii) Termination of the Entire Agreement for Persistent Failure to Meet
Specifications. Notwithstanding any other remedy available to BATUS Japan under this
Agreement, BATUS Japan shall be entitled (but not required) to terminate the entire Agreement for
cause without allowing the cure period provided for other material breaches of contract as provided
in Sub-Section 4.2(c)(iv) if, over any twelve (12) month period, pursuant to the remedies
available under Sub-Section 3.4, BATUS Japan rejects and RJRTC is required to replace
twenty percent (20%) or more of the total Product volume manufactured under this Agreement based on
the failure of such Products to meet the required Specifications. After the effective date of such
termination BATUS Japan may have Products manufactured by any other Person, free from RJRTC’s
exclusive manufacturing rights stated in Sub-Section 2.1.






BATUS Japan must invoke its termination rights under this Sub-Section 2.17(d)(iii) by
written notice to RJRTC within thirty (30) calendar days of the accrual of such right or such right
of termination shall be waived with respect to the applicable material breach. Further, after
notice of termination is given, the Agreement’s termination shall become effective not less than
three (3) months, nor more than twelve (12) months, from the date of BATUS Japan’s notice as
designated by BATUS Japan in such notice (the “Workout Period”). During such Workout Period, BATUS
Japan shall continue to order Products exclusively from RJRTC, but shall be allowed to have test
Products manufactured by alternative sources for purposes of qualifying such alternative
manufacturers.




          (iv) Termination of the Entire Agreement For Failure to Meet Required On Time/In Full
Delivery Percentage. RJRTC must maintain at least an eighty percent (80%) On Time/In Full
Delivery Percentage based on a rolling twelve (12) month assessment period. RJRTC’s failure to
maintain at least an eighty percent (80%) On Time/In Full Delivery Percentage based on a rolling
twelve (12) month assessment period shall constitute material breach of contract by RJRTC,
entitling (but not requiring) BATUS Japan to terminate the entire Agreement for cause without
allowing the cure






-23-









 







period provided for other material breaches of contract as provided in Sub-Section
4.2(c)(iv). After the effective date of such termination BATUS Japan may have Products
manufactured by any other Person, free from RJRTC’s exclusive manufacturing rights stated in
Sub-Section 2.1.



BATUS Japan must invoke its termination rights under this Sub-Section 2.17(d)(iv) by
written notice to RJRTC within ninety (90) calendar days of the accrual of such right or such right
of termination shall be waived with respect to the applicable material breach. Further, after
notice of termination is given, the Agreement’s termination shall become effective one (1) year
from the date of BATUS Japan’s notice. During such one (1) year period, BATUS Japan shall continue
to order Products exclusively from RJRTC, but shall be allowed to have test Products manufactured
by alternative sources for purposes of qualifying such alternative manufacturers.



2.18 Contingency Manufacturing Plans; Alternative Source of Supply. RJRTC shall maintain
and, upon the request of BATUS Japan, disclose to BATUS Japan contingency manufacturing plans which
have been prepared or entered by RJRTC to ensure that Products can be manufactured and supplied to
BATUS Japan in accordance with this Agreement should RJRTC suffer a loss or damage to its
manufacturing facilities or any other interruption to, or interference with, RJRTC’s ability to
manufacture Products. Further, in the event that during the Term of this Agreement, RJRTC becomes
unable to provide Product to BATUS Japan in accordance with the terms and conditions of this
Agreement and in accordance with the volumes placed by BATUS Japan through its Purchase Orders,
then RJRTC shall cooperate with BATUS Japan towards arranging an alternative supply of Product for
BATUS Japan as quickly as possible and always in compliance with applicable Trade Restrictions (if
any).



2.19 Title and Risk. In accordance with Sub-Section 2.17(a), risk of loss to
Products shall pass to BATUS Japan once the Products pass Outside the Jurisdiction of the U.S.A.
Title to Products shall likewise transfer to BATUS Japan once the Products pass Outside the
Jurisdiction of the U.S.A. and BATUS Japan shall own the Products free and clear of any liens,
claims, security interest or other encumbrances of any nature.



2.20 Additional Services. Upon written request by BATUS Japan, RJRTC may, at RJRTC’s sole
discretion, provide certain additional services subject to compliance with applicable laws,
including Trade Restrictions (if any). The Parties shall negotiate in good faith towards arriving
at a separate agreement setting forth terms and conditions by which RJRTC shall provide such
services for BATUS Japan, and by which BATUS Japan shall pay RJRTC for such services.



2.21 Incorporation of Existing Guidelines and Collateral Agreements. Certain existing
guidelines pertaining to matters including capital expenditures, the pricing of new products,
specification changes and the sourcing of novelty items, and certain agreements relating the
procurement, funding and allocation of materials and equipment for the manufacture of Capsule
Cigarettes, the maintenance of materials inventories and the disclosure of information concerning
ingredients, as more specifically identified in





-24-












 




Schedule “E” of this Agreement and set forth in the Appendices attached thereto, are
expressly incorporated into and made a part of this Agreement. All references therein to the
Original Agreement shall hereafter be regarded as references, mutatis mutandis, to this Agreement.
In the event of any inconsistency between any provisions of this Agreement and any provisions in
any of the guidelines incorporated by reference pursuant to the above and Schedule “E”,
this Agreement shall prevail.




SECTION 3

COMMERCIAL TERMS



3.1 Pricing.




     (a) Product Base Pricing for Contract Year 2010. For Products manufactured pursuant
to Purchase Orders issued by BATUS Japan between the Execution Date and the end of Contract Year
2010, RJRTC shall charge and BATUS Japan shall pay the Product Base Prices established in
Schedule “F”. In relation to Products manufactured pursuant to Purchase Orders issued by
BATUS Japan between the Effective Date and the Execution Date the Product Base Prices established
in Schedule “F” will be applied retroactively and, as soon as reasonably practicable, the
Parties shall carry out a reconciliation of actual prices paid against prices that would have been
paid had the Product Base Prices established in Schedule “F” been applied to all such
Purchase Orders and to reflect any price changes that result from mutually agreed Specification
changes and which are in accordance with Sub-Section 2.3(d). Within ten (10) days
following such reconciliation a corresponding adjustment payment shall be made from RJRTC to BATUS
Japan. In addition, RJRTC shall be allowed to recover and BATUS Japan shall pay the actual costs
incurred by RJRTC resulting from any new fees, duties, taxes, and/or levies that are not in
existence or imposed as of the Execution Date by any Governmental Authority applicable to RJRTC’s
manufacture in the U.S.A. and/or export of Product to the Territory.



