Contract Negotiations - Terms & Conditions

This Wisdom of the Crowd, compiled from questions and responses posted on the Small Law Departments eGroup*, addresses issues involving negotiating terms and conditions. The issues discussed include:

*(Permission was received from the ACC members quoted below prior to publishing their eGroup comments in this Wisdom of the Crowd resource.)

I. Avoiding Restrictive Terms & Conditions

Question:

We sell hardware/software solutions to a wide variety of large Fortune 100 companies and government contractors. In each case, we are bound by our customer's purchase order terms and conditions. Some state a specific product warranty period, some do not. What are some best practices around managing the risk of large variances in product warranty periods?

Our product marketing materials and quotes state the standard warranty. But the PO Ts&Cs usually exclude them so we have been asking the buying agents to either revise the PO to accept our standard warranty or accept it via email. But it is a labor-intensive effort since we deal with a large number of smallish-dollar orders.

Wisdom of the Crowd

Response #1

Here is how we deal with this. When my company receives a request for quotation, our response necessarily states the price, standard warranty period, payment terms, quote duration. It also contains a disclaimer:

"Your subsequent submittal of any purchase order indicates acceptance of these terms. The price quote is based on [Company's] Standard Terms and Conditions of Sale, available at _________ ."¹

Response #2

We use very similar language on our quotes. We use blurbs like that everywhere we can (quotes, sales emails, etc.) with the idea that they add up to a critical mass where we could argue "how could the customer not have been aware of our standard T&C's? He was told about them and furnished with a link ____ times". Fortunately, we have not yet been in the position of testing that argument. The blurbs are just one of a series of backstops we have in place to ensure our T&C's apply.²

Response #3

Another way to accomplish the same goal of protecting a supplier from an unacceptable standard warranty of a buyer and other terms in a Buyer's PO Terms and Conditions is in the following statement.

Quotations.

A quotation is an offer to sell, is valid only for the buyer's 3D CAD model on which it was based, and is subject to these terms and conditions, all of which are deemed incorporated therein. Any change to the 3D CAD model requires an updated quotation. Quotations are valid for 30 days, after which pricing may change without notice. Seller reserves the right to correct clerical and other patent errors in any quotation.

Offer and Acceptance.

This document from Seller, together with a valid quotation, contains the entire terms and conditions associated with this transaction. The buyer may accept a quotation by issuing a purchase order or other writing expressing its intention to be bound, or in any other manner acceptable to Seller. Any terms, conditions or writing within such a purchase order or writing addressing the subject matter of this transaction, shall be for the buyer's internal purposes only and the terms and conditions contained therein shall have no force or effect. Seller objects to any different or additional terms or conditions contained in any request for quotation, purchase order or other writing or document of the buyer, and no such different or additional terms shall be effective or binding upon Seller unless agreed to in writing and signed by an officer of Seller." ³

Response #4

In the auto industry, this comes up all the time. Suppliers are leery of the 10yr/100k miles warranty that some OEM's ask for. The issue comes down to an actuarial problem. Instead of trying to approach it from a legal perspective, look at it from an underwriting perspective.

If you are in complete control of your own product, then you ("you" being the plural 3rd person) know your product best. What is the likelihood that it will break/malfunction within the period being asked, and what is the most likely malfunction/failure mode, and are you able to bear the financial downside risk if that bit of stuff were to hit the fan?

In the auto industry, of course, this becomes complicated because there are multiple layers of suppliers involved. If I am supplying the air bag control and deployment system, but I only make the controller and I don't myself make the air bag igniter, then I have to assess my level of confidence in the supplier who makes that igniter.

So, back to your dilemma that, indeed, blue-penciling every proposed purchase order is "...a labor-intensive effort since we deal with a large number of smallish-dollar orders", if you are 99.999% confident that your product is doggoned bullet-proof even when wet and left in the dark for two weeks, then don't sweat whether company X asks for three years and company Y asks for ten. Either you do or you don't have good confidence in your product.

Software tends to not have too many consumable parts that wear out, but perhaps the interface/data-exchange issues are where the biggest risks lie. "Hardware" does "wear out" and so that is probably where your product and warranty people need to sit down and do a thoughtful assessment of what components/systems are most likely to fatigue or have a maximum life cycle.

So, by way of example, if the consumable part most likely to wear out after two years is a $0.35 battery, and there's a 95% likelihood that indeed every single battery will be dead by the 3rd year, then your company needs to decide whether buying $0.35 batteries for every customer who asked for a warranty beyond two years is a "cost of doing business" that you can live with.

