Q: What are incidental and consequential damages?
A: Incidental Damages are expenses incurred by the injured party as a result of the other party’s breach of a contract.

If Supplier Breaches the Contract the Buyer’s Incidental Damages include expenses for inspection, receipt, transportation, and storage of rejected goods or services, expenses associated with buying replacement goods or services, and any other expense related to delay in delivery or non-delivery.

For example: The $5 products are delivered, integrated into the buyer’s product and installed in the field. A defect appears. Buyer pays $12,000 in recall and return transportation expenses. These are examples of incidental damages

Consequential Damages: Damages which do not derive directly from the breach, but from the results of the breach; they are more indirect in nature.

If Supplier Breaches the Contract the Buyer’s Consequential Damages include losses Buyer incurs which the Supplier had reason to know at the time of contracting and which Buyer could not reasonably have prevented; and injury to person or property resulting from any breach of warranty.

For example: Supplier is delayed in its delivery of the $5 products. These components are critical and Buyer can’t find replacement product. As a result, Buyer’s production line is down for 1 day and the cost to Buyer is $50,000 in loss of production. The $50,000 is an example of consequential damages.

Q. What are the Supplier’s responsibility to the Customer for incidental and consequential damages?
A. Incidental and Consequential Damages are the Buyer’s Remedies at Law if the Supplier breaches the Contract. A Remedy at Law is a right that is automatically available to a contracting party.

In other words, if the Supplier is late in delivering, or delivers defective products or services, or in any way breaches the Contract, the Supplier is automatically liable (responsible) to the Buyer for reimbursement of these damages even if the Contract says nothing about them nor did the Buyer or Supplier ever discuss them.

Q. What is the Limitation of Liability paragraph and why do the lawyers argue so much about it?

A. When you think about it, the potential for incidental and consequential damages exists in any number of ways if the Supplier breaches the Contract. Poor quality, late delivery, failure to perform or deliver, and field failures are just some examples of things that can go wrong and cause the Buyer additional money, time, expenses, lost business….the list goes on.

If the Supplier breaches the Contract and causes harm (damages) to the Buyer, the Supplier will be liable (responsible) to reimburse the Buyer. The exception to his is if the Supplier includes a Limitation of Liabilities clause in the Contract. An example of this clause is:

In no event shall Supplier be liable to Buyer for any incidental or consequential damages. Supplier’s maximum liability under this Contract shall be limited to the purchase price of the Product.

Limiting liabilities for damages is a means of reducing a Supplier’s exposure for having to pay large sums of money. Most Suppliers try to exclude incidental and consequential damages because such liability exposes a Supplier to a risk of having to pay damages far in excess of the price of the Product or Service.

Obviously, the Buyer’s concern will be that if the Supplier limits its liabilities, Buyer is left “holding the bag” and will be responsible for additional costs not paid by the Supplier.

You can see what happens when you introduce the lawyers into the negotiation. Each lawyer takes the position that best protects his/ her client, and polarization often results. The unfortunate scenario that often occurs is that the issue is debated for months between lawyers, they reach a stalemate, and the contract languishes until one party or the other pushes to get the contract signed. When the business person looks to the lawyer for a resolution, the lawyer usually tells her client “It’s a business issue”….leaving the client to decide whether or not to sign the contract with or without the limitation of liability clause.

The most unfortunate part is that the business person still doesn’t have any insight into the issue, assumes its some esoteric “legal” issue and signs the contract as is….and the cycle continues.

Consider another approach: Don’t assume that this is a legal issue only. These issues boil down to the question: Who is going to pay the money? Therefore, stay involved and encourage your counterpart to do the same.

Make realistic risk assessments and discuss with your customer who takes responsibility for which risk.

Consider the real world risks and determine what makes sense under the circumstances.

Talk to your customer in specifics. For example, identify those actions your company will take if product is defective: what you’ll do; when you’ll do it; how you handle field failures.

Identify your customer’s concerns and discuss the actions your company will take to remedy such problems should they occur. After discussing potential real world problems and solutions, you can discuss the larger economic concerns such as loss of production, loss of business, etc. Recognize that every prudent business makes a conscious business decision as to which risks/ liabilities it is willing to assume and those it is not, including your customer. If you look at your customers’ terms of sale to its customers, you will find your customer has included a Limitation of Liabilities clause as well. Failure to include a Limitation of Liability clause is akin to issuing a check with a blank dollar amount..

One common approach to resolve this issue is to create a maximum dollar amount for which the Supplier will be responsible. Whatever the approach, the bottom line is: Make sure the upside gain is commensurate with the risk.

These are real world contingencies that should be discussed by business people. You’ll be discussing compensatory and incidental damages without using the emotionally charged words. Talk concepts BEFORE you talk about the language. You’ll find it easier to reach an understanding. Once you have reached agreement with your customer, the language is more easily written.

Q.  Who wins in the Battle of the Forms: ……the Buyer’s Purchase Order or…the Seller’s Quote or Acknowledgement form?
A. The common scenario in which Buyers and Sellers exchange forms with terms on the reverse is often referred to as “The Battle of the Forms”.

Where both Buyer and Seller exchange forms, and both forms have terms and conditions on the reverse, the usual end result will be that the different terms will cancel each other out and the Uniform Commercial Code (UCC) terms will be substituted in their place.

Q.  What’s the best way to fight the Battle of the Forms?

A. In spite of the odds against the Seller in fighting the Battle of the Forms, the following steps should be considered:

1. The best advice with respect to fighting the “ Battle of the Forms” is to include specific language in all your forms which object to any of the Buyer’s terms which in any way alter the terms and conditions on your forms. The following is offered as a model for your use. Its language mirrors the Uniform Commercial Code (UCC).

   This Quotation is limited to the terms and conditions contained on the face and the reverse herein. Any additional or different terms proposed by Buyer in any purchase order or other document are hereby deemed to be material alterations and notice of objection to them is hereby given. Any such proposed terms shall be void and the terms herein shall constitute the complete and exclusive statement of the terms and conditions of the contract between the parties. Neither Seller’s acknowledgment of a purchase order nor Seller’s failure to object to conflicting, different, or additional terms and conditions in a purchase order shall be deemed an acceptance of such terms and conditions or a waiver of the provisions hereof.

2. Every Quotation, Sales Acknowledgement Form, Invoice, and other document you send to your Buyer should contain language similar to that above which objects to the Buyer’s terms. In fact, even if there is only one provision on your form it should be the language referred to in the UCC in which Seller objects to any different or additional terms in the Buyer's form.
   
   
3. The face of your Quotation, Sales Acknowledgment and Invoice forms should refer to the terms and conditions on the reverse. If there is no reference to these terms on the front of your form, the Buyer may argue that they do not apply to the sales transaction. The following is offered as a model for your use:

   IMPORTANT NOTE TO BUYER: THIS QUOTATION IS LIMITED TO THE TERMS AND CONDITIONS CONTAINED ON THE FACE AND REVERSE SIDES HEREOF.

4. Try to get the Buyer to sign your form.

   If you do, you'll win the “ Battle” and your terms will prevail. One approach is to create a Quotation or Proposal form which contains a signature line for the Buyer and states that when the Buyer signs the Proposal it will become a Contract.

5. Do not sign the Buyer’s forms.

   If you do, you'll lose the battle immediately!

6. Negotiate a Master, Corporate or Blanket Agreement.

   The Ts and Cs you agree upon in the Master Agreement will take the place of the Ts and Cs on the back of either party's form thereby avoiding the Battle of the Forms.

7. Clear up any discrepancies before going forward.

   Don't let disputed terms and conditions become part of the “ Battle”