INTRODUCTION TO PURCHASE AND SALE CONTRACT TERMS.
To reduce your business’ exposure to liability, your sales contracts and purchase orders should contain many, if not all, of the commercial reasonable standard provisions set forth below. While the following terms are by no means exhaustive, they do represent some of the standard terms contained in contracts drafted by sellers. I remind you that this advice is general and not intended to cover all of the legal issues involved in your business, so please use this information merely as a starting point for educating yourself about the legal aspects of your business, not as a substitute for a lawyer.
1. DELIVERY TERMS.
Although we would all like to rely on the U.S. postal service and prefer not to think about certain disasters that prohibit us from fulfilling an order, disasters do occur. All contracts should contain a “force majeure clause” which excuses a delay in performance for a reasonable time in the event it is caused by an event beyond your business' reasonable control (e.g., fire, earthquake, tornado, labor strike, etc.). Another thing to be especially aware of is “time is of the essence" clauses (also sometimes referred to as “delivery is of the essance”. These type of clauses should be deleted if possible, as they allow the buyer to terminate and/or collect damages if your business is even one day late in delivery.
2. ACCEPTANCE TERMS.
When will the buyer be required to accept the goods? Will the buyer be given an opportunity to reject the goods well after delivery, or will the time frame be limited to 48 or 72 hours. After acceptance, the buyer’s remedies are generally limited to those specified in your warranty clause -- which hopefully has been expressly limited to repair, replacement or refund. Prior to the time of acceptance, the buyer's remedies are much broader -- e.g., it may reject non conforming goods and recover money damages.
3. F.O.B. TERMS
In the absence of any specific language contained in your purchase order or sales contract, the F.O.B. destination point will determine the point at which risk of loss, title and transportation expenses shift from your business to Buyer. Ask yourself the following three questions: (1) When will the risk of loss pass to the buyer; (2) when will title to the property pass to the buyer; and (3) who is responsible for paying the cost of delivery.
4. TAX TERMS
You want to ensure your contract specifically states that the buyer is required to pay all taxes, duties and other governmental charges in connection with the sale, purchase, delivery and use of any of the goods (except for taxes based upon your business' net income). Many states have gross receipts taxes in lieu of sales taxes, and these should normally be for the account of the Buyer.
5. SPECIAL, INDIRECT, CONSEQUENTIAL AND PUNITIVE DAMAGE CLAUSES
Your purchase orders and sales contract should specifically limit damages to “Actual Damages” and should expressly state that the Buyer is prohibited from recovering special, indirect, consequential or punitive damages.
6. WARRANTY CLAUSES
If you are selling a product, your business will probably be expected to provide a warranty that the product meets certain defined specifications and is free from defects in material and workmanship. The first issue when addressing warranties, is what will be the warranty period. If the contract fails to state a specific time frame, the warranty period will generally be set by state law, which typically provides for 4 years. You can, however, limit this period to 6 months or 1 year in your contract. The second issue arising with respect to warranties is the type of remedy you are providing to the buyer in the event there is a defect in material or workmanship. You can expressly limit the buyer’s remedy for breach of warranty to repair, replacement, or refund of the purchase price, less shipping and handling (if applicable). The third issue that arises is whether you will provide the implied warranties of “merchantability” and “fitness for a particular purpose” or you can expressly exclude all implied warranties.
7. MODIFICATIONS AND CHANGE ORDER TERMS
Oftentimes, after a contract has been signed, the buyer will want to effectuate a change or modification. You want to make sure your purchase order and/or sales contract: (1) specifically set forths what can and cannot be modified; (2) specifically set forths the procedures for making a modification and (3) provides that no requested modifications will be deemed binding upon the other party absent that party’s written consent.
8. INDEMNITY CLAUSES
Does your contract require your business to defend and indemnify the Buyer against all claims, liabilities, losses and damages arising out of actual or alleged defects in material or workmanship, or anything else? If it does, your business may be assuming significant contingent liabilities that can easily be limited by excluding such a clause. It is considered commercially reasonable and common practice for a seller to limit his business's responsibility to repair, replacement, or refund, which can be covered in the warranty clause.
9. TERMINATION CLAUSES
The first issue which arises is limiting the time period during which the Buyer may cancel and the reasons why a buyer may cancel. The buyer's right to terminate should occur only for a material default and a failure to cure after 15 or 30 days written notice. Your purchase order or sales contract should also state that in the event the Buyer elects to terminate the contract that your business is entitled to recover money damages, including: (a) the cost of the work in process; (b) the cost of the raw materials utilized; (c) and a certain reasonable amount for lost profits and reasonable overhead. Be careful not to limit your recovery just to the cost of the work in process and raw materials allocable to the terminated work. Finally, you should ensure that your business is afforded the right to terminate the contract in the event the Buyer materially breaches the contract.
10. ENTIRE AGREEMENT CLAUSE
All contracts should contain an “Entire Agreement” clause– This agreement represents the entire agreement of the parties and supercedes all other oral and written promises, assurances, and agreements. This type of clause will prohibit future claims that oral promises were made.
11. PATENT/COPYRIGHT/TRADEMARK INDEMNIFICATION CLAUSES
Any clause agreeing to indemnify and hold the buyer harmless again infringement claims should be specifically tailored to limit your potential liability. For example, patent, copyright or trademark infringement can be limited to indemnifying the buyer for alleged infringement of U.S. patents, trademarks, and copyrights only. You should also have the right, at your option, to: (1) defend of any such action; (2) procure the right for the Buyer to continue using the goods, (3) modify the goods within a reasonable time so they no longer infringe a thrid party’s right or (4) refund the purchase price (preferably less depreciation). This part of the contract should also provide that you will not indemnify Buyer, and the Buyer will indemnify you, if the claimed infringement is a result of (a) the buyer's detailed specifications, (b) parts supplied or designated by Buyer, (c) modification of the goods, by someone other than your business, or (d) combination of your business' products with other products, the combination of which is alleged to be infringing.
12. CHOICE OF LAW AND VENUE TERMS
You want to ensure that your state’s law governs the construction and validity of your contract and that any claim or cause of action will be adjudicated in your local county, either in the state or federal courts or before an arbitrator.
13. CONFIDENTIALITY CLAUSES
In many instances a confidentiality clause is unnecessary, but where confidential information is being disclosed be sure to include a clause requiring both parties to maintain the confidentiality of proprietary information or enter into a separate non-disclosure agreement.
14. COMPLIANCE WITH GOVERNMENT REGULATIONS OR STANDARDS
If your products are regulated by certain government standards, the buyer will insist these standards be met. These requirements should be set out specifically in the specifications for the goods and specifically limited to those regulations and standards in effect on the date of the contract. Larger buyers may also insist on compliance with OSHA or other government regulations; this type of clause should be resisted, if possible, but if such a provision must be included, it should be treated in the same manner discussed above.
The contract clauses discussed above are by no means exhaustive, but they do represent some of the common commercial reasonable language that should be included in your purchase orders or sales contracts. Negotiate these clauses at the outset, reduce them to a writing and have your contract signed by the buyer BEFORE your business commences work under a sales contract or purchase order.