Sales transactions between companies are a typical part of day-to-day business — whether it’s purchasing components as part of a whole product, buying equipment or contracting services. It’s so common, in fact, that it’s likely that a company may overlook or ignore terms and conditions, which could result in serious disputes in the event of a defective product or loss.

“Sometimes the terms and conditions of the purchase order or the invoice are not clearly communicated to the other merchant,” says Stephan A. Barber, a senior partner at Ropers Majeski Kohn & Bentley, PC. “Thus, a dispute can arise as to whose terms and conditions control if some kind of event occurs.”

Situations like this are widespread and may lead to a conflict if there’s an issue with the product or service purchased.

Smart Business spoke with Barber to find out more about the troubles that may come up during commercial transactions between companies, and how to avoid them.

What may cause a dispute between companies during a commercial transaction?

 

Business owners have to be careful with competing or conflicting terms and conditions relating to shifting or accepting the risk of a loss. When ordered goods are in transit, who is responsible if the goods are damaged, lost or delayed? Is there a warranty, and if so, what are the terms and how long is it in effect? Are there disclaimers or limitations on liability or damages? Are there are any terms relating to indemnification for claims made by third parties for damages relating to the goods that have been purchased?

Also, attention must be given to payment terms. Many times, the purchase order has very liberal payment terms, and the purchasing company does not have to pay the whole amount or has excuses for not paying everything. However, the invoice may state that the entire payment is due within 10, 15 or 30 days. Sometimes there is no formal purchase order at all — just a telephone call or email and an invoice that is faxed or emailed confirming the order.

Who is responsible for the loss or damage of goods?

 

The Uniform Commercial Code, adopted in virtually all states, can resolve some of these issues, often called the ‘battle of the forms.’ Section 2-207 of the code addresses additional or different terms in an acceptance or contract, and there are several sections dealing with deterioration, casualty, nonarrival, etc., as well as what happens if there is no agreement between the parties as to a risk of loss.

The situation becomes complicated if parties attempt to make an agreement regarding risk of loss or if there is a course of dealings or conduct between the parties. The court can look at the course of dealings to see how to interpret the contract. It’s problematic when companies do not give each other their respective terms and conditions, or when the entities do not pay strict attention to terms and conditions. Additionally, the terms and conditions in the invoice, purchase order and other contract documents or communications could compete or be contradictory.

What happens when the terms and conditions are contradictory?

 

If you have a discrepancy in the purchase order and the invoice as to who is responsible for defective or nonconforming goods, then determine whose term supersedes, if at all. There are a number of Uniform Commercial Code rules as to how that dispute can be resolved. However, a court could disregard both terms if they are in such conflict and then resort to general law.

If the purchaser sends a purchase order and someone on the receiving end signs it but then sends back an invoice with different terms and conditions, the purchaser could argue that because the seller signed the order, in effect agreeing to its terms and conditions, the invoice’s conflicting terms and conditions are superseded by the purchaser’s terms and conditions. Or, if evidence shows that when you started doing business, you met with the seller and showed the terms and conditions in your standard purchase order, the purchaser’s terms and conditions can be part of the contract despite different terms in the invoice.

How often do these types of arguments escalate to legal trouble or litigation?

 

Trouble happens more frequently than people think. Problems do not always reach the level of lawyers, but they certainly get to management and the respective companies getting together to try to resolve the issue, or even going to mediation. It also can sour a relationship so that even after a successful resolution, companies do not want to do business anymore. Sometimes, litigation ensues if a large amount of money is involved.

How can a business owner avoid disputed terms and conditions from the beginning?

 

Try to require the party with whom you are contracting to sign a document acknowledging that it has reviewed and agrees to your terms and conditions or other contract terms. Then, your terms and conditions should supersede any contradictory terms and conditions. However, additional or supplementary terms in the other party’s purchase order or invoice will probably be a part of the contract. Additionally, if you will have repeated transactions with a company, have a master contract negotiated and signed, controlling the commercial relationship.

Both companies should determine whether the other has standard or general terms and conditions and read them. Find important ones that may be in conflict and then specifically agree to the terms that will control the commercial relationship.

An ounce of prevention is worth a pound of cure, so business owners should pay attention to what’s going on before a problem arises, not after. Therefore, relevant employees must be trained what to do and instructed to consider all possible ramifications.

Stephan A. Barber is a senior partner at Ropers Majeski Kohn & Bentley PC. Reach him at (408) 918-4524 or sbarber@rmkb.com.

Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC

Published in Northern California
Saturday, 30 June 2012 21:05

How to leverage Ohio law in your favor

Corporate policyholders often spend significant sums on insurance coverage to protect themselves against loss or injury. These policies are important assets and policyholders should be mindful of ways to protect and maximize them, particularly when an insurer has denied a claim or reserved its rights to deny a claim, says Amanda M. Leffler, partner with Brouse McDowell.

“There are fundamental principles of Ohio law that favor policyholders,” says Leffler. “Policyholders have the ability to use these principles to negotiate favorable outcomes with their insurance companies and often have more leverage than they think they do.”

Smart Business spoke with Leffler about the leverage you have as a policyholder and how to use it to your advantage.

What are the defense rights of policyholders?

Policyholders have some fundamental rights with respect to any defense provided by their insurance company, the first of which is the ability to choose and control their counsel when the insurer has reserved its rights. Many third-party insurance policies say they will pay for defense costs for policyholders if they are the subject of a suit. The right to defense costs is significant and can operate as leverage in a dispute with an insurer.

Many insurance companies attempt to impose upon their policyholders counsel of the company’s choosing, and policyholders frequently don’t want to use that counsel because they don’t feel those attorneys have their best interests at heart. When there is a reservation of rights, the insurer cannot control the litigation and can’t mandate the counsel that will act on behalf of the policyholder.

What are policyholders’ defense rights regarding multiple claims?

In Ohio, the insurer must defend all claims pled in the suit, even if they are unrelated to coverage. If a complaint sets forth multiple claims, but only one of those triggers coverage, the insurer must pay all defense costs and cannot require the policyholder to contribute unless the policy states otherwise.

Also, insurers in Ohio are not permitted to recover defense costs paid, even if the claim is ultimately not to be covered. For example, if a policyholder were sued for both negligence and intentional conduct, the claim for negligence would likely be covered, but the claim for the intentional tort would likely not be covered. Nonetheless, the insurer must defend the entire case. If the policyholder were ultimately held liable for only the intentional tort claim, the insurer would not have to indemnify the policyholder for the damages for which it was liable. The insurer, however, could not recover its defense costs, even though the claim was not covered by the indemnity provisions of the policy.

What is important to understand about the interpretation of insurance policies?

Insurance policies are contracts, and most disputes between insurers and policyholders present claims for breach-of-contract. Actions for breach of insurance contracts differ from other breach-of-contract actions in certain respects. Significantly, courts in these actions apply rules of contract interpretation that strongly favor policyholders, which provides leverage to policyholders in disputes with their insurers.

Where provisions of an insurance contract could have more than one interpretation, courts will adopt the interpretation that favors the insured. The test applied in determining whether there is ambiguity is not what the insurer intended its words to mean, but what a reasonably prudent person applying for insurance would have understood. Under such circumstances, any reasonable construction that results in coverage of the insured must be adopted by the trial court.

The burden is always on the insurer to prove the language of an exclusion bars a particular claim. Moreover, for a court to apply an exclusion to bar coverage, it must be clear and explicitly stated.

When must an insurer provide a defense for a claim?

An insurer’s duty to defend is distinct from and broader than its duty to indemnify. A liability carrier has the duty to defend its policyholder whenever the allegations against the policyholder arguably or potentially state a claim within the coverage of the policy.

Where the insurer’s duty to defend is not apparent from the pleadings in the action against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy has been pleaded, the insurer must accept the defense of the claim.

What types of damages can a policyholder recover from its insurer?

This is a significant leverage point in Ohio because damages go beyond what you would typically think of being able to recover as compensatory damages. In insurance coverage matters, if you win, you can be made completely whole.

If policyholders are required to litigate with their insurer, they can expect to obtain damages that include the amount the policyholder had to pay to settle the claim, the amount the policyholder had to pay to satisfy a judgment against it that should have been covered, and, if the insurer refused to defend the action, the reasonable and necessary cost incurred to investigate and defend the underlying claim.

Policyholders may not be aware they will also be awarded attorneys’ fees if they win a breach-of-contract case. The Ohio Supreme Court has made it clear that the state recognizes an exception to the American Rule to permit policyholders to recover attorneys’ fees when they must litigate with their insurers to enforce policy rights. The rationale is that the insured must be put in a position as good as that which it would have occupied if the insurer had performed its duty. This does not require the policyholder to demonstrate any impropriety on the insurer’s part, and these coverage case attorneys’ fees can be a significant component of a damages award.

Amanda M. Leffler is a partner with Brouse McDowell, L.P.A. Reach her at (330) 535-5711 or aleffler@brouse.com.

Insights Legal Affairs is brought to you by Brouse McDowell

Published in Akron/Canton