You can never "guarantee" anything never go wrong. What you are warranting, therefore, is that on the chance that something does go wrong, that you'll stand behind your product.⁴

II. Battle of the Forms: Conflicting Terms

Question:

Do you actually put the Offer and Acceptance statement in your quotations? I think it would be sufficient to keep it as the first paragraph of the terms and conditions, which are referenced.

Can anyone attest to the enforceability of these provisions? Have you been successful in a lawsuit, especially when it relates to construction?

Wisdom of the Crowd

Response #1

I find it curious that, instead of addressing the issues head-on, the consensus response seems to be to simply pile your standard language on top of the opponent's standard language, and to leave it all for another day. Or to then see if later whether a court will sort out the battle of the forms to favor you or to favor the other guy. Given that it's a coin toss, basically, on which form will win in a battle of the forms, isn't the better business/legal advice to determine whether you need to worry about "their" warranty period being the one enforced in the first place? Again, if you're warranting against a hardware failure in the first (1)(5)(10)(100) years, then your company is best to do the fault-cause-root analysis up-front on your product to determine what is most likely to fail/wear-out/fatigue in that first (1)(5)(10)(100) year time span, and to then decide if replacing the failed/worn/fatigued portion is a cost-of-doing-business that you can live with.⁵

Response #2

Why bother with all the standard language about whose form will control if you do not know if it will be effective? It is better to negotiate and agree the terms and conditions than to rely on your form. That way you avoid the uncertainties of the battle of the forms.

For example, what if the customer's purchase order terms provide that the seller warrants that their product is not defective and will indemnify the customer from any defects? The best legal advice is to precisely define what is meant by defective and what is warranted (e.g., meeting certain specifications). Do not just rely on your quotation standard terms governing instead of the customer's PO. It is too risky.⁶

Response #3

It is possible that occasionally a quotation containing specific terms like price, quantity, and delivery terms may be considered as an offer for sale. Generally, however, a quotation is considered an invitation for an offer. Unfortunately for us representing sellers, the UCC is drafted to favor buyers in this respect.

Since ALL buyers have their set terms and conditions referenced in purchase orders, seller is left with two choices. One is to blue-pencil every objection to every PO (an impossible choice for a business of any substantial volume of sales). Another option is to take steps that would assist in winning the battle of the forms. These include having a disclaimer on quotations I mentioned earlier, never signing a customer PO, responding with own acknowledgement form that constitutes acceptance of PO but is expressly limited to company's own terms and conditions. I use the word "assist" in winning the battle of the forms, because the chances of the seller winning the battle are slim. Especially, when seller's limitation of liability clause is "knocked out" and the UCC gap-filler consequential damages clause steps in.

The only viable solution is to have a General Terms Agreement - agreed upon general commercial terms - with frequent buyers. Once two companies can agree on set commercial terms, which may or may not include a warranty term, all POs would reference this agreement and need only reference the specifics, like price, quantity, delivery, payment terms.⁷

Response #4

I have been researching this topic as well, i.e. how to protect Seller from being saddled with Buyer's T&Cs. From what I have read, it would appear, with regard to sale of goods, that quotes are typically interpreted as merely an initiation for an offer-whether a quote can be deemed an offer depends on the manifest intent of parties to be bound based on the terms of the quote, and not just the statement that the quote is an offer to sell. Are the terms of the quote sufficient in detail such that all the buyer needs to do to accept and form a contract is to say 'yes' to the quote-, i.e. the terms of quote be reasonably interpreted as the seller's commitment to enter into a bargain for the subject of the offer? Are 'dickered' terms definite enough?

I believe a major sticking point can be indefiniteness with regard to quantity ---UCC has gap fillers for some indefinite terms (delivery, price, warranty), but it does not for quantity (excluding requirement contracts) and lack of quantity to be sold in the 'quote" may undermine its ability to claim it as an offer (see 2-(204)(3) Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy -- difficult to form a remedy where you can not calculate damages due to lack of quantity).

Where a quote is not deemed an offer, then typically a Buyer's P.O. is caste as an offer---usually with its own set of terms and conditions attached. The only certain way for Seller to avoid getting into the battle of the forms (and being either subject to Buyers terms or having to be subject to UCC gap-filler terms under 2-207(3)) is to have the Buyer expressly assent to Seller's terms – e.g. have the Buyer sign-off on Seller's Sales Acknowledgment Form or other Seller document with Seller's T&Cs incorporated or otherwise have parties execute a separate contract for the goods; mere acceptance of goods by Buyer is not enough to create assent to Seller's terms.

