Steve Wilker, The Daily Record Newswire
When purchasing software, equipment or services to set up a new business or better manage a fast-growing one, officials may be inclined to simply scan the fine print on any sales contract, sign it and receive delivery.
Conversely, one who is selling a product or service naturally wants to encourage customers to buy from the company, so perhaps an attractive warranty becomes a competitive advantage.
In either case, be aware that the company’s potential success or even its survival is at stake.
Consumers and businesspeople like to assume that the products and services they buy will work just fine and last as long as they expect. Product developers and manufacturers like to assume that customers will use their products as they were designed to be used, and that the quality assurance process will catch any defective products before they go out the door.
But things don’t always work out as expected, and when we dig into the fine print of a sales agreement, those warranties and limited liability clauses suddenly take on a lot more
importance. Depending upon whether the product or service in question is mission-critical to a company, a party may find itself litigating to obtain a resolution.
The obvious way to avoid or at least reduce this kind of headache is to do your homework before buying or selling a product or service.
Buyers, beware
If something mission-critical or with significant dollar value is being purchased for the organization, be sure to read the contract and understand the seller’s warranties and limitations of liability. A buyer wants protection as broad as possible.
Pay special attention to any clauses that raise red flags, such as limitations of liability, limitations of warranty, disclaimers and anything in capital letters. Be sure the sales contract spells out what the warranty covers. Don’t rely on what the salesperson said. What matters is what is in the written agreement.
If the contract includes limitations of liability from the seller, be prepared to accept them or consider negotiating for better terms. How important is the product or service to the business?
How much risk is acceptable for use of this particular product or service? If a risk is being taken without ideal protections, assess that risk and determine if there are alternatives in the marketplace.
Sellers, use caution
A company selling products or services and hoping to gain repeat customers (and who doesn’t?) must find an acceptable balance between offering buyers some protections without exposing itself to unlimited liability.
No one will want to do business with a company that disclaims responsibility for everything. But a company that accepts full responsibility for the performance of a product or service under any and all circumstances — even if the buyer misuses it — may be jeopardizing its very existence. The goal should be to stand behind products and services, but limit exposure.
Develop a template for the sale of a product or service before sales begin, so the organization is not unnecessarily exposed to liability. Within sales documents, clearly state whatever reasonable warranties for performance, parts, service or consequential damages will be covered.
Also, conspicuously indicate any liability limits or disclaimers. For example, one may want to limit warranty remedies to repair or replacement, or to cap liability at the price of the product/service sold.
One may want to spell out very specific express warranties and disclaim any implied warranties. But be aware that if a customer is sold something critical to the organization (such as a customized accounting program) and it fails in some way that lead to the customer’s financial ruin, it may challenge the warranty or limited liability clauses.
Implied warranties
The purchase and sale of goods in the United States is generally governed by Article 2 of the Uniform Commercial Code (UCC), which has been adopted by all states except Louisiana. The UCC includes two implied warranties in every sale of goods, unless they have been disclaimed: 1, merchantability — the product is saleable and will perform in the ordinary course of business in a manner one would expect; and 2, fitness for a particular purpose — the buyer, having indicated how he intends to use the product, is relying on the seller’s skill and knowledge to select the appropriate product.
Most sellers prefer to disclaim any implied warranties under the UCC and instead provide an express limited warranty. While sales of services without goods are not generally subject to the UCC, most states apply similar rules to sales of services.
Finally, if products are being sold at retail to consumers for personal or household use, a company needs to be extra careful about limiting remedies and disclaiming warranties, because many states make doing so in that context more difficult than in a business-to-business transaction.
While it is important to think about legal obligations and protections, as a matter of good business practice, buyers and sellers should try to communicate clearly so that the buyer knows what he is buying and the seller understands what the buyer needs and sells him an appropriate product or service.
The more complex a commercial transaction, the greater the potential risk to both parties, so it only makes good common sense to pay close attention to transaction details.
—————
Steven Wilker is a partner in Tonkon Torp’s litigation group. Contact him at 503-802-2040 or at steven.wilker@tonkon.com.
