Confirmations and Contracts – How to Avoid A Million-Dollar Mistake
The following article originally appeared in the Precision Manufacturing Journal.
As an attorney, I have represented manufacturers for over 20 years in cases involving their warranty obligations. These clients have faced claims from other manufacturers who used my clients’ products as components in finished goods, or end users who were dissatisfied with the products. Unfortunately, clients often express surprise at two things:
- First, product-liability insurance usually does not cover these types of claims because these claims do not involve personal injury or damage to other property.
- Second, a small amount of proactive investment in legal advice by clients on their sales confirmations or contracts could have significantly reduced their exposure for claims that can range from several hundred-thousand dollars to several million dollars.
Details are Decisive
The default position under Article 2 of the Uniform Commercial Code (UCC), which is the law that governs the sale of goods, is that unless a seller takes affirmative measures to limit its liability, a seller is responsible for all of a buyer’s recoverable damages. Every state has adopted UCC Article 2.
The impact of not making a minimal investment in confirmations and contracts is illustrated by a recent case that involved two companies. Company A had purchased product from Company B that it claimed breached Company B’s warranty obligations to Company A. Likewise, Company B had purchased a different product from Company A, and Company B claimed that Company A’s product breached Company A’s warranty obligations. Both companies valued their respective claims at around $600,000.
Thus, the two companies started the litigation in close to factually-identical positions. At the end of the case, Company B ended up paying Company A almost the full value of Company A’s claim, while Company B received nothing. Why? Company A invested in a legal review of its forms and, as a result, had included notice requirements and limitations regarding the time period for bringing a claim. These terms proved decisive. Unfortunately for Company B, it had failed to take the proactive steps necessary to make sure it was protected.
How can you avoid becoming Company B?
- Make sure that your supply contracts and confirmations include critical language regarding disclaimer of warranties, limitation of remedies, exclusion of damages, notice requirements, and limitations on the time to bring an action.
- Having the correct language in your forms may not be enough. You need to make sure that your sales and supply chain personnel are following the practices and procedures that maximize the chance your documents will be enforceable.
In another case, the outcome of the case turned on whose confirmation form controlled. My client’s pattern of conduct allowed me to demonstrate that in practice both parties recognized that my client’s form controlled. The buyer then quickly settled for less than 10 percent of its original claim.
When in a hole, stop digging. This common-sense rule applies in litigation just as strongly as it applies to other management decisions.
Some of the most important legal advice is whether going down the litigation path makes sense. It is important that you, as a manufacturer, have access to counsel that not only understands the law, but also has the experience with arbitrators, judges, and juries that gives your counsel the base of experience to provide you with an informed judgment on the likely outcome, including the likely cost of achieving that outcome.
Even if a client has a strong defense, the legal expense of vindicating that defense, the distraction litigation represents, and the desire to preserve a business relationship might all weigh against litigation. Having counsel that can advises you on all these issues gives you the best shot of getting your company the optimal outcome.
Manufacturers spend thousands of dollars a year on liability insurance that often does not cover commercial exposure, but often fail to invest a fraction of that amount on bullet-proofing the contracts and confirmations that they use daily. That failure could expose your company to unnecessary risk.