     (b) Product Pricing Increases and Decreases for Contract Year 2011 through Contract Year
2014. For Contract Year 2011 through Contract Year 2014, the prices chargeable for Products
manufactured under this Agreement shall increase or decrease, as the case may be, over or under the
prices chargeable in the immediately preceding Contract Year by the percentage change in: (i) the
PPI in effect for September of the immediately preceding Contract Year from (ii) the PPI in effect
for September of the Contract Year prior to the immediately preceding Contract Year.
Notwithstanding the foregoing, and regardless of the actual change in PPI over the applicable
period, Product price increases or decreases shall be capped at six percent (6.0%) from those
charged in the immediately preceding Contract Year. By way of example only, and subject to the six
percent (6.0%) cap stated above, the Product prices chargeable for Contract Year 2012 shall
increase or decrease from prices in effect for Contract Year 2011 by the percentage increase or
decrease in PPI between September 2010 and September 2011.


In addition to the foregoing, RJRTC shall be allowed to recover and BATUS Japan shall pay the
actual costs incurred by RJRTC resulting from any new fees, duties, taxes, and/or





-25-









 







levies that are not in existence or imposed as of the Execution Date by any Governmental Authority
applicable to RJRTC’s manufacture in the U.S.A. and/or export of Product to the Territory.



Once Product pricing is established for a Contract Year, RJRTC shall prepare and the Parties shall
mutually execute a revised Schedule “F” governing the Product pricing for the Contract Year
in question which shall automatically be incorporated into this Agreement without further action by
the Parties.




     (c) [Intentionally Left Blank].


3.2 Invoices. RJRTC shall invoice BATUS Japan (or, where applicable, RFEBV) monthly for
all Products shipped by RJRTC during the applicable month. BATUS Japan’s obligation to make
payment shall accrue once title and risk of loss to the applicable Products pass to BATUS Japan.
Such invoices shall be due and payable by BATUS Japan (or RFEBV) twelve (12) calendar days after
the last calendar day of the month following the month of shipment from RJRTC’s manufacturing
facilities.



3.3 Payments. All payments to RJRTC shall be by wire transfer of funds to RJRTC’s bank
account (or accounts) as clearly designated from time to time in RJRTC’s invoice, or as otherwise
specified by RJRTC and agreed upon by the Parties. RJRTC’s current payment instructions are set
forth in Schedule “D” of this Agreement. All payments made to RJRTC shall be in U.S.A.
Dollars. Payments to RJRTC in accordance with Sub-Section 3.2 are without prejudice to any
rights BATUS Japan may have for any reason whatsoever, and any liability of RJRTC for breach of
this Agreement shall not be terminated or reduced by reason of such payment.



3.4 Rejected Products. RJRTC shall ensure that the Products it manufactures for BATUS
Japan comply with the Specifications of BATUS Japan as have been confirmed between the Parties and
with all Packaging, Carton and Case marking requirements as provided hereunder. BATUS Japan may
reject any Product that, as of the time the Product passes “across the ship’s rail,” does not
comply with the applicable Specifications and/or Packaging, Carton or Case marking requirements as
are current upon manufacture within one hundred and twenty (120) calendar days after arrival of the
Products in the Territory. In such case, BATUS Japan’s written notice of rejection to RJRTC shall
state in commercially reasonable detail the Products which BATUS Japan deems non-compliant, the
Purchase Order pursuant to which those Products were manufactured and the Specification defects
and/or Packaging, Carton or Case marking requirements which BATUS Japan believes were not
fulfilled. BATUS Japan shall bear the burden to demonstrate Product non-compliance as of the time
the Product passes “across the ship’s rail.” Within ten (10) business days of receipt of a notice
of rejection, RJRTC may contest such rejection and provide documentation and other evidence
relating to the quality assurance measures taken with respect to the rejected Products and any
other matters relating to the compliance of the Products at issue. Thereafter, the Parties shall
confer in good faith to resolve the controversy.







-26-









 







If any Product is finally deemed to be non-compliant, such non-compliant Product will be, at
RJRTC’s option and expense, either returned to RJRTC or destroyed. If returned to RJRTC in the
U.S.A., BATUS Japan shall provide necessary reference information to allow RJRTC to receive such
returned Product without being required to incur the expense of applicable U.S.A. customs duties or
U.S.A. excise taxes.



In the event of any such rejection, RJRTC shall replace such non-complying Products with complying
Products as soon as possible at no additional charge to BATUS Japan. RJRTC shall bear all
reasonable costs incurred by BATUS Japan in inspecting and disposing of or returning the
non-complying Products, as well as the full costs of shipping complying Products to the Territory
via air freight shipment, including applicable insurance. If non-complying Product returned to
RJRTC is destroyed by RJRTC, RJRTC will provide documentary evidence of such destruction to BATUS
Japan.



3.5 Audit Rights of BATUS Japan. RJRTC shall maintain accurate and complete records
including, but not limited to, correspondence, instructions, receipts, quality assurances records,
Specifications, Purchase Orders, Non-Tobacco Component and Tobacco Material procurement records,
warehousing records and cost data, export records, transportation records and cost data, other
manufacturing cost records and data, and similar documents and data relating to BATUS Japan’s order
and receipt of Products from RJRTC and RJRTC’s production and delivery of Products for BATUS Japan.
RJRTC shall keep such records in sufficient detail to enable BATUS Japan to determine or verify
raw materials inventories, process conditions and quality controls for Products supplied pursuant
to each Purchase Order. BATUS Japan shall likewise have the right to review and audit RJRTC’s
records (a) relating to projected and actual Product costing increases or decreases derived from
changes in Specifications made pursuant to the procedures set forth above in Sub-Section
2.3 and (b) relating to RJRTC’s projected and actual cost of raw materials to enable it to
verify the raw material costs referred to in Sub-Section 4.4(d).



RJRTC shall keep such records for a period of time as determined by its normal document retention
policies, but in any event not less than eighteen (18) months after the date of the transaction to
which those records relate, or longer if required by law. RJRTC shall permit BATUS Japan to
examine RJRTC’s records and its facilities from time to time (during regular business hours and
upon not less than five (5) business days written notice) to the extent necessary for BATUS Japan
to make the foregoing determinations and verifications, and such examination shall be made at the
expense of BATUS Japan either by its employees (or those of its Affiliates) or by an independent
auditor appointed by BATUS Japan who shall report to BATUS Japan those matters associated with such
examination.



3.6 Audit Rights of RJRTC. BATUS Japan shall maintain (or cause to be maintained) accurate
and complete records including, but not limited to, those relating to the ordering, exportation,
transport, handling, importation, receipt, inspection, storage and distribution of Products
manufactured under this Agreement. BATUS Japan shall keep such records in sufficient detail to
enable RJRTC to evaluate, determine or verify






-27-









 







any claim by BATUS Japan that Products do not meet Specifications or are not delivered On Time/In
Full. BATUS Japan shall keep such records for a period of time as determined by its normal
document retention policies, but in any event not less than eighteen (18) months after the date of
the transaction to which those records relate, or longer if required by law. BATUS Japan shall
permit RJRTC to examine BATUS Japan’s records from time to time (during regular business hours and
upon not less than five (5) business days written notice) to the extent necessary for RJRTC to make
the foregoing evaluations, determinations and verifications, and such examination shall be made at
the expense of RJRTC either by its employees (or those of its Affiliates) or by an independent
auditor appointed by RJRTC who shall report to RJRTC those matters associated with such
examination.



