Vol. 85, No. 2, February 2012
Litigators are the perpetual Monday-morning quarterbacks of the legal profession. Slicing and dicing four-sentence segments of lengthy, detailed contracts, we quibble that the language should have been more narrowly tailored to the unlikely turn of events that has just resulted in a lawsuit. But occasionally, the same hindsight that makes litigators such pests yields useful insights.
The enormous impact that boilerplate language in standardized contract forms – most frequently purchase order and product-invoice forms – can have is frequently seen in products liability litigation, during determination of which company in a distribution chain ends up paying when something goes wrong with a product. Some standardized forms are adequate but many are not. Here are a few tips for in-house and transactional attorneys from litigators about improving purchase order, invoice, and other standardized form contracts.
First, a note on organization All these tips apply to the drafting of standardized purchase order and invoice forms for companies and institutions that do enough high-volume purchasing or selling to have them (for example, hospitals, manufacturers, distributors, restaurants, retailers, and larger construction firms). Although this article pertains primarily to standardized sales contracts, tips 1 and 2 also apply to almost any type of standardized form agreement. Finally, for clients who do not have standardized forms but who, from time to time, either enter into supply contracts or make large purchases that could potentially expose them to extensive loss or liability, tips 4 to 7 provide information that should be considered in negotiating supply contracts or individual purchase agreements.
1: Fax It
Most forms are printed in 8-point font or smaller so as to reduce the space boilerplate terms occupy. You may look at a form and conclude that it is legible, but your criterion should not be whether the original is legible. What counts is whether a faxed or other replicated copy is legible. If your office uses fax machines or scanners to transmit form contracts, run some tests and examine the output. Remember, if it cannot be read, a court, or worse a jury, may discount it. Experiment with the font style and size until a faxed copy is truly legible. Bold typeface blurs when faxed; to avoid blurring, try increasing the point size of bold text. Make sure the fax banner line does not cover any text.
2: Fax It the Way Your Employees Will Fax It
To save paper, forms are frequently printed on the front and back of a single page, often with the key legal terms on the back. Double-sided printing comes with risks. Employees must either flip and re-feed the document or program the office scanner or fax machine to scan double-sided. Sometimes employees do not make this effort. Courts will not enforce great legal clauses on the backs of forms if an employee fails to fax or copy both sides. To minimize this risk, place “page __ of __” numbering on all forms and include a clause on the first page specifying that the order is subject to the terms either on the front and reverse sides or on pages __ to __. This alerts the recipient – your client, customer, or supplier – to the number of pages it should receive.
Even if forms are printed single-sided, it is still possible that only the top sheet may be sent. As a failsafe, put your standard purchase and sale terms on your website and include the appropriate URL for these terms on your forms. This should be done in addition to, never in lieu of, placing the terms themselves on purchase orders and invoices.
3: Companies with Multiple Brands Should Clean Up Inconsistencies
Companies that market multiple brands under a single corporate umbrella often have inconsistencies in the purchase and sales forms used by the various brands. This often arises when a large corporation buys several smaller ones without changing or making uniform the inherited purchase and sales forms. If litigation arises concerning a transaction based on a poorly drafted purchase order or invoice, savvy opposing counsel may attempt to draw negative inferences by pointing to the better-drafted terms in a sibling brand’s form. Although it is not necessary that a single form be used for all related brands, a company should review the key liability terms (warranty provisions, disclaimers, damages limitations, and the like), decide which terms it prefers, and use these terms in all related-brand forms.
4: Mind the Implied Warranties
In addition to any express warranties that a manufacturer or other seller may provide, warranties of merchantability or fitness for a particular purpose may be implied at law unless explicitly disclaimed.1 “[A] warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind,” while a warranty that goods will be fit for a particular purpose is implied “[w]here the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods.”2 Other warranties (in addition to the ones for merchantability and fitness for a particular purpose) may be implied at law based on the course of dealing between the parties or usage of trade.3
Many manufacturers and other sellers may determine that these implied warranties reflect the guarantees they wish to give their customers, in which case, no action is necessary. However, others may decide to sell products “as is” or that their express-warranty provision sets forth the full and exclusive scope of the guarantee they intend. For those sellers, implied-warranty disclaimers are essential.
To exclude the implied warranty of merchantability, a disclaimer must mention merchantability and should be conspicuous and in writing.4 A disclaimer to exclude or modify any implied warranty of fitness for a particular purpose also must be in writing and conspicuous.5 Because other implied warranties may be implied from the course of dealing or usage of trade, it is advisable to disclaim any and all implied warranties of whatever nature, whether implied, arising from operation of law, or arising from trade usage or course of dealing, including but not limited to merchantability and fitness for a particular purpose. To make implied-warranty disclaimers conspicuous, they should be printed in all capital letters, using either or both bold or underlined font.
For purchase documents, the rule is the reverse: purchasing documents should indicate that the agreement to purchase is subject to and contingent on the application of all warranties implied at law, including but not limited to the implied warranty of merchantability and the implied warranty of fitness for a particular purpose or, alternatively, that any disclaimer of any or all implied warranties is expressly objected to.
