A common but serious mistake of UK companies selling goods in the United States is the assumption that the terms and conditions they use in the UK will be effective under US law. Terms and conditions in both the UK and the US are meant to accomplish the same objectives: To minimize liability while maximizing flexibility in conducting the transaction. Unfortunately, when terms and conditions are not properly drafted, a UK seller can fail in both these objectives and additionally become vulnerable to damages and losses far in excess of the value of a sale.
This article will touch upon a few key areas where every seller of goods in America must be sure to protect himself with properly drafted provisions. Most such provisions derive from The Uniform Commercial Code, Article 2 (UCC), a complex and elegant code designed to facilitate sales by enforcing contracts, even where many of the details of the contract have been left unclear or even absent. In this regard, the UCC fills gaps in a poorly drafted document, often to an unwitting party’s detriment.
WARRANTY DISCLAIMERS. In the absence of a precisely drafted disclaimer, the UCC implies 3 warranties into all sales of goods. The first is that the seller has proper title to the goods and that the goods are not subject to a security interest or lien. The second implies that the goods meet certain minimum standards of quality so as to, for instance, pass in the trade without objection. Finally, the third implied warranty states that when the seller is aware of a particular purpose for which the goods are being purchased, the seller impliedly warrants that the goods will be fit for that purpose.
While each of these implied warranties can cause a seller some concern if their extent is not fully understood, the third, fitness for a particular purpose, can be the most treacherous. If the seller is even arguably aware that products sold will be used for a purpose for which they might not be adequate, then a properly drafted disclaimer that meets UCC requirements must be included. In the absence of such a disclaimer, the seller could be liable not only for immediate losses of the product’s failure in that purpose, but also for what is known as “incidental and consequential damages “. These are the damages that can cause an unfortunate situation to become a very serious loss.
LIMITATION OF DAMAGES. By default, the UCC provides that a buyer may recover both incidental and consequential damages, the latter being any foreseeable consequences incurred as a result of the seller or the product to properly perform. By way of extreme example, this means that in the absence of a properly drafted limitation of damages provision, the seller of industrial coatings not recommended for use on ocean going vessels could be liable for any and all damages resulting from damage to the vessel while at sea, including loss of cargo and possibly even the vessel itself!
A properly drafted limitation of damages provision will not only exclude liability for incidental and consequential damages, but will additionally limit damages to the price of the goods or some greater but definite and predictable amount acceptable to both buyer and seller.
EXCLUSIVITY OF REMEDIES. Remedies are the vehicles through which damages are obtained. The UCC allows for a series of remedies. Simply limiting damages does not limit the number of remedies through which those damages can be obtained. A limitation of remedy to repair and replacement is the most acceptable to sellers and can be effective, so long as the terms and conditions make clear that such remedy is exclusive and that all other remedies are disallowed.
INDEMNIFICATION. Indemnification, an arrangement whereby one party protects another from liability to a third party, is common in sales contracts. Both sellers and buyers may insist upon indemnification clauses for their own protection, depending primarily upon the type and uses of product being sold and the risks it may pose to third parties. Indemnification clauses must therefore take account of the type of risks being indemnified as well as the extent of foreseeable loss and type of damage. In the example above, an indemnification clause may require the buyer of industrial coatings to “hold the seller harmless” from any suits based upon improper use of the product. Where an indemnification clause is unclear or subject to broad interpretation, the field for dispute between a buyer and seller likewise broadens and can mire a party in unnecessary costs, delay and even litigation.
DELIVERY, PAYMENT TERMS AND RISK OF LOSS. In the UCC, these three areas are all inter-related and interdependent. Where there is lack of clarity in the agreement, default terms provided by the UCC may prove very disadvantageous. For instance, it is quite possible that in an interplay between the UCC and a poorly drafted contract, a UK seller faced with goods lost or damaged en route to the buyer, might think that delivery has been effectively made giving him the right to payment, only later to find that he has lost both the goods and the right to payment. Further, if correct language has not been used as regards sales in parts, instalments or setoff, the seller could find himself on the hook to continue with an unprofitable bargain or face costly dispute resolution.
When considering UK terms and conditions for the US market, the old proverb “a stitch in time saves nine” is entirely applicable.