BATUS Japan shall likewise maintain (or cause to be maintained) the information relating to the
Manufacturing Costs (to be provided by BATUS Japan to RJRTC pursuant to Sub-Section 4.4(b))
and BATUS Japan shall permit RJRTC to examine such information on the terms referred to above.



3.7 Insurance and Transportation Costs. Costs of insurance and transport shall be paid in
accordance with Sub-Section 2.17. Further, BATUS Japan shall be responsible for all
customs duties, excise taxes, and like fees and expenses due as a result of import of Products to
the appropriate jurisdiction within the Territory.




SECTION 4

TERM, GENERAL TERMINATION, EXTENSION



4.1 Term of the Agreement. This Agreement shall be effective upon the Effective Date and
shall remain in effect until December 31, 2014 unless (a) terminated earlier by either Party
pursuant to its terms and conditions or (b) extended in
accordance with Sub-Section 4.4 (in
which case the foregoing reference to December 31, 2014 shall be deemed to refer to the last day of
the extended term).



4.2 General Termination.




     (a) Mutual. The Parties may mutually agree in writing at any time to terminate this
Agreement.



     (b) By BATUS Japan. BATUS Japan shall have those rights of partial and complete
termination for cause as provided in Sub-Section 2.17(d)(i), (ii), (iii) and (iv).



     (c) By Either Party. Either Party may terminate this Agreement at any time upon
written notice to the other if:



          (i) Voluntary bankruptcy or a petition for involuntary bankruptcy of the other Party is not
dismissed within a period of sixty (60) calendar days of its filing, in which case the termination
shall become effective immediately upon the non-terminating






-28-









 







Party’s receipt of notice of termination from the terminating Party or at such later date as
specified in the termination notice;




          (ii) The other Party ceases to pay its debts as they mature in the ordinary course of
business, or makes an assignment for the benefit of its creditors, in which case the termination
shall become effective immediately upon the non-terminating Party’s receipt of notice of
termination from the terminating Party or at such later date as specified in the termination
notice;




          (iii) A receiver is appointed for the other Party or its property, in which case the
termination shall become effective immediately upon the non-terminating Party’s receipt of notice
of termination from the terminating Party or at such later date as specified in the termination
notice; or




          (iv) The other Party is in material breach of any material term of this Agreement and the
breaching Party fails to cure such breach within thirty (30) calendar days of receipt of notice of
breach from the other Party, or if such breach is not reasonably capable of cure within such thirty
(30) calendar day period, such breaching Party fails to cure the breach within ninety (90) calendar
days of receipt of notice of breach from the other Party. The terminating Party must invoke its
rights of termination under this Sub-Section 4.2(c)(iv) by written notice to the breaching
Party within thirty (30) calendar days of the accrual of such right or such right of termination
shall be waived with respect to the applicable material breach. Further, after notice of
termination is given, termination of the Agreement shall become effective one (1) year after the
date of the terminating Party’s notice of termination. During such period, BATUS Japan shall
continue to order Products exclusively from RJRTC, but shall be allowed to have test Products
manufactured by alternative sources for purposes of qualifying such alternative manufacturers.




     (d) Automatic Termination. This Agreement shall automatically terminate on the date
being twelve (12) months after the first to occur of the following events:



          (i) RJRTC shall cease to be a direct or indirect wholly owned subsidiary of RAI;




          (ii) a Person, including B.A.T., is or becomes the beneficial owner, directly or indirectly,
of fifty percent (50%) or more of the combined voting power of the outstanding securities
ordinarily having the right to vote at elections of directors of RAI (the “RAI Voting Power”);




          (iii) individuals who constituted the Board of Directors of RAI (or who have been designated
as Directors of RAI in accordance with Section 1.09 of the BCA) as of July 30, 2004 (the “Incumbent
Board”) cease for any reason to constitute at least a majority thereof, provided that any person
becoming a Director of RAI subsequent to such date whose election, or nomination for election by
RAI’s shareholders, was (A) approved by a vote of at least three-quarters (3/4) of the Directors
comprising the Incumbent Board, including at least one (1) Investor Director (as such term is
defined in






-29-









 







the Governance Agreement) who is a B.A.T. Group executive (either by a specific vote or by
approval of the proxy statement of RAI in which such person is named as a nominee of RAI for
Director) or (B) made in accordance with Section 2.01 of the Governance Agreement, but excluding
for this purpose any such individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest with respect to the election or removal of
Directors or other actual or threatened solicitation of proxies or consents by or on behalf of an
individual, corporation, partnership, group, associate or other entity or Person other than the
Board of Directors of RAI, shall be, for purposes of this paragraph (iii), considered as though
such individual were a member of the Incumbent Board; and




          (iv) the consummation of (A) a merger or consolidation of RAI other than where the following
clauses (a) and (b) are satisfied: (a) where such transaction is with a wholly owned subsidiary or
would result in the voting securities of RAI outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of the voting
securities of RAI, such surviving entity, or the direct or indirect parent of such surviving entity
outstanding immediately after such merger or consolidation and (b) so long as B&W’s Percentage
Interest (as such term is defined in the Governance Agreement) is at least 32% immediately prior to
such transaction, immediately following such transaction no other Person beneficially owns a
greater percentage of the RAI Voting Power, or the combined voting power of the voting securities
of the surviving entity, or the direct or indirect parent of such surviving entity, than B.A.T. and
its Affiliates, or (B) a sale, lease, transfer or other disposition of the majority of the
operating assets of RAI and its subsidiaries taken as a whole, or RJRTC and its subsidiaries taken
as a whole, in a single transaction or a series of related transactions, other than any such
transaction(s) where the following clauses (x) and (y) are satisfied: (x) the transferee of the
assets is a wholly owned subsidiary of the transferor or an entity more than fifty percent (50%) of
the combined voting power of the voting securities of which is represented by voting securities of
RAI outstanding immediately prior to the transaction and (y) so long as B&W’s Percentage Interest
(as such term is defined in the Governance Agreement) is at least 32% immediately prior to such
transaction, immediately following such transaction no other Person beneficially owns a greater
percentage of the RAI Voting Power, or the combined voting power of the voting securities of the
surviving entity, or the direct or indirect parent of such surviving entity, than B.A.T. and its
Affiliates.



4.2A Pre-Termination Actions.




     (a) Transition Co-operation.