I too liked the language from Response #3--but if the quote, like most quotes I have seen, only gives a description of the good and a price, and perhaps other standard terms –(warranty, delivery) –is that sufficient to have it enforceable as an offer?⁸

Response #5

We have master terms agreements with several customers. The master terms includes this provision:

Integration. THIS AGREEMENT CONTAINS THE FULL UNDERSTANDING OF THE PARTIES AND SUPERSEDES ALL OTHER AGREEMENTS, UNDERSTANDINGS, OR REPRESENTATIONS BY OR BETWEEN THE PARTIES, WRITTEN OR ORAL, REGARDING THE PRODUCTS AND THE SUBJECT MATTER OF THIS AGREEMENT. NO ADDITIONAL TERMS, CONDITIONS, CONSENT, WAIVER, ALTERATION, OR MODIFICATION SHALL BE BINDING UNLESS IN WRITING AND SIGNED BY BOTH PARTIES. Acceptance of any order by Seller is expressly limited to the terms and conditions of this Agreement. Any proposed additional or inconsistent terms or conditions, including those in or accompanying any Reseller proposal, any Reseller purchase order, any EDI or other agreement or any other Reseller document issued in connection with the sale or delivery of Products or services is deemed by Seller to be a material change and is objected to and rejected by Seller. Seller's acceptance of any orders will not constitute acceptance of any terms and conditions contained therein.

It may be a little overkill, but I don't mind overkill on this topic.⁹

III. Dealing with Hard-line Negotiators

Question:

In dealing with more and more (large) customers with draconian terms and conditions posted to a web site which completely negate all your own terms and conditions (see example below) does anyone have an approach which would not completely cause the management and sales team to completely go off the deep end by suggesting negotiating???

Acceptance of this Order is expressly limited to the terms and conditions contained herein. No other terms and conditions shall apply, including any terms or conditions contained in any Seller quotation, acknowledgment, response hereto, or other form which is in addition to or different than the terms and conditions contained herein.

Wisdom of the Crowd

Response #1

That language is standard boilerplate. I still negotiate the terms that are unfavorable and most often make them sign our MPA. I explain to sales why we cannot accept certain language- the legal and business risk.¹⁰

Response #2

If I find myself stuck with an obstinate party (and internal client), I try to salvage what I can - I'd accept the offending language after advising the client of the risk, but then seek to carve out those provisions that matter most -- an indemnification, choice of law, etc., so they come back into play. If the risk that is posed, however, is significant or I run up against resistance even to that approach, I would escalate it for a senior business manager's call once all pertinent facts are disclosed. Important bit of advice: Don't take it personally if you run into a brick wall. Give the advice, zealously represent the client, advocate internally (while being politically astute) -- and then move on.¹¹

Response #3

In the end, the courts will look at this as a Battle of the Forms. We have the so-called Last Shot doctrine and the Knock-Out rule. Meaning, conflicting terms will drop out and UCC provisions will be substituted. I believe many states and countries are embracing the Knock-Out rule these days.¹²

Response #4

There really is no way around this dilemma - you have to deal with it head on. The problem also occurs with standard purchase order T&C's that are inserted on the backside of the PO and in fine print, not just those referred to on a web site. It took some time for me to convince the sales team (and purchasing) that we needed to specifically negotiate terms and conditions for ALL customers and our larger and more strategic suppliers. What turned the corner was one good lawsuit that allowed a customer to terminate for convenience after we had spent a lot of money on tooling out-of-pocket, plus the risk that we would owe the other side's attorney fees if we lost, but they did not have a similar obligation if we won. I was able to point to several memos in which I urged the importance of negotiating T&C's, which were ignored. It got the attention of the CEO (a former sales guy) who then laid down the new rule that all form T&C's needed review by legal.

Many of your sales guys do not consider T&C's a "contract". Go figure. They also think the customer will be unwilling to change them for you - especially if they are on a website that you cannot talk to. (In fact, I have been able to negotiate changes in shrink-wrap T&C's on purchased software - the ultimate take-it-or-leave-it perception.)

To be fair, when a contract is presented to you, the turn around time has to be short so that you are not seen as holding up a deal. I usually am able to turn it around in 24 hours. And I don't major in the minor - each industry has its usual hot button issues and you should focus on those. I do not try to re-write every paragraph that I may have a concern with - only those that have significant risk to us in the specific fact situation. Where we meet a refusal from the other side, we have an internal discussion and decide whether to accept the risk as a business decision - not a legal decision.

