Don’t Let Your Sales Agreements Sabotage You

The sales agreement is the nexus of commerce: One party agrees to provide a product or a service, and the other party agrees to exchange a certain amount of money for that product.

There are all sorts of ways to conclude that agreement — everything from an informal handshake deal to a purchase order to a formal, written sales contract. In fact, a sales contract can take many forms, from a multi-page legal document to the fine print on an order form or invoice. Even transactions where there is no paperwork fall under legal guidelines; the Uniform Commercial Code addresses how disagreements between buyers and sellers should be handled.

From the seller’s point of view, the best contract or agreement is one where the price, terms and conditions for the agreement are clear, the seller’s liabilities are limited, and the buyer has every incentive to pay the bill quickly. But we have seen some common mistakes in sales or credit contracts that can hobble your business’s efforts to get paid. Below are a few issues that should spur managers to review their sales and credit contracts.

Identify Your Customer — Precisely

Do your sales and credit contracts provide for customers to identify their correct legal composition (i.e., partnership, sole proprietorship, corporation, LLC, LLP, L.P.)? Let’s say you have to sue someone who you believe is a sole proprietor but who actually is a corporation. The proprietor can defend on the basis that the debt is not his but that of his corporation. If the customer can prove that you knew, or reasonably should have known, that the party responsible for the debt was actually the corporation, the court would find in favor of the proprietor, leaving you with the expense of a second lawsuit, this time against the corporation, which may or may not be collectible. Better to have a space in your original contract or on your purchasing forms where your customers specify a legal business entity.

Require Customers to Name Approved Buyers

Do your contracts require your customers to designate which of their employees are authorized to make purchases from you? If you allow a customer’s employee who hasn’t been so designated to make purchases on the customer’s behalf, you do so at some risk. Sure, if the employee actually worked for the customer, and the customer received the goods or services and derived economic benefit from them, the court wouldn’t let them off the hook simply because the purchase was made by an employee not listed as authorized. But a case our office is currently involved in illustrates the problem. An individual from a company purchased something from our client, the seller, but the company never received the product — the individual used it for personal use, and is long gone. The company is now arguing that the individual wasn’t authorized to make a purchase, and the company derived no economic benefit, therefore it shouldn’t be responsible for payment