Key Sales Terms and Conditions

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Warranties, Indemnities and Key Contract TermsFor GACC South

John L. WatkinsBarnes & Thornburg, [email protected](404) 264-4043 (direct dial)(404) 663-0538 (cell)




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this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 4




Key Takeaways From What We Will Cover

• Common sales techniques can create liabilities

• Common contract terms create and define risk

• Contractual provisions are a key to risk management• Risk can be limited

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Caution!

• Each situation is different

• Consumer products = Additional rules

• Work with a professional: Don’t “play lawyer”

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Warranties: What Is a Warranty?

•Formal written piece of paper?







How About This?




Which Says This ….

• “Our 2000CFX injection molding system provides the highest possible level of efficiency and productivity.”

• “Time studies conducted by Marathon University demonstrate that the 2000CFX produces 40 percent more parts per hour than your existing machinery.”

• “Purchasing just one 2000 CFX would save your company 1000 man hours per year. At your fully loaded cost of $25.50 per hour, this will result in a cost savings of $25,500 per year.”

• “The additional productivity of each 2000 CFX would result in the production of an additional 400 units per week. At your net profit of $10 per unit, this will result in additional profit of $4,000 per week, or $200,000 per year.”







Express Warranties

• Express warranties are created by:

– “Any affirmation of fact or promise … which relates to the goods ...” (U.C.C. § 2-313(1)(a)); or

– “Any description of the goods which is made part of the

basis for the bargain ...” (U.C.C. § 2-313(1)(b))







Express Warranties

• “It is not necessary … that the seller use formal words such as ‘warrant’ or ‘guarantee’”– BUT: An “affirmation merely of the value of the goods or a statement purporting to be merely the sellers opinion or commendation of the goods does not create a warranty” (U.C.C. § 2-313(2))




So Let’s Return to the Sales Quotation …

• “Our 2000CFX injection molding system provides the highest possible level of efficiency and productivity.”

• “Time studies conducted by Marathon University demonstrate that the 2000CFX produces 40 percent more parts per hour than your existing machinery.”

• “Purchasing just one 2000 CFX would save your company 1000 man hours per year. At your fully loaded cost of $25.50 per hour, this will result in a cost savings of $25,500 per year.”

• “The additional productivity of each 2000 CFX would result in the production of an additional 400 units per week. At your net profit of $10 per unit, this will result in additional profit of $4,000 per week, or $200,000 per year.”







What Does This Mean?

• Proposals, reports and quotations may create warranties

– More specific = greater chance of warranty

• Problem for consultative selling







Implied Warranties

• The law also creates implied warranties in any sale of goods

• The two big ones are:

– Implied warranty of merchantability

– Implied warranty of fitness for a particular purpose







Implied Warranty of Merchantability

• Created by law unless excluded

• Goods must:

– Pass without objection in the trade

– Fair average quality– Fit for general purpose– But:

Very vague Judged after the fact







Implied Warranty of Fitness for a Particular Purpose

• Implied Warranty of Fitness for a Particular Purpose

– “Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under Code Section 2-316 an implied warranty that the goods shall be fit for such purpose”

– U.C.C. § 2-315







Implied Warranty of Fitness for a Particular Purpose

• Big problem for sophisticated German sellers

• Consultative selling common

• Problems:

– Not defined– Buyer’s “purpose” will be

defined after the fact in litigation

• Very dangerous







• Exclude and disclaim implied warranties

– Not difficult, but

– Requires magic language

– Leave this to the experts

“Homemade” documents often do not do this properly

So What Should Sellers Do?







What Should Sellers Do?

• Express Warranties Are More Difficult

• Recommendations:

– Keep sales documents and contracts separate

– Written limited warranty should state it is the only warranty

– “Entire agreement” or “merger” clause

– Signed contract







Practical Tips for Sellers

• Avoid statements regarding performance if possible (particularly in the sales contract)

• Qualify performance statements in sales documents

– “Actual field performance may vary”

•Do not exaggerate

•Consider a specific limited written performance warranty with agreed test procedures and criteria

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What If You Are a Buyer?

• Remember possible express warranties

• Preserve implied warranties if possible

• Preserve all legal remedies if possible

– Remember UCC remedies are skewed toward buyers

• Remember possible consumer product remedies

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Indemnity Clauses and Agreements

• Also called “hold harmless” agreements

• Purpose: To protect one party from claims and liabilities caused by doing business with the other party

• Should apply to third party claims

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Indemnity Agreements = Danger

• Increasing demand for broad indemnity agreements

– Any claim relating to your product or service

– Particularly if claim occurs on their property

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Indemnity Agreements: Key Points

• Usually construed against indemnified party

– Particularly for claims caused by indemnified party’s negligence

• Many states have statutory or common law restrictions

– But a clearly written broad indemnity may be enforceable

• Professional advice important

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Indemnity Agreements: The Most Important Point

• Make sure your indemnity obligations are insurable

• And insured

• Check with your insurance agent or broker!

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Provisions Regarding Remedies and Damages

• Remedy: What you will do if there is a breach

• Damages: Payment of money in recompense (form of remedy)

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Incidental and Consequential Damages

• Unless excluded, UCC generally allows recovery of incidental and consequential damages

• The big ones are:

– Lost profits

– Lost production

– Excess costs of labor or materials

• Sellers will want to exclude such damages

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Limited Remedies

• UCC generally allows the parties to agree to limited remedies

• Sellers will often want to limit remedies:

– Repair or replacement of goods

– Refund of the purchase price and return of goods

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Liquidated Damages

• Liquidated Damages: Agreed monetary payment for breach

– Example: Delayed Delivery

• Why?

– Incentive to perform

– Can eliminate disputes







Liquidated Damages: Seller’s Friend or Foe?

• Sellers/contractors often object to liquidated damages

– Should they?

• Limited and defined LDs can limit risk:

– Example: Limited to percentage of sales price

– LDs exclusive remedy

• May offer a reasonable compromise for both parties

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Damages Caps

• Damages caps limit the total amount one party can recover from the other

– Example: Total recovery limited to the sales price

• Prevents absolute disaster

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Dispute Resolution

• Could be its own seminar!

• Binding arbitration vs. litigation

– Arbitration clauses generally enforceable

– Panel of 1-3 arbitrators instead of a jury

– Probably not cheaper or significantly faster

– But allows experts instead of laypersons to decide

– Favored by many international companies

• Forum selection clauses

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Re-Cap for Product Sellers

• Beware of creating unintended express warranties

– Qualify performance statements

– Have a contract that limits warranties to those stated in contract

• Disclaim implied warranties

• Make sure indemnities are limited, insurable and insured

– Call your broker!

• Disclaim or limit incidental and consequential damages• Consider liquidated damages

• Consider exclusive remedies

– Example: Repair or replacement

• Consider cap on total damages

• Consider binding arbitration

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Important Reminder

•This Presentation is Only for General Information Purposes!

•Get Professional Advice from an Experienced Lawyer in Your Jurisdiction




Thank you!

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