          Commencing on (a) the date being eighteen (18) months prior to the expected termination of
this Agreement or (b) where the Parties have less than eighteen (18) months’ advance notice of the
termination of this Agreement, on the Parties becoming aware that the Agreement is expected to
terminate within eighteen (18) months (including by virtue of a reasonable possible occurrence of
an event of the type set out in Sub-Sections 4.2(d)), until the date of termination of this
Agreement (the “Termination






-30-









 







Migration Period”), the Parties shall work together in good faith with a view to achieving an
orderly transition of the manufacturing arrangements to such facilities and such Persons as BATUS
Japan may specify due to the termination of this Agreement. During the Termination Migration
Period: (a) as soon as reasonably practicable, BATUS Japan shall submit to RJRTC a draft migration
plan to assist in the orderly transfer of the relevant manufacturing arrangements, which the
Parties shall discuss and seek to agree as soon as reasonably practicable thereafter; (b) RJRTC
shall provide to BATUS Japan all reasonable assistance and co-operation to transfer production
including enabling BATUS Japan to carry out consumer product and other relevant tests; and (c)
RJRTC shall provide to BATUS all blend recipes, Bills of Materials and Specifications and will
identify other Intellectual Property relating to the Products (and relevant Cigarette brand
families) being manufactured by RJRTC at the relevant time.




          The above shall apply irrespective of the reason for termination of this Agreement and
irrespective of whether this Agreement is extended in accordance with Sub-Section 4.4.




     (b) Volumes in final twelve (12) months of Term.



          In connection with the transition of manufacturing arrangements contemplated by
Sub-Section 4.2(A)(a), the Parties shall work together in good faith so as not to
disadvantage RJRTC in respect of the volume of Products which it is entitled to manufacture under
this Agreement in the twelve (12) months prior to its termination. Further, the Parties
acknowledge that the migration plan referred to in Sub-Section 4.2A(a) may entail RJRTC
manufacturing certain Products beyond the termination of this Agreement, on such terms as may be
agreed by the Parties.




          The above shall apply irrespective of the reason for termination of this Agreement and
irrespective of whether this Agreement is extended in accordance with Sub-Section 4.4.




     (c) Costs.



          For the avoidance of doubt, except as provided in Sub-Sections 4.2A(d) and 4.3(b)and
except for unavoidable costs incurred by RJRTC in relation to writing off inventory of raw
materials used exclusively in the manufacture and/or packaging of Products, RJRTC shall not be
entitled to charge BATUS Japan any fees or seek any costs from BATUS Japan in relation to the
transfer of manufacturing arrangements contemplated by this Sub-Section 4.2A.




          The above shall apply irrespective of the reason for termination of this Agreement and
irrespective of whether this Agreement is extended in accordance with Sub-Section 4.4.









-31-









 








     (d) Surplus Equipment.



          The Parties shall discuss in good faith the possible acquisition by BATUS Japan, on such terms
as the Parties may agree, of any Surplus Equipment on the termination of this Agreement. By no
later than (a) the date being twelve (12) months prior to the expected termination of this
Agreement or (b) where the Parties have less than twelve (12) months’ advance notice of the
termination of this Agreement, on the Parties becoming aware that the Agreement is expected to
terminate within twelve (12) months, RJRTC shall provide BATUS Japan with details of all Surplus
Equipment.




          The above shall apply irrespective of the reason for termination of this Agreement and
irrespective of whether this Agreement is extended in accordance with Sub-Section 4.4.



4.3 Effect of Termination.




     (a) Actions by RJRTC. Upon termination of this Agreement, RJRTC shall:



          (i) Deliver to BATUS Japan or its designee all raw materials, finished Products, and/or
specialized manufacturing equipment that have been, or must be, paid for by BATUS Japan in
accordance with this Agreement;




          (ii) Execute all documents and take all actions reasonably necessary to enable BATUS Japan to
carry out its obligations to customers, and make commercially reasonable efforts to cooperate with
BATUS Japan in making the necessary transition;




          (iii) Make commercially reasonable efforts to cooperate with BATUS Japan in the preparation of
a final accounting; and




          (iv) Stop producing Product, except as the Parties may agree at the time in writing.




     (b) Actions by BATUS Japan. Upon the effective date of termination of this Agreement,
BATUS Japan shall promptly pay RJRTC for such Products in accordance with Sub-Section 3.1,
together with any other amounts that are due and owing by BATUS Japan to RJRTC. BATUS Japan also
shall promptly pay RJRTC for such unique raw materials that RJRTC has purchased, in accordance with
Sub-Sections 2.3, 2.11 and 4.4(e), to produce Products for BATUS Japan and such raw
materials shall be shipped to BATUS Japan or its designee at BATUS Japan’s expense. If a written
agreement for reimbursement of identified capital costs exists between the Parties, BATUS Japan
also shall promptly pay RJRTC for such identified capital expenditures and commitments that RJRTC
has made on behalf of BATUS Japan and for which RJRTC has not been paid as of the effective date of
termination.



     (c) Wind-Up Payment by BATUS Japan. Upon the effective date of any termination of
this Agreement by BATUS Japan, RJRTC shall be reimbursed by BATUS



-32-









 




Japan for all reasonable costs incurred and non-cancelable commitments made in the performance of
this Agreement for which BATUS Japan has expressly agreed in writing to be responsible. In such an
event, RJRTC shall take steps to minimize any amount for which BATUS Japan may be responsible.



4.4 Possible Extension of Term.




     (a) Option to Extend Term.



          Unless either Party shall have terminated this Agreement prior to December 31, 2014 in
accordance with its terms, RJRTC shall have a one-time option to extend the Term in accordance with
this Sub-Section 4.4.




     (b) Criteria and Process for any Extension of the Term.



          From June 30, 2012, upon request, RJRTC shall provide to BATUS Japan all blend recipes, Bills
of Materials and Specifications and will identify other Intellectual Property relating to the
Products (and relevant Cigarette brand families) being manufactured by RJRTC at that time.




          Prior to June 30, 2013 (but not earlier than May 31, 2013) BATUS Japan shall provide RJRTC
with written notice of (a) the Manufacturing Costs; (b) a good faith estimate of the quantity of
Products (on a brand family by brand family basis) that it would require RJRTC to manufacture,
should the Term be extended, over the 36 month period commencing on January 1, 2015; and (c) to the
extent not already in the possession of RJRTC, expected Specifications for the Products referred to
in (b) (the “Manufacturing Costs Notice”).




          Within forty-five (45) calendar days of receiving the Manufacturing Costs Notice RJRTC shall
provide BATUS Japan with written notice indicating whether or not it elects to extend the Term (the
“Extension Response Notice”); provided, however, that RJRTC shall only be able to elect to extend
the Term if (a) RJRTC states in its Extension Response Notice that it is willing and able to charge
BATUS Japan for Products to be manufactured pursuant to Purchase Orders issued by BATUS Japan
during any extension period a fixed price (to apply regardless of SKU) which is not more than the
Manufacturing Costs (as specified in the Manufacturing Costs Notice) plus the cost of raw materials
as provided in Sub-Section 4.4(d) (b) RJRTC confirms in the Extension Response Notice that
it can fully comply with all BATUS Japan’s Product requirements (as specified or referred to in the
Manufacturing Costs Notice) and (c) RJRTC is, and has been, in all material respects, meeting all
of its obligations under this Agreement, including as to Product quality ((a), (b) and (c) being
the “Extension Criteria”). If RJRTC fails to provide an Extension Response Notice in accordance
with this Sub-Section 4.4(b) (including within the time specified above and satisfying all
the Extension Criteria) it shall be deemed to have chosen not to extend the Term and this Agreement
shall automatically terminate as scheduled on December 31, 2014. RJRTC shall also provide, within
any Extension Response Notice, details of its estimated raw materials






-33-









 







costs (based on costs at the time of providing any Extension Response Notice) that would apply
during any extension of the Term.




