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Crafting a Strong Sales Contract
Well-written contracts are key to protecting your business.
Posted May 20, 2009
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Imagine that for 10 years, you have sold goods to a customer with nothing more than a call and a handshake. Your customer, in turn, sells your goods to the end user. For as long as you can remember, your customer and the end users have been very happy with the performance and durability of your goods. However, the goods in your most recent shipment are not holding up well, and the end users are demanding their money back and taking their business elsewhere. Now your customer is suing you, and the relationship which had been so profitable for so many years is threatening the very existence of your business.

Although we all hope for long-lasting relationships with customers, disaster can strike. Therefore, sellers must protect themselves in all relationships with a strong, well-written sales contract. The sales contract need not be long, complicated, or wordy and one such contract can govern a relationship for years. This article focuses on four key provisions which should be included in all sales contracts.

Warranty disclaimer

Sales contracts should include a clause waiving all express and implied warranties. Under the laws of most states, every sale creates implied warranties that the goods will conform to the standards of the industry and will hold up if used properly or in accordance with a salesperson's recommendations.

Most states permit sellers to waive these warranties in a sales contract. The warranty disclaimer must be "conspicuous" and include specific language to be effective, such as "seller disclaims any and all representations and warranties." Properly written, this disclaimer can save your company enormous amounts of time and money in litigation, if your goods happen to fail.

Liability limitation

Many states allow companies to limit the amount customers can recover in court if goods are non-conforming through a "limitation of liabilities" clause. Consider a scenario where you sell goods to Company A for $100,000, who, in turn, sells your goods to Company B. If B sues A claiming that your goods are non-conforming, A could claim that your goods caused B to stop doing business with A, resulting in substantial lost profits to A. So, although the contract price for the goods was $100,000, Company A could claim lost profits of $1,000,000 or more. Such a claim could destroy your business.

A well-written limitation of liability clause will explicitly state the type of damages the customer can sue you for, and, more importantly, the type of damages for which the customer cannot sue. For example, you can limit the amount your customer could win to the actual contract price of the goods sold.

Choice of law/forum selection

Sellers can maintain the home field advantage by including choice of law and forum selection clauses, which state that all disputes relating to the goods sold will be litigated and decided in your state under its laws. Without these clauses, you may find yourself litigating a dispute in a courtroom 2,000 miles away instead of within miles of your business. It is important to explicitly identify which state law controls and in which state the litigation will occur. It is also necessary to have your customer waive any objection to personal jurisdiction-that is, you want your customer to waive any argument that your state's courts have no power to hale him there for court or to decide the case.

Risk of loss

Including a risk of loss provision in a sales contract can also help you save money. Imagine your customer places an order with you and decides he will contract with XYZ Delivery Company to pick up the goods from your warehouse. Based on your experience, you wouldn't choose XYZ to deliver the goods because its drivers regularly damage goods. Without fail, XYZ destroys the goods that your customer ordered, and now your customer wants you to pay for the damage. You can protect yourself from having to pay if your customer chooses a bad carrier by putting a risk of loss clause in the sales contract. This clause makes the customer responsible for any damage that might occur to the merchandise while in transit if he selects the carrier.

Conclusion

Ultimately, a well-drafted sales contract is beneficial to both seller and buyer. The seller protects itself from costly litigation and can keep prices lower for the buyer as this risk would otherwise need to be factored into the purchase price of its goods. Although this article offers a thumbnail sketch of key clauses, in order to be effective, the language in these clauses must be specific and the sales contract must be tailored to the state law and to issues for your particular business and its bottom line.

About the Authors

Steven N. Malitz (snmalitz@arnstein.com) is a partner in the litigation department of law firm Arnstein & Lehr LLP (www.arnstein.com). He has extensive experience representing public and privately-held businesses in sophisticated litigation and transactional matters. Timothy W. Tyler (twtyler@arnstein.com) is an associate in the Chicago offices of Arnstein & Lehr LLP and focuses his practice on business law.

Please note that the Viewpoints listed in CRM magazine and appearing on destinationCRM.com represent the perspective of the authors, and not necessarily those of the magazine or its editors. If you would like to submit a Viewpoint for consideration on a topic related to customer relationship management, please email viewpoints@destinationCRM.com.

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