It’s Friday at 3:00 p.m. at ABC Corp., and Mike from purchasing enters your office, slumping into his chair with a heavy sigh. Prime resin is in short supply. The next delivery will be weeks late, only half your order can be filled, and now it’s double the price it was three months ago. No surprise; you’ve been dealing with the shortage for months.
But now a key customer has been demanding delivery of their entire order, on-time, and at the price negotiated a year before the resin market imploded. Negotiations have deteriorated, and the customer is threatening to sue ABC Corp. 500 miles away, claiming ABC Corp. owes lost profits—plus attorneys’ fees—if it does not deliver.
Taking a deep breath, you pull out ABC Corp.’s terms and conditions and confirm they were sent to your customer. It’s plain as day that the terms bar them from recovering lost profits or fees, and require any suit to be filed near your home office. Satisfied, you send them to your customer. But just to be sure, you ask your attorney to confirm. And the response? “When’s a good time to talk?”
Stories like this have been playing out all over the U.S. as supply chain disruptions wreak havoc across industries large and small. Years of practice have demonstrated that for many of our clients, contracts with suppliers and customers do not contain the protections our clients believe they do. Problems rarely arise when business is good, but supply chain disruptions have exposed numerous issues that can leave businesses far more vulnerable than they thought possible. Thankfully, there are simple, practical steps that businesses can take to improve their contracts and place themselves in a better position when inevitable disruptions arise.
Quarles & Brady is pleased to present a multi-part series of practical, digestible articles on best practices for contracting applicable to both the purchasing and sales business units. Supply chain disruptions are everywhere, but because manufacturing sectors have been hit the hardest, this series will begin by focusing on contracting for the purchase and sale of goods.
Who is this series for? Business executives, purchasing and sales managers, and anyone in a position to bind your company to a contract—which may be more people than you think. While the series will try to avoid getting bogged down in legalize, hopefully it can also serve as a reference guide for in-house counsel advising stakeholders on contract matters throughout your organization. Our intent is not to cover every part, subpart, or exception, but rather to cover the most common issues and situations that arise when entering into, and challenging, contracts for the purchase and sale of goods.As always, you should seek legal counsel to address any specific issue facing your company.
It is important to begin with a few common terms and definitions before moving to our next article, which will address how easy it is to form a contract.
Contracts for the sale of goods are governed by the Uniform Commercial Code Section Two, codified (with occasional modifications) in every state of the U.S.—except Louisiana. While parties are free to contract for whatever terms suit their business needs, the Uniform Commercial Code or “UCC” provides a comprehensive set of default rules that apply where a contract does not address an issue or—as is commonly the case—where parties conduct business through quotes, purchase orders, and invoices in lieu of a formal, signed contract.
There are a few key definitions in the UCC that will be used throughout this series.
Goods: Under the UCC, “goods” means all things, including specially manufactured goods, which are movable at the time of the contract for sale.The expansive definition is intended to capture the full gamut of things bought and sold at every stage from raw materials to finished goods. The definition does not include services, money used to pay for goods, investment securities, or real estate.
Sale: A “sale” consists in the passing of title or ownership in goods from a seller to a buyer. The UCC’s provisions on sales do not address other types of transfers, including leases. Licenses, and particularly software licenses, present thorny issues regarding sales, but this series will focus on traditional sales where goods pass from one party to another.
Merchant: Several critical provisions of the UCC depend on whether a transition occurs “between merchants.” Under the UCC, a “merchant” means a person who deals in or otherwise holds themselves out as having knowledge or skill related to the goods subject to a sale. While the definition can be cumbersome, it’s meant to exclude purchases by the general public, and you can assume that if your company regularly buys or sells things in the normal course of business, then you will be considered a “merchant” for purposes of the UCC.
With these definitions out of the way, we move next to Article #2: Is There a Contract?
Quarles & Brady attorneys Michael Chargo, Hannah Schwartz and Lauren Zenk also contributed to this article.