     (c) Extension Period.



          Provided RJRTC meets all of the Extension Criteria, it shall be entitled to extend the Term
for a period of 12, 24 or 36 months, in each case from December 31, 2014, as RJRTC specifies in the
Extension Response Notice (the “Extension Period”). If the Term is extended, this Agreement shall
automatically terminate on the expiration of the Extension Period with no further option to extend.




     (d) Product Pricing during Extension Period.



          In the event of an extension of the Term in accordance with this Sub-Section 4.4, for
Products manufactured pursuant to Purchase Orders issued by BATUS Japan during the Extension
Period, RJRTC shall charge and BATUS Japan shall pay (a) in relation to the manufacturing cost
component, the fixed price specified in the Extension Response Notice, regardless of SKU (which,
for the avoidance of doubt: (i) will be not more than the Manufacturing Costs; and (ii) includes
all labor costs) and (b) in relation to raw materials acquired in accordance with Sub-Sections
2.3, 2.11 and 4.4(e), the actual cost incurred by RJRTC in acquiring the raw materials
necessary for the manufacture of Products which are the subject of a Purchase Order, plus a mark-up
of not more than ten percent (10%). No further amounts shall be charged to or payable by BATUS
Japan for such Products. For the avoidance of doubt, during the Extension Period, no change to the
price payable for Products shall be made on account of any change in the PPI. Prior to the start
of any Extension Period the Parties shall agree on the basis on which raw materials costs will be
charged to BATUS Japan in any Extension Period (subject to (b) above).




     (e) Purchase/Supply of Materials during Extension Period.



          During the Extension Period, BATUS Japan may from time to time (a) direct RJRTC to purchase
particular raw materials (including but not limited to, Tobacco Materials, Non-Tobacco Components,
and Packaging materials) from specific sources and/or suppliers, including BATUS Japan or any of
its Affiliates (in which case, for the avoidance of doubt, RJRTC shall remain solely responsible
for ordering, receiving, storing, maintaining, using, paying for (including the payment of all
import duties, fees and internal revenue taxes, if applicable) and disposing of any such raw
materials) or (b) supply particular raw materials to RJRTC, and, save where purchasing the relevant
raw materials from the specified source and/or supplier or receiving them from BATUS Japan would be
contrary to any relevant law or regulation, RJRTC shall purchase the relevant raw materials from
the source and/or supplier specified by BATUS Japan or receive them from BATUS Japan (as the case
may be). A change of source or supplier in accordance with the above shall be treated as a
Specification change proposed by BATUS Japan and the provisions of Sub-Sections 2.3(b) and
(d) shall apply (including in relation to resultant pricing changes to reflect any lower raw
material costs and/or any change in






-34-









 







labor costs due to machinability of the raw materials). To assist BATUS Japan source raw materials
on more advantageous trade terms, on request by BATUS Japan, RJRTC shall promptly provide BATUS
Japan a then current and a pro forma priced Bill of Materials for the particular Product(s) in
question. Where any direction from BATUS Japan pursuant to the foregoing would put RJRTC in breach
of any binding contractual arrangement it has in place with other suppliers as at the Execution
Date, the Parties shall work together in good faith to resolve such matter.




          Sub-Sections 2.10(a) and (b) shall not apply during any Extension Period.



4.5 Other Agreements. Non-extension or termination of this Agreement for any reason shall
have no legal effect upon other projects, activities, collaborations, commercial arrangements or
service arrangements that the Parties may have with one another.



4.6 Effect of Non-Extension or Termination. Subject to the provisions of Sub-Section
4.7, on termination of this Agreement as provided in this Section 4, this Agreement
will be of no further force and effect, and except as set forth in Sub-Sections 4.2A and
4.3, there will be no liability or obligation on the part of either Party to the other.
Non-extension or termination of this Agreement does not impair or extinguish any accrued right,
obligation or liability that a Party hereto may have under this Agreement at the time it is
terminated.



4.7 Survival. The provisions of Sections and Sub-Sections 1, 3.4, 3.5, 3.6, 5,
6.2, 6.3, 6.4, 6.5, 6.6, 6.8, 6.9, 7.5, 7.6 and 7.10 will continue in effect after expiration
or termination of this Agreement.




SECTION 5

CONFIDENTIALITY



5.1 Confidentiality Obligation. During the Term of this Agreement and for a period of five
(5) years thereafter, each Party receiving Confidential Information as a “Receiving Party” shall
maintain in confidence all Confidential Information disclosed to it by the other Party, as a
“Disclosing Party.” Notwithstanding the foregoing, subject to Sub-Section 5.2, each of the
Party’s respective obligations of confidentiality with respect to the other Party’s Trade Secrets,
including BATUS Japan’s and its Affiliates’ Specifications, shall be perpetual. Neither Party will
use, disclose or grant the use of such Confidential Information except as expressly authorized by
this Agreement. To the extent that disclosure is authorized by this Agreement, the Receiving Party
shall obtain prior agreement from its employees, representatives and contracting parties to whom
disclosure is to be made to hold in confidence and not make use of such information for any purpose
other than those purposes permitted by this Agreement. Each Party, as a Receiving Party, will use
at least the same standard of care (but not less than a reasonable standard of care) as it uses to
protect its own proprietary and Trade Secret information to ensure that such employees,
representatives and contracting parties do not disclose or make any unauthorized use of such
Confidential Information. Each Party, as a Receiving






-35-









 







Party, will promptly notify the other upon discovery of any unauthorized use or disclosure of
Confidential Information. The Receiving Party shall be responsible to the Disclosing Party for any
loss of Confidential Information of the Disclosing Party or breach of the provisions of this
Sub-Section 5.1 by any employee, representative or contracting party of the Receiving
Party.



5.2 Exceptions. The obligations of confidentiality contained in Sub-Section 5.1
will not apply to the extent that it can be established by the Receiving Party by competent proof
that such Confidential Information:




     (a) Was already known to the Receiving Party, other than under an obligation of
confidentiality, at the time of receipt from the Disclosing Party;



     (b) Was generally available to the public or otherwise part of the public domain at the time
of its receipt from the Disclosing Party;



     (c) Becomes generally available to the public or otherwise part of the public domain after its
disclosure and other than through any act or omission of the Receiving Party in breach of this
Agreement;



     (d) Was received by the Receiving Party, other than under an obligation of confidentiality, by
a third Person lawfully in possession of the information; or



     (e) Was independently developed by the Receiving Party, without reference or access to any
Confidential Information of the Disclosing Party.


