Fortifying Your Customer Contracts
By Max Julian, Attorney at The Gertsburg Law Firm
For business done on the final leg of the chain of commerce—that is, directly to the customer—agreements for the sale of goods or services should be especially well thought out. Customers often lack knowledge of your industry and yet they may be very critical of the goods or services they receive. For this reason, your customer contracts should set reasonable expectations and account for every contingency.
Terms & Conditions
Detailed Description of the Goods or Services. A thorough description of the goods or services to be provided under the contract may help you avoid protracted disputes with disgruntled customers down the road. Be sure to include specifications for your goods and/or define the goal and scope of the services you will provide; you may also want to provide a list of exclusions that describes what you or your products will not do. Where appropriate, include a completion or delivery timetable, although you might consider qualifying the timetable so that completion or delivery dates are “estimated.”
Pricing Terms. Total amounts owed, discounts offered, taxes and penalties assessed, amounts and dates of each payment (assuming the contract has a payment schedule), installation or delivery fees—these items should be standard in every customer contract. For agreements between buyers and sellers with long-term relationships , you might consider including price adjustments to account for market conditions. Conversely, fixed rates may be more appropriate for some output and requirements contracts.
Warranties. Sellers of goods and service providers sometimes find themselves on the hook for fulfilling warranties. Warranties can be either expressly spelled out in the contract’s language, or they can be implied under the law. A baseline express warranty can be the promise to provide a functional product, in which case it would constitute the “basis of the bargain.” Such warranties cannot be disclaimed. Even so, contracts for the sale of goods should limit express warranty recitals as much as possible, and they should carefully disclaim implied warranties such as:
• Freedom from defects (by stating that the item is sold “as is” or “with all faults”);
• Merchantability (by specifically referencing “merchantability”); and
• Fitness for a particular purpose.
Importantly, disclaimers of implied warranties must be CONSPICUOUSLY WRITTEN into the contract. If you plan on including a repair or return warranty, you should consider what is normal in your industry.
Limitations on Liability. Beyond those warranties that you’re required to and comfortable making, you want to limit your liability to the customer as much as possible. A good start would be capping the buyer’s maximum recoverable money damages at the purchase price of the goods or service. You can (and probably should) also exclude consequential, punitive, and speculative damages. Depending on the breadth of the limited liability statement, some elements of the provision may not be enforceable; however, it does not hurt to include strong language as long as you also include a severability or separability clause. Severability clauses prevent unenforceable clauses from rendering surrounding language (as well as the entire contract) unenforceable.
Intellectual Property Ownership. If you utilize your patents, trademarks, copyrights, or trade secrets to provide your goods or services, it is extremely important to assert your ownership of the underlying intellectual property. After all, the customer is purchasing a good or service from you—not the underlying blueprints, branding, etc.
Dispute Resolution Procedures. Requiring the parties to adhere to a contractual dispute resolution procedure can help avoid escalating disputes with customers to costly litigation. If a dispute does arise, it may be a good idea to require mediation before litigation or arbitration instead of litigation, especially if the controversy involves a large sum of money. Mediation allows for early negotiations outside of the court system, and it can save you substantial legal fees; whereas arbitration is a cheaper, more streamlined alternative to litigation.