Key Sales Terms and Conditions

Warranties, Indemnities and
Key Contract Terms
For GACC South
John L. Watkins
Barnes & Thornburg, LLP
john.watkins@btlaw.com
(404) 264-4043 (direct dial)
(404) 663-0538 (cell)

ATLANTA CHICAGO DELAWARE INDIANA LOS ANGELES MICHIGAN MINNEAPOLIS OHIOINDIANA LOS ANGELES MICHIGAN MINNEAPOLIS OHIO WASHINGTON, DC
ATLANTA CHICAGO DELAWARE WASHINGTON, DC

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What Is the Value of a Lawsuit Avoided?

ATLANTA CHICAGO DELAWARE INDIANA LOS ANGELES MICHIGAN MINNEAPOLIS OHIO WASHINGTON, DC

© 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on
this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

What You Don’t Know …
“I don’t know what the fuss is …. Nothing bad has happened yet”



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


4 2

Caution!
• Each situation is
different
• Consumer products
= Additional rules
• Work with a
professional: Don’t
“play lawyer”


5 3

Warranties: What Is a Warranty?
• Formal written piece of
paper?


6 4

How About This?


7 4

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))


9 5

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))


10 6

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


12 7

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


13 8

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


14 9

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


15 10

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


16 11

So What Should Sellers Do?

• Exclude and disclaim implied warranties
– Not difficult, but
– Requires magic language
– Leave this to the experts
 “Homemade” documents often do not do this
properly


17 12

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


18 13

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


this page is intended LLPinformational purposes only and shall page and all information on it may notlegal opinion of Barnesform, by anyone without the express written consent of the author or presenter. 19

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


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



Indemnity Agreements = Danger
• Increasing demand for
broad indemnity
agreements
– Any claim relating to your
product or service
– Particularly if claim
occurs on their property



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



Indemnity Agreements: The Most Important Point

• Make sure your
indemnity obligations
are insurable
• And insured
• Check with your
insurance agent or
broker!



Provisions Regarding Remedies and Damages

• Remedy: What you will
do if there is a breach
• Damages: Payment of
money in recompense
(form of remedy)



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



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



Liquidated Damages
• Liquidated Damages:
Agreed monetary
payment for breach
– Example: Delayed
Delivery

• Why?
– Incentive to perform
– Can eliminate disputes


28 15

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



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



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



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



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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