5.3 Authorized Disclosure. Each Party (and third Persons as applicable) may disclose
Confidential Information to the extent such disclosure is reasonably necessary in filing or
prosecuting patent applications, prosecuting or defending litigation, complying with court orders,
or complying with applicable governmental regulations, provided that if such Party is required to
make any such disclosure of Confidential Information it will to the extent practicable give
reasonable advance notice to the other Party of such disclosure requirement and, except to the
extent inappropriate in the case of patent applications, will use its best efforts to secure
confidential treatment of such information required to be disclosed.




SECTION 6

WARRANTIES, REPRESENTATIONS, COVENANTS AND INDEMNITY



6.1 Warranties and Disclaimer of Warranties. RJRTC WARRANTS THAT PRODUCTS MANUFACTURED AND
PACKAGED PURSUANT TO THIS AGREEMENT SHALL BE FREE FROM DEFECTS IN MATERIALS AND WORKMANSHIP, AND
SUCH PRODUCTS SHALL BE MANUFACTURED, PACKAGED AND SHIPPED IN CONFORMITY WITH BATUS JAPAN’S
SPECIFICATIONS AND THE PACKAGING AND SHIPPING REQUIREMENTS OF THIS AGREEMENT. ANY MEASURES TAKEN
TO REMEDY NON-






-36-









 







CONFORMANCE WITH THIS WARRANTY WILL BE AT RJRTC’S SOLE COST AND EXPENSE. SUBJECT TO THE FOREGOING,
PRODUCTS SUPPLIED BY RJRTC ARE PROVIDED “AS IS” AND WITHOUT ANY REPRESENTATION OR WARRANTY, EXPRESS
OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS
FOR ANY PARTICULAR PURPOSE.



6.2 Limitation of Remedies, Liability and Damages. A PARTY’S LIABILITY FOR DAMAGES FOR
BREACH OF ITS OBLIGATIONS UNDER THIS AGREEMENT SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY; SUCH
DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY, AND ALL OTHER REMEDIES OR DAMAGES AT
LAW ARE WAIVED. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL,
PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS INTERRUPTION DAMAGES, BY
STATUTE, IN TORT OR BY CONTRACT.



6.3 U.S.A. Statutes and Regulations. BATUS Japan represents and warrants that it is aware
of: (a) U.S. Trade Restrictions controlling exports from the U.S.A. and re-exports from third
countries of U.S. origin goods, software, and technology, including foreign made goods, software
and technology with more than de minimus U.S. content, to Prohibited Countries and Restricted
Countries and to Restricted Parties, as well as the restrictions and prohibitions under U.S. trade
sanctions on dealings by U.S. persons with such countries and persons, and is further aware that
the lists of Prohibited Countries, Restricted Countries, and Restricted Parties may change from
time to time; (b) Antiboycott Laws; and (c) the Foreign Corrupt Practices Act.



6.4 Compliance with Laws. In performance of their respective obligations under this
Agreement, RJRTC and BATUS Japan each shall comply with, and shall ensure that their respective
employees and Affiliates shall comply with, all laws, regulations, agreements, licenses and
consents applicable to or otherwise relating to the subject matter of this Agreement, including
those referenced in Sub-Section 6.3. Without limitation to the foregoing, the Parties
represent and warrant that they shall not transfer, provide, resell, export, re-export, distribute,
or dispose of any Product or component thereof or any related technology or technical data,
directly or indirectly, without first obtaining all necessary written consents, permits and
authorizations and completing such formalities as may be required by any applicable laws, rules and
regulations. BATUS Japan shall not sell or otherwise provide Products to any Person that BATUS
Japan knows, believes or has reason to believe will take any action which, if done by BATUS Japan,
would constitute a violation of any of the terms and conditions of this Agreement.



6.5 Product for Export Only. Except for limited quantities of Product manufactured for
testing purposes only, the Parties each represent and warrant that Products produced by RJRTC for
BATUS Japan in accordance with this Agreement are intended to be manufactured in the U.S.A. solely
for lawful export from the U.S.A. and for sale only within the Territory in accordance with the
laws of the Governmental Authority within






-37-









 







each relevant country within the Territory. RJRTC will not provide Product manufactured for BATUS
Japan to any third Person, without BATUS Japan’s prior written consent. BATUS Japan will not in
any way transport, or cause to be transported, Product to any country outside of the Territory for
use, distribution or sale.



6.6 Export Laws. No equipment, computer software, technology or information obtained by
one Party from the other, and no Product or component thereof, will be made available or
re-exported, directly or indirectly, except in compliance with all applicable export laws and
regulations.



6.7 BATUS Japan’s Duty to Inspect. BATUS Japan or its designees shall be solely
responsible for inspecting all Specifications of Products to be produced by RJRTC in order to
ensure that each such Product is in compliance with all applicable laws of the relevant
Governmental Authority of the Territory into which the Product is intended to be shipped or sold.
BATUS Japan or its designees shall be solely responsible for giving RJRTC full and complete
instructions to ensure that all Packaging, Cartons and Cases are appropriately marked with relevant
health warnings (if applicable) and other relevant markings mandated by relevant Governmental
Authority, whether within the U.S.A., the Territory or elsewhere.



6.8 BATUS Japan’s Indemnity Obligations.




     (a) In General. BATUS Japan will indemnify, defend and hold harmless RJRTC, its
Affiliates and their respective current and former officers, directors, employees, representatives
and agents (each an “RJRTC Indemnified Party”) from and against any and all losses, damages,
claims, liabilities, demands, assessments, judgments, settlements, compromises and related costs
and expenses (including without limitation reasonable attorneys’ fees and costs) (collectively,
“Damages”) resulting from demands, actions, suits or proceedings initiated by any third Person
(including any Governmental Authority) and arising out of:



          (i) A material breach of the obligations of BATUS Japan under this Agreement; or




          (ii) The marketing, advertising, distribution or sale by BATUS Japan or its Affiliates of any
Products, including any Damages which relate to any claimed adverse health effects or health risks
relating to the use of such Products.




     (b) Exceptions. Notwithstanding Sub-Section 6.8(a), BATUS Japan shall not be
required to indemnify any RJRTC Indemnified Party for any portion of Damages to which such RJRTC
Indemnified Party may become subject to the extent (but only to the extent) they relate to, result
from or arise out of:



          (i) The failure of RJRTC to comply with its obligations under this Agreement;







-38-









 








          (ii) The negligence or willful misconduct or willful failure to act of RJRTC; or




          (iii) RJRTC’s failure to produce Products meeting the required Specifications and/or to comply
with the Packaging and shipment requirements of this Agreement.




