Imagine for 10 years, you have sold your metal goods to a customer with nothing more than calls and handshakes. Your customer, in turn, sells your goods to his buyer.
For as long as you can remember, your customer and the end-users have been very happy with your service and the quality of your metal. However, the end-user now claims the metal in your most recent shipment is defective and is demanding their money back, and taking their business elsewhere.
Now, your customer is suing you, and the relationship that had been so profitable for so long is on the rocks.
Although long-lasting relationships with your customers are the goal, problems can arise. Therefore, sellers must protect themselves in all relationships with a strong, well-written sales contract.
The sales contract need not be long, complicated, or wordy, and one form contract can govern a long-term relationship. This article focuses on four key provisions that should be included in all sales contracts.
1. Warranty Disclaimer
Sales contracts should include a clause waiving all express and implied warranties. Under the laws of most states, every sale creates implied warranties that the goods will conform to the standards of the industry, and will hold up if used properly or in accordance with a salesperson’s recommendations.
Most states permit sellers to waive these warranties in a sales contract. The warranty disclaimer must be “conspicuous” and include specific language to be effective, such as, “SELLER DISCLAIMS ANY AND ALL REPRESENTATIONS AND WARRANTIES.” When properly drafted, this disclaimer can save your company enormous amounts of time and money in litigation if your goods happen to fail.
2. Liability Limitation
Many states allow sellers of goods to limit the amount purchasers can recover in court if goods are non-conforming, through a “limitation of liabilities” clause.
Consider a scenario where you sell goods to Company A for $100,000, who, in turn, sells your goods to Company B. If Company B sues Company A claiming your goods are defective, Company A could claim your goods caused Company B to stop doing business with it, resulting in substantial lost profits to Company A. Although the contract price for the goods was $100,000, Company A could claim lost profits of $1 million or more. Such a claim could destroy your business.
A well-written limitation of liability clause will explicitly provide for the type of damages the customer can sue you for, and more importantly, the type of damages for which the customer cannot sue. For example, you can limit or cap the amount your customer could sue you for to the actual contract price of the goods.
3. Choice of Law/Forum Selection
Sellers can maintain the home-field advantage by including a choice of law provision and a forum selection clause in the contract, which provide that all disputes relating to the goods will be litigated in your designated state, under its laws.
Without these clauses, you may find yourself in a courtroom 2,000 miles away instead of in your hometown. It is important to explicitly identify which state’s laws apply and in which state the litigation will occur. You will also want your customer to agree that the courts of your home state have the power to decide the case and to make the customer come to your state for court.
4. Risk of Loss
Including a risk of loss provision in a sales contract can save you money.
Imagine your customer places an order and decides he will contract with XYZ Cartage to pick up the goods from your plant. Based on your experience, you wouldn’t choose XYZ to deliver the goods because its drivers have a poor safety record. Without fail, XYZ destroys the goods that your customer ordered, and now your customer wants you to pay for the damage.
You can protect yourself by inserting a clause allocating the risk of loss. This clause makes the customer responsible for any damage that might occur if he selects the carrier. Or, the clause could lay off risk on your buyer once the carrier picks up the goods at your plant.
Ultimately, a well-drafted sales contract is beneficial to both seller and buyer. The seller protects itself from costly litigation and, as a result, can keep prices lower for the buyer. Although this article offers a thumbnail sketch of key contract provisions, these provisions must be specific; should be tailored to the relevant state law; and should address specific issues that have arisen in your particular business and in the industry, generally.
This article is for general informational purposes only and does not, and is not intended to, constitute legal advice.
About the authors:
Steven N. Malitz is a partner at Saul Ewing Arnstein & Lehr LLP and is an advisor and general counsel to successful entrepreneurs.
Tim Tyler is assistant general counsel at WIlton Brands LLC.