5: Incidentals Are Not Always so Incidental
The title “incidental and consequential” might lead a person to think that damages in that category are of the pocket-change variety. Not so. Incidental and consequential damages often refer to just about all the damages that a buyer might have, excluding the purchase price.6 The good news for producers, manufacturers, and distributors is that most states, including Wisconsin, permit them to disclaim liability for incidental and consequential damages unless doing so would be unconscionable.7 (Note that a “limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable.”8)
Rebecca Frihart Kennedy, Ohio State 2003, is a shareholder at Reinhart Boerner Van Deuren s.c and a member of its litigation and products liability practice groups. She previously was a law clerk to the Hon. Barbara B. Crabb, U.S. District Court for the Western District of Wisconsin.
However, to effectively exclude consequential damages, the disclaimer must be explicit and be carefully drafted. In a recent example of just how explicit a consequential-damages disclaimer must be, the Wisconsin Court of Appeals held in Estate of Kriefall v. Sizzler USA Franchise Inc. that the phrase “[t]his Guaranty shall not render Seller liable for any incidental or consequential damages of whatsoever nature” did not actually prevent the seller from being held liable for incidental and consequential damages.9 The court found that this particular phrasing rendered the damages limitation applicable only to the express warranties in the guarantee and did not extend to implied warranties. The consequential damages found on the breach of implied warranty totaled nearly $7 million. Accordingly, incidental and consequential damages disclaimers should specifically refer to any and all claims, including but not limited to tort, strict liability, statutory, breach of contract, and breach of express and implied warranty claims. (The Wisconsin Supreme Court accepted a petition for review of Estate of Kriefall on Sept. 27, 2011, but specificity will remain a best practice even if the opinion is reversed.)
Again, purchase documents should be drafted conversely. They should specify that the agreement to purchase is subject to and contingent on the right of the purchaser to recover for any incidental or consequential damages related in any way to the products purchased, whether in tort, strict liability, breach of contract, breach of express or implied warranty, or any other claim permitted under applicable law.
6: Seek Indemnification
Once you have limited your liability with implied warranty and incidental and consequential damages disclaimers, the next step is to seek indemnification for the potential liability that remains. By including indemnification clauses in purchase and sales forms, companies in a product’s distribution chain can attempt to shift potential liability to other parties.
Unlike waivers, indemnification clauses do not seek to extinguish liability altogether. Instead, they contractually shift potential liability from one party to another. For this reason, indemnification clauses are more readily enforceable than waivers. (In older forms, the terms “release” and “waiver” are generally interchangeable, and the phrase “hold harmless” is sometimes used in place of “indemnification.”)
Although indemnification clauses are more readily enforceable than waivers, drafting an enforceable indemnification clause is difficult because there are few bright-line rules that set out what is and is not allowed. Instead, questions of validity are submitted to the unpredictable law of unconscionability, a term that translates roughly to mean “the randomly assigned judge not of your choosing is not thrilled about this.”10 Fortunately, the Wisconsin appellate courts have addressed the validity of indemnification clauses in standardized sales forms under the law of unconscionability, and this precedent offers at least some guidance.
First, a note on what an indemnification clause can and cannot cover. Indemnification clauses that run “downstream” (that is, those that provide indemnification of a seller by a buyer) are permissible in commercial contexts between companies of relatively equal bargaining power, but they will be strictly construed and should therefore be both clear and conspicuous.11 Similarly, indemnification clauses can cover an indemnitee’s own negligence so long as this intention is stated clearly and the clause itself is conspicuous.12 Never use an indemnification clause that extends to the indemnitee’s reckless conduct or intentional misconduct.13 If you want your indemnity clause to cover attorney fees, and you probably do, this must be stated explicitly.14
Second, a note on how indemnification clauses should be formatted. To qualify as conspicuous, a clause must be “so written that a reasonable person against whom it is to operate ought to have noticed it.”15 Some ways to ensure meeting this standard include putting it in bold, putting it in all capital letters, setting it off in a box, placing it on the first page of the form or immediately above any signature line, and using a larger font size than is used elsewhere on the form. Never combine an indemnity clause with another clause under a single numbered paragraph, and never deliberately bury it in the hope that the other party will miss it.
7: Arm Yourself for the Battle of the Forms
The battle of the forms refers to a series of rules, found in article 2 of the Uniform Commercial Code (UCC) (section 2-207), that dictate whether a buyer’s or seller’s standard terms control when the parties send each other purchase and sales forms with conflicting terms but both parties agree that a contract has been formed.
The full text of UCC section 2-207 has been adopted nearly verbatim in Wis. Stat. section 402.207. Any documents that might constitute an offer to either buy or sell should contain a clause indicating that acceptance is limited to the terms of the offer, that acceptance constitutes an acceptance of all the terms of the offer, and that any terms or conditions proposed in an acceptance that are in addition to or inconsistent with the terms of the offer are objected to.