     (c) Notice. RJRTC shall give BATUS Japan prompt written notice of any claim or suit
that may be brought directly against RJRTC or any other RJRTC Indemnified Party by a third Person,
and BATUS Japan shall thereafter be entitled to employ counsel, control the defense of, and settle
or compromise, such claim or suit.


6.9 RJRTC’s Indemnity Obligations.




     (a) In General. Subject to Sub-Section 6.1, RJRTC will indemnify, defend and
hold harmless BATUS Japan, its Affiliates and their respective current and former officers,
directors, employees, representatives and agents (each a “BATUS Japan Indemnified Party”) from and
against all Damages resulting from demands, actions, suits, or proceedings initiated by any third
Person (including any Governmental Authority) and arising out of material breach of the
obligations of RJRTC under this Agreement including, but not limited to, RJRTC’s failure to produce
Products meeting the required Specifications and/or to comply with the Packaging and shipment
requirements of this Agreement.



     (b) Exceptions. Notwithstanding Sub-Section 6.9(a), RJRTC shall not be
required to indemnify any BATUS Japan Indemnified Party for any portion of Damages to which such
BATUS Japan Indemnified Party may become subject, to the extent (but only to the extent) they
relate to, result from or arise out of:



          (i) The failure of BATUS Japan to comply with its obligations under this Agreement; or




          (ii) The negligence or willful misconduct or willful failure to act of BATUS Japan.




     (c) Notice. BATUS Japan shall give RJRTC prompt written notice of any such claim or
suit that may be brought directly against BATUS Japan or any other BATUS Japan Indemnified Party by
a third Person, and RJRTC shall thereafter be entitled to employ counsel, control the defense of,
and settle or compromise, such claim or suit.


6.10 BATUS Japan’s Exclusive Supplier for Product. BATUS Japan represents and warrants
that as of the Effective Date, it has not entered into any agreement with any third Person that
obligates BATUS Japan to purchase any Product subject to this Agreement from any third Person,
which Product is subject to BATUS Japan’s obligations to RJRTC






-39-









 







regarding BATUS Japan’s appointment of RJRTC to exclusively provide BATUS Japan’s requirements of
American-blend Cigarettes during the Term of this Agreement.



6.11 BATUS Japan’s Right to Intellectual Property. BATUS Japan represents and warrants
that it (or its Affiliate, RFEBV) has the right to use all Intellectual Property associated with
the Products, including Trademarks, in the relevant countries in the Territory. RJRTC shall obtain
no rights with respect to Intellectual Property owned by BATUS Japan or its Affiliates as a result
of this Agreement.




SECTION 7

MISCELLANEOUS



7.1 Further Assurances. Each Party agrees to enter into or execute, or procure the
entering into or execution, of such agreements, assignments or further assurances, or do such other
acts as the other Party may reasonably request to carry out the terms and conditions of this
Agreement.



7.2 Waiver. No waiver by either Party of any of the provisions of this Agreement will be
effective unless explicitly set forth in writing and executed by that Party. Any waiver by either
Party of a breach of this Agreement will not operate or be construed as a waiver of any subsequent
breach.



7.3 Relationship of the Parties. RJRTC and BATUS Japan shall be and shall remain
independent contractors, and this Agreement shall not be construed as establishing a general
agency, employment, partnership, or joint venture relationship between BATUS Japan and RJRTC.
Neither Party shall have the authority to make any statements, representations or commitments of
any kind (whether express or implied), or to take any action, which shall be binding on the other
or create any liability or obligation on behalf of the other, without the prior written
authorization of the other Party to do so.



7.4 Force Majeure. Notwithstanding anything to the contrary herein, neither Party shall be
liable to the other for loss, injury, delay, damage or other casualty suffered by such other Party
due to any inability to perform any obligation hereunder, and neither Party shall be deemed to have
defaulted under or breached this Agreement for failure or delay in fulfilling or performing any
term or provision of this Agreement (other than payment of monies due), when such failure or delay
is caused by or results from causes beyond the control of the affected Party including, but not
limited to, acts of God, fire, flood, storm, earthquake, explosion, epidemic, embargo, war, acts of
war (whether war be declared or not), acts of terrorism, insurrection, riot, civil commotion, labor
disputes and strikes suffered by third-party suppliers, sub-contractors, or services providers not
working in or on RJRTC’s facilities, or acts, omissions or delays in acting by any Governmental
Authority (including legislative, administrative, judicial, police or any other official
governmental acts). Notwithstanding the foregoing, nothing set forth in this Sub-Section
7.4 shall relieve RJRTC of its obligation to initiate its contingency manufacturing plans as
identified pursuant to Sub-Section 2.18.







-40-









 







7.5 Governing Law. The validity, construction and performance of this Agreement shall be
governed and interpreted in accordance with the substantive laws of the State of New York, without
giving effect to principles of conflicts of laws thereof.



7.6 Dispute Resolution. Any dispute arising out of or concerning the existence, validity,
interpretation or performance of this Agreement (“Dispute”) shall be resolved in accordance with
the procedures specified in this Sub-Section 7.6, which shall be the sole and exclusive
procedures for the resolution of any such Disputes:




     (a) Escalation to the Parties’ Executives. To the extent that Disputes cannot be
resolved by the respective personnel of each Party responsible for the administration of this
Agreement, the Parties shall attempt in good faith to resolve any such Dispute by negotiation
between their respective senior executive officers or representatives who have authority to settle
the controversy and who are at a higher level of management than those employees who administer
this Agreement on a day to day basis. Such negotiations shall continue either until the
controversy is resolved or until one of the Parties initiates the arbitration procedure set forth
below in Sub-Section 7.6(b). During the negotiation process, all reasonable requests for
information and documents from one Party to the other shall be honored. If, prior to the
initiation of an arbitration procedure set forth below in Sub-Section 7.6(b), a Party
requests that the Parties engage in a non-binding mediation, the other Party shall consider such
request in good faith.



     (b) Arbitration. If a Dispute cannot be resolved pursuant to the negotiation
procedures set forth above in Sub-Section 7.6(a) within 45 days of the initial date of
negotiations (or such longer period as both Parties agree), then the Dispute shall be resolved by
arbitration administered by the American Arbitration Association (“AAA”) and in accordance with its
Commercial Arbitration Rules. The decision of the arbitration panel shall be final and binding on
the Parties, and the arbitration award may be enforced in any court of competent jurisdiction.



     The arbitration panel shall consist of three members, one to be appointed by each Party and
the third arbitrator, who shall preside over the arbitration panel, to be chosen by the two-Party
appointed arbitrators. If the responding Party fails to appoint an arbitrator or the two
Party-appointed arbitrators fail to appoint the third within the prescribed time periods, then the
appointments shall be made by the AAA pursuant to its rules and procedures in effect at the time of
the appointments.



