By UpCounsel Business Transaction Attorney Eric Kirkland

A company’s standard sales contract needs to be well thought out and, not only does it need to contain the right provisions, but the contract mechanics also need to be practical. There is no other agreement that is consulted more often to determine potential liability than a company’s sales contract.

Every state in the U.S. has adopted the Uniform Commercial Code with little modification, and that is the law that controls contracts for the sale of goods. The UCC is sometimes seen as the gap filler law; if the sales contract is silent on some issue, the UCC will provide the terms in which the parties must live by. The UCC has been fantastic in that it has prevented contracts from failing for lack of specificity within the document, however, some of the terms that will, in essence, be placed in your agreement if your agreement is silent, may not always be acceptable to you. You want your sales agreement to appear warm to your customers, but there needs to be teeth in it as well.

The provisions below are designed to work together to accomplish one of the biggest issues in many sales contracts: the “Inspection” and “Acceptance” of a shipment.

A buyer’s rights are vastly different depending on whether the customer has accepted the goods or is inspecting them before they accept them.

Below is the critical trio of clauses to make sure the Master Agreement terms apply and that the transaction is pushed quickly through the inspection phase – where the customer has many rights – and into the acceptance phase where you can control the rights and remedies of the customer through a well-drafted warranty provision.

Step One: The Two Document Approach

Before getting into the terms, it is important to realize that for most businesses, it’s not practical to hand a customer a big thick contract to sign every time they make a purchase.

Whether your business is an ecommerce business or a more traditional wholesale distribution company, you should create a Master Agreement that only needs to be signed once: when the customer opens the account.

Subsequent sales orders reference the terms of the Master Agreement by stating that that the Master Agreement previously signed by both parties is hereby incorporated into this sales order. The Master Agreement serves to prevent a rogue salesperson from making critical changes to the terms in a sales order or invoice that violate company policies. The first clause in the Master Agreement says that the terms in the Master Agreement control if there is a conflict between the sales order or invoice and the Master Agreement. The clause below ensures that the Master Agreement controls:

Standard Clause Making the Master Agreement Controlling: Buyer acknowledges and agrees that the Standard and Conditions of Sale (the “Standard Terms”) are incorporated in, and are a part of, each purchase order or sales order agreement relating to the provision of goods and/or related services by Seller, whether expressed in written form, by electronic data interchange or otherwise (each referred to as a “Contact”). These Standard Terms supersede all conflicting or additional terms pre-printed on any purchase order or otherwise set forth on any release, acknowledgement, confirmation, requisition, work order, shipping instruction, specification and similar document or communication.

Step Two: Control Acceptance of the Goods.

The UCC provides that a buyer of goods has reasonable time – in light of the industry customs – to inspect the good before they “Accept” them to make sure the goods conform to the invoice.

In this inspection phase, the buyer has much broader rights and remedies than they do after they have “Accepted” the goods. Once the goods are accepted, if the contract has a well-drafted warranty provision, that provision will control the rights and remedies of the buyer.

Every industry is of course different. For example, obviously selling ice cream over the counter has a very short inspection period, but a truckload shipment of widgets that don’t spoil, then 90 days could be a reasonable inspection period. The acceptance provisions focus on moving the transaction through a quick inspection phase and right into the acceptance phase so that your warranty provision will control a potential product return.

Standard Acceptance Clause: Buyer acknowledges and agrees that the buyer has (X days, hours, etc) to inspect the goods from the time the goods have been picked up by buyer or their representative or after the goods have been delivered to the destination in the invoice or an place that the buyer typically receives goods from Seller. Buyer must notify the Seller if the goods are being rejected as non-conforming goods by email sent no later than (X days) after receipt including the invoice and transaction number, the goods that Buyer believes are non-conforming and the details of why Buyer asserts the goods are not conforming. Failure to notify Seller within (X days) will be deemed acceptance of the goods and any subsequent product issue with being controlled by the product warranty section of this Agreement.

Step Three: Control the Rights and Remedies of the Buyer

During the inspection phase, the buyer has a broad set of rights and remedies available to them if they reject the goods including bringing suit against the Seller for damages beyond the value of the goods. Once the buyer accepts the goods, then the contract can control what remedies they have against the seller for defective goods. Warranty provisions can be long and tailored to the particular product, however, what you want to make sure to do is to reduce the remedies available to the buyer to no more than repair, replacement or refund. Each product is different, and no one size fits all, but, below are good examples of a warranty provision:

Limited Warranty: The warranty obligations of Seller for goods sold by Seller will in all respects conform and be limited to the warranty extended by the manufacturer of such goods, if transferable. The sole remedy available to Buyer on defects in such goods will be against such manufacturer under any applicable manufacturer’s warranty to the extent available to Buyer. TO THE EXTENT THE MANUFACTURER WARRANTY IS NOT TRANSFERABLE TO BUYER, SELLER MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO OR IN ANY WAY RELATING TO THE GOODS, WHETHER BASED ON BREACH OF WARRANTY OR CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

Limitation of Liability: Except as provided for herein, in no event will Seller be liable for any indirect, incidental, special, consequential, punitive or similar damages including, but not limited to, lost profits, loss of data or business interruption losses. In no event will the total, aggregate liability of Seller under the Contract exceed the value of the Contract under which liability is claimed. The liability limitations shall apply even if Seller has been notified of the possibility or likelihood of such damages occurring and regardless of the form of action, whether in contract, negligence, strict liability, tort, products liability or otherwise. The parties agree that these limits of liability shall survive and continue in full force and effect despite any termination or expiration of any Contract. Any action by Buyer against Seller must be commenced within one year after the cause of action has accrued. No employee or agent of Seller is authorized to make any warranty other than that which is specifically set forth herein. The provisions in any specification, brochure or chart issued by Seller are descriptive only and are not warranties. The Seller shall have right to elect to repair the goods purchase, replace them with an equivalent item or provide the buyer a refund. If Seller repairs, replaces or refunds the Buyer, the Buyer agrees that it is the Buyer’s exclusive remedy under this contract.

There are many important provisions in a sales contract, however, the three above are among the most important in any sales agreement. They work together to reduce potential liability dramatically, put the remedies to solve a bad product issue in the hands of the seller and make sure that provision applies even if the rogue salesperson makes promises of which the company is not aware.

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About the author

Eric Kirkland

Eric Kirkland

Eric is an entrepreneurial business attorney who serves the needs of businesses and entrepreneurs, including drafting contracts and contract review, incorporating and forming LLCs, intellectual property, private placements and venture capital, strategic partnerships, stockholder agreements, software and technology licensing, general business operations and business litigation. He has served as President & General Counsel of a publicly traded holding company for two years and was the founder and CEO of a company that grew to $10 million in revenue.

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