This is an issue you need to be firm about and explain that all companies face this issue and that T&C's are routinely negotiated. I presume your customers ask you to revise your T&C's from time to time. We don't have our T&C's on a website, but I don't think there is a difference in how you should approach it. Our purchasing department does not click "accept" until I have reviewed the digital terms.

If sales and purchasing understand they can have quick turnaround and that negotiating T&C's is not unusual, and therefore they will not likely be losing a sale, you won't face a lot of flack. But it takes support from the top decision-maker to enforce this practice.¹³

Response #5

The question all comes down to the risk/likelihood that you will be enforcing contract terms "at" each other. "Big companies" tend to have ridiculous terms e.g. you give them a royalty-free perpetual license to use any/all of your IP that might be contained in the product you are proposing to sell to them. You can wring your hands, or you can ask yourself whether you'd ever bother to try to sue BigCo for infringing your IP in the first place. The most likely scenario for this hypothetical would be BigCo sourcing LowBallCo to make your product for them instead of you, because LoBallCo is just building to print versus investing the time/energy in having developed your product in the first place. So, if this scenario came to fruition, would your company have the internal fortitude and the multi-million dollar war chest to sue BigCo and/or LoBallCo for infringement? If the answer is "no", then why wrangle over negotiating that out of BigCo's ridiculously overbroad T&C's because it's not something you'd miss anyway. In the world of co-parenting with an ex-spouse, this is called deciding is this is the hill that you want to die upon. The better way to protect yourself is to never give BigCo sufficiently detailed drawings/specs such that they could hand them to LoBallCo and have LoBallCo start making your product instead of you. If BigCo realistically needs outer dimensions ("envelope") and interface/wiring info, then give them only that but don't give them the full detailed drawings/specs that explain how to make everything inside that envelope.¹⁴

Response #6

If you have a signed agreement with your customer that contains a standard "entire agreement" clause, including a provision that all changes need to be signed by both parties in order to be binding and that all additional or different terms are rejected and excluded, nobody is going to try to argue that the browse-wrap trumps the signed agreement.

If you don't have written agreements, and if the UCC applies, you should be able to rely on the "last shot" rule to trump your customers' terms with you own equally draconian boiler-plate acceptance document.¹⁵

Response #7

If you have a clause in your agreement that it can only be modified through a writing signed by both parties, then any "click-wrap" terms posted on the other company's website should have no effect on your agreement. Unless your agreement lacks a standard provision like that, or there's something I'm missing, I don't see a problem here.¹⁶

¹ Natalya Vasilchenko, Contracts Attorney, Kulite Semiconductor Products (Small Law Departments, Oct. 4, 2012). ² Everett Billingslea, Chief Legal Officer & Senior Vice President, Lynden Incorporated (Small Law Departments, Oct. 5, 2012). ³ Charles Barry, Director of Contracts & Compliance, Proto Labs, Inc. (Small Law Departments, Oct. 5, 2012). ⁴ Laura Vogel, Assistant General Counsel, The Auto Club Group (Small Law Departments, Oct. 5, 2012). ⁵ Laura Vogel, Assistant General Counsel, The Auto Club Group (Small Law Departments, Oct. 9, 2012). ⁶ Russell Fink, Vice President & General Counsel, Titan America (Small Law Departments, Oct. 10, 2012). ⁷ Natalya Vasilchenko, Contracts Attorney, Kulite Semiconductor Products (Small Law Departments, Oct. 10, 2012). ⁸ Elise Nulton, In-house Counsel, Zeptometrix Corporation (Small Law Departments, Oct. 10, 2012). ⁹ Anonymous (Oct. 2012). ¹⁰ Karen Guthrie, Senior Contract Manager/Counsel, iDirect (Small Law Departments, Jan. 23, 2012). ¹¹ David Schonbrun, Head of Legal, Hiscox (Small Law Departments, Jan. 23, 2013). ¹² Anonymous (Jan. 2013). ¹³ Jeffrey Turner, Senior Vice President, General Counsel & Secretary, Metal Technologies, Inc. (Small Law Departments, Jan. 23, 2013). ¹⁴ Laura Vogel, Assistant General Counsel, The Auto Club Group (Small Law Departments, Jan. 23, 2013). ¹⁵ Hebe Doneski, Vice President, Deputy General Counsel, JDA Software Group (Small Law Departments, Jan. 23, 2013). ¹⁶ Michael Cremata, Corporate Counsel, ClosingCorp Inc. (Small Law Departments, Jan. 23, 2013).

Published on February 20, 2013