1

Warranty.

Sellers may provide a full warranty, a limited warranty, or no warranty. Some warranties, unless disclaimed, are implied, i.e., automatically included. Often purchasers also ask for specific, i.e., express warranties. Look carefully for warranties regarding "merchantability" and "fitness for purpose." These are legal terms that have defined meanings and may go beyond the obligations you would ordinarily commit to as a seller based on information that your customer shares with you. If you accept these terms or fail to modify or disclaim them, it may have the effect of shifting the risk regarding the quality and selection of suitable goods from the purchaser to you. Be wary of accepting any implied warranties or express warranties. Also, be sure to limit any warranties you provide to a specific period of time and include any qualifiers that may void or limit your warranty.

2

Liability.

If you breach the agreement the purchaser will want you to pay for all damages or losses attributable to your breach. This amount may be out of all proportion to the size of the contract. Give some thought to not simply accepting this term without any limitations. Often, it is quite reasonable to insist on a limitation on damages. A purchaser may accept a proposed cap or ceiling on the amount of total damages to be claimed. Sellers frequently use the value of the contract or a stated amount of money as a cap. Additionally, you should try to detail in your agreement the kinds of damages the purchaser can, and cannot, sue you for.

3

Consequential Damages.

Generally, there are two kinds of damages: "direct damages" and "consequential damages." Direct damages result directly from the breach, such as the cost to repair the goods or complete the work. Consequential damages, also known as indirect or special damages, include the purchaser's loss of profit or revenue, business interruption, etc., and may be recovered if these damages are proven to be reasonably foreseeable or within the contemplation of the parties. Consequential damages may be all out of proportion to the direct damages and/or to the underlying value of the contract. Disclaim responsibility for consequential damages if possible. Having both a limitation on total liability and a disclaimer of consequential damages in the contract puts you in the best position to sustain a manageable claim for damages in the event of your breach.

4

Indemnity.

Indemnity is a concept designed to make the purchaser whole again if the purchaser becomes subject to third party claims as a result of your breach. When contracting with the purchaser you have three choices: provide a full and complete indemnity; deny or disclaim the indemnity; or negotiate and modify the indemnity. Which alternative is best depends on many factors including the liability insurance program you have in place. At a minimum, you may want to consider limiting any indemnity you provide to the value of your product liability or other insurance coverage limits. That eliminates the possibility of exposing your business to indemnity claims by the purchaser in excess of the limits, which would then otherwise have to be paid out of your general assets if you are found liable. Any indemnity you provide should relate only to your own acts or negligence. A balanced, fault-based approach is fair.

5

Termination.

Often, a purchaser will not allow you to terminate the contract without cause or without notice, but will retain its own right to do so. If a purchaser terminates "for convenience," you may be exposed to costs you cannot recover. Fortunately, most purchasers' terms treat the seller fairly in this case, usually indicating that the seller is entitled to its costs expended to date of termination and any other costs not reasonably preventable prior to the termination notice. You should make sure you have at least this amount of protection. Consider having a provision that allows you to recover your administrative or overhead costs allocated to the order, or a pro rata share of the profit you anticipated to be made on the order. This protects you and it serves as a potential disincentive to the purchaser to cancel the order without cause if it knows it will be responsible for these additional costs.

6

Conclusion.

Commercial purchase orders can be long, daunting to read, and frustratingly complex. Although each term and condition is important, if you can focus on the critical items that pose the most potential for shifting risk to you if things go badly, you will be in a better position to protect yourself and your business.