Pitfalls for the Unwary Related to U.S. Terms and Conditions of Sale
German Practice Alert
November 19, 2012
German companies selling goods into the United States, be it directly or through U.S. subsidiaries, should use terms and conditions of sale that are both (i) compliant with U.S. laws and (ii) in accordance with customary trade practices in the United States. For example, a “retention of title” clause included in terms and conditions of sale with the purpose of accomplishing what is known in Germany as “Eigentumsvorbehalt” (i.e. retention of ownership following delivery of goods until full payment is received) may be ineffective to create what is known in the U.S. as a “security interest” to secure the buyer’s payment obligations. Or, a German seller’s proposed limitations on warranties or liabilities in its terms and conditions may be too broad or too narrow in comparison to U.S. market practice and be invalid or result in competitive disadvantages to the seller, respectively. Following are a few typical issues we regularly see when working with our German clients.
Battle of the Forms
Often, a buyer’s purchase order includes terms and conditions that contradict the terms and conditions of the seller included in its quotation (issued before the purchase order) or acknowledgement of the purchase order (issued after the purchase order). This issue is referred to customarily as the “battle of the forms.” Whose form prevails (if any) will depend on the sequence of events and particular language included in the buyer’s and seller’s purchase documentation. Certainly the seller cannot simply rely on language in its terms and conditions stating that those terms and conditions should prevail over the buyer’s terms and conditions, without detailed analysis of the buyer’s terms and conditions.
Express and Implied Warranties
When selling goods in the United States, German businesses need to consider also the warranties for the goods sold. Warranties related to goods sold in the U.S. are governed by Article 2 of the U.S. Uniform Commercial Code (the “UCC”) (if, as is often the case, the applicability of the U.N. Convention on Contracts for the International Sale of Goods is excluded). There are express and implied warranties under the UCC. An express warranty is a specific statement made by the seller with respect to the product sold. A breach of that promise entitles a buyer to assert a claim against the seller for breach of warranty. Additionally, however, even without such a specific promise, the seller makes certain implied warranties: In every sale by a merchant who deals in the goods of the kind sold, there is an implied warranty of merchantability. This warranty includes the promise that the goods would pass without objection in the trade and that the goods are fit for the ordinary purpose for which such goods are used. Additionally, if a seller knows that a buyer wants to use goods for a particular purpose, there is an implied warranty of fitness of the goods for that particular purpose. Sellers should consider disclaiming any implied warranties in their terms and conditions.
Limitation of Liabilities
Another problem relates to damages resulting from defective products. Customarily, sellers of goods in the United States disclaim liability for consequential and incidental damages. For example, a German seller of equipment could exclude liability to a U.S. manufacturer-purchaser for loss of business, loss of production, downtime or costs of removal of the defective equipment. Note, however, that exclusions of liabilities are invalid if they are unconscionable. Limitations of liability for direct damages or for personal injury or death may not be enforceable, in particular with respect to consumer goods.
The above issues are only highlights of the many questions that can arise under terms and conditions of sale for products sold by German companies in the United States. Simply translating domestic forms of terms and conditions of sale will almost never suffice to address questions which can arise in commercial contract disputes in the United States in a way that is beneficial to the German company. An even riskier practice is to rely on the U.S. party’s proposed terms and conditions, which are inevitably drafted to the benefit of the U.S. party. Instead, German businesses are best served by drafting their own separate standard terms and conditions for sales in the United States as a basis for their arrangements with U.S. companies.