     Arbitration may be commenced by any Party by giving written notice setting out the nature of
the claim to the other Party and to the AAA pursuant to the rules of the AAA then in existence.
Within 15 days of such notice, the Party demanding arbitration shall appoint its arbitrator.
Within 15 days of that appointment, the other party shall appoint its arbitrator. Within 15 days
after the appointment of both Party-appointed arbitrators, those arbitrators shall appoint the
third.



     The situs of the arbitration shall be the State of New York and evidentiary proceedings shall
be conducted in New York, New York; however, the panel may



-41-









 




conduct proceedings in other locations if the Parties so agree or if necessary for the taking of
evidence.




     Each arbitrator shall be impartial.



     Any litigation commenced by either Party (a) in aid of the arbitration; or (b) for injunctive
relief to preserve assets, maintain the status quo or prevent any act pending the result of the
arbitration, may be commenced only in the federal or state courts in New York, New York. With
respect to any litigation, each Party hereby irrevocably consents to the exclusive jurisdiction of
such courts and waives any objection to personal jurisdiction of and venue in such courts with
respect to such proceedings and waives any claim that such forum is inconvenient.



     In connection with any arbitration hereunder, the arbitration panel shall apply the IBA Rules
on the Taking of Evidence in International Commercial Arbitration. The arbitration panel may seek
to compel the production of evidence from non-parties.



     The fact of arbitration, the claims and arguments made in the arbitration and any arbitral
award shall be confidential and shall not be disclosed to any person other than the Parties and
their legal representatives, except as required by law or legal duty or in order to confirm,
challenge or enforce the arbitral award. Materials and documents of one Party utilized or produced
in connection with the arbitration that are not otherwise public shall be treated as confidential
by the other Party and shall not be disclosed or utilized by the other Party other than in the
arbitration.



     The arbitration panel is authorized to award monetary damages and to grant injunctive relief,
including interim relief pending the final award. Any interim or provisional measures in the form
of conservatory or injunctive relief ordered by the arbitration panel shall, to the extent
permitted by applicable law, be deemed final arbitration awards for purposes of enforceability.
The arbitration panel is not authorized to award punitive or exemplary damages.



     The Parties shall bear their own costs incurred in connection with the arbitration and share
equally the costs of administration of the arbitration and the fees and expenses of the arbitration
panel.



     (c) Waiver of Jury Trial. EACH OF THE PARTIES IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THE AGREEMENT.


7.7 [Intentionally Left Blank].



7.8 Severability. If any provision of this Agreement shall be held to be invalid or
unlawful, the same shall be deemed to be deleted from this Agreement, but this Agreement shall
remain in full force and effect as if the deleted provision had never been






-42-









 







contained in it. The Parties shall negotiate in good faith as to the terms of a mutually
acceptable and satisfactory provision in place of any deleted provision, and if such terms shall be
agreed, this Agreement shall be amended accordingly.



7.9 Amendments. This Agreement may be amended, or any term hereof modified, only by a
written instrument duly executed by both Parties hereto. In the event of any conflict between this
Agreement and the terms of a Purchase Order, the terms of this Agreement shall govern.



7.10 Notices. Unless otherwise provided in this Agreement, day to day commercial
communications may be exchanged by any reasonable means. All material notices, requests, claims,
demands and other communications under this Agreement shall be in writing and shall be deemed given
upon receipt by the Parties at the following addresses (or at such other address for a Party as
shall be specified by like notice):





	 	If to RJRTC, to: 	 	R. J. Reynolds Tobacco Company

401 North Main Street

Winston-Salem, North Carolina 27101

Attn: General Counsel






	 	If to BATUS Japan, to:  	 	BATUS Japan, Inc.

103 Foulk Road

Suite 117

Wilmington, Delaware 19803

Attn: President






	 	With a Copy to: 	 	Jeffrey P. Clemente, Esq.

Tozai Sogo Law Office

Kioicho K Bldg.

3-28 Kioicho, Chiyoda-Ku

Tokyo, Japan 102-0094




7.11 Entire Agreement. This Agreement contains the entire agreement and understanding
between the Parties regarding the subject matter hereof, and supersedes any prior agreement and
negotiations between the Parties with respect to the subject matter hereof.



7.12 Assignment. This Agreement shall be binding upon and inure to the benefit of the
Parties hereto and their respective legal successors and assigns. This Agreement may not be
assigned or otherwise transferred, nor, except as expressly provided hereunder, may any right or
obligation hereunder be assigned, subcontracted, licensed or transferred by either Party without
the other Party’s prior written consent, which consent shall not be unreasonably withheld, delayed
or conditioned; provided, however, that either Party may, without the other Party’s prior consent,
assign this Agreement and its rights and obligations hereunder to a wholly owned subsidiary or
entity under common control with such assigning Party through 100% ownership of the equity
interests therein. Any






-43-









 







permitted assignee shall assume all the rights and obligations of its assignor under this
Agreement. Any assignment in violation of the foregoing shall be null and void.



7.13 No Third Party Beneficiaries. This Agreement is not intended to and shall not be
construed to give any Person (other than the Parties signatory hereto and to the extent provided
herein, their respective Affiliates), including any employee or former employee, any interest or
rights (including, without limitation, any third-party beneficiary rights) with respect to or in
connection with any agreement or provision contained herein or contemplated hereby.



7.14 Counterparts. This Agreement and any amendment may be executed in multiple
counterparts, each of which is an original and all which constitute one agreement or amendment, as
the case may be, notwithstanding that all of the Parties are not signatories to the original or the
same counterpart, or that signature pages from different counterparts are combined, and the
signature of any Party to any counterpart is a signature to and may be appended to any other
counterpart.



7.15 Schedules and Appendices. The Schedules to this Agreement, including Appendices to
those Schedules, form part of this Agreement and, subject to Sub-Section 2.21, the Parties
shall act in accordance with their terms at all times during the Term.




     IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly
authorized representatives effective as of the Effective Date as defined above.



	 	 	 	 	 
	 	BATUS JAPAN, INC.

 	 
	 	By:  	/s/ Teresa Riggs
 	 
	 	 	Print Name:  	Teresa Riggs 	 
	 	 	Title:  	President 	 



	 	 	 	 	 

	Date:

	 	May 26, 2010
 

	 	 
	 

	 	          (“BATUS Japan”)	 	 






	 	 	 	 	 
	 	R. J. REYNOLDS TOBACCO COMPANY

 	 
	 	By:  	/s/ Daniel M. Delen
 	 
	 	 	Print Name:  	Daniel M. Delen 	 
	 	 	Title:  	President 	 



	 	 	 	 	 

	Date:

	 	05/26/2010
 

          (“RJRTC”)
	 	 






-44-









 





Schedules to the Agreement:



“A” – Identification of the Territory



“B” – Supplies to Restricted Countries



“C” – BATUS Japan’s Standard Consumer Product Testing Protocols



“D” – RJRTC Payment Instructions



“E” – Existing Guidelines and Agreements Incorporated by Reference (including Appendices 1-9 to
such Schedule)



“F” – Product Base Prices





-45-