Any document that might constitute an acceptance of an offer to sell or an offer to purchase should contain a clause indicating that 1) acceptance is conditioned on the terms of the acceptance governing the contract; 2) acceptance is further conditioned on assent to these terms by the offeror; and 3) if the acceptance is to be regarded as a counteroffer, a) acceptance of it is limited to the terms of the counteroffer, b) acceptance shall constitute an acceptance of all terms of the counteroffer, and c) any terms or conditions proposed in an acceptance that are in addition to or inconsistent with the terms of the counteroffer are objected to.16
In a perfectly fought match of battle of the forms (that is, when each party’s document insists on its own terms prevailing and rejects any additional or contrary terms of the other), the outcome usually favors buyers. This is because the UCC provides that when forms knock each other out, but the parties have acted as though there had been a contract by buying from and selling to one another, a contract will be implied at law. The contract will consist of those terms, if any, to which the parties have agreed together with any supplementary terms incorporated under the UCC.17 Although not always the case, these supplementary terms often include the implied warranties of merchantability and fitness for a particular purpose, whereas damages-limitation provisions fall away in the knock-out.18
Even the best-written sales and purchase forms cannot insulate against all liability, but having great terms can go a long way toward minimizing risks. If it has been a while since your sales contracts and forms have been updated, put it on your to-do list. For more advice and other ideas on how to improve your purchase and sales forms and other standardized form contracts, talk to a litigator.19
1Wis. Stat. §§ 402.314 (implied warranty of merchantability), 402.315 (implied warranty for fitness for a particular purpose).
2Wis. Stat. §§ 402.314(1), 402.315. To qualify as “merchantable,” goods must “(a) [p]ass without objection in the trade under the contract description; and (b) [i]n the case of fungible goods, [be] of fair average quality within the description; and (c) [be] fit for the ordinary purposes for which such goods are used; and (d) [r]un, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and (e) [be] adequately contained, packaged, and labeled as the agreement may require; and (f) [c]onform to the promises or affirmations of fact made on the container or label if any.” Wis. Stat. § 402.314(2).
3Wis. Stat. § 402.314(3).
4Wis. Stat. § 402.316(2).
6“Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.” Wis. Stat. § 402.715(1). Consequential damages include, among other things, “[i]njury to person or property proximately resulting from any breach of warranty.” Wis. Stat. § 402.715(2).
7Wis. Stat. § 402.719(3).
9Estate of Kriefall v. Sizzler USA Franchise Inc., 2011 WI App 101, ¶ 16, 335 Wis. 2d 101, 801 N.W.2d 781 (review granted).
10More technically, a contract is deemed “unconscionable” when there is an absence of meaningful choice on the part of one party (procedural unconscionability) and the terms of the contract unreasonably favor the other party (substantive unconscionability). Discount Fabric House of Racine Inc. v. Wisconsin Tel. Co., 117 Wis. 2d 587, 602, 345 N.W.2d 417 (1984).
11Deminsky v. Arlington Plastics Mach., 2003 WI 15, ¶ 22, 259 Wis. 2d 587, 657 N.W.2d 411.
12Id. ¶ 28; see also Lampe v. Genuine Parts Co., 463 F. Supp. 2d 928, 935 (E.D. Wis. 2006).
13Indemnification clauses purporting to cover all of an indemnitee’s reckless or intentional misconduct are widely recognized as void as a matter of public policy. See, e.g., Brennan v. Connors, 644 F.3d 559, 562 (7th Cir. 2011) (Illinois law); American Civil Liberties Union of Minn. v. Tarek ibn Ziyad Academy, 788 F. Supp. 2d 950, 967-68 (D. Minn. 2011) (Minnesota law); American Tissue Inc. v. Donaldson, Lufkin & Jenrette Secs. Corp., 351 F. Supp. 2d 79, 99 (S.D.N.Y. 2004) (New York law).
14Woodhaven Homes & Realty Inc. v. Hotz, 396 F.3d 822, 825 (7th Cir. 2005) (holding that “Wisconsin indemnification clause that does not mention attorney fees will not be construed to permit their recovery.”)
15Wis. Stat. § 401.201(10).
16See generally id.; Rich Prods. Corp. v. Kemutec Inc., 66 F. Supp. 2d 937, 961-62 (E.D. Wis. 1999) (discussing requirement that conditional acceptance specify that acceptance is not just subject to terms of acceptance but subject to assent to such terms by offeror).
17Wis. Stat. § 402.207(3).
18Rich Prods., 66 F. Supp. 2d at 962 (noting that under normal circumstances, when inconsistent terms on parties’ forms prevent formation of formal contract, terms of implied contract will include implied warranties of fitness and merchantability and UCC standard damages for warranty breaches, which include consequential losses); see also Wis. Stat. §§ 402.314 (implied warranty of merchantability), 402.315 (implied warranty for fitness for a particular purpose), 402.714 (buyer’s remedy for breach may include incidental and consequential damages).
19This article is drafted descriptively and is not intended to provide text that can be copied verbatim into contract documents without regard to context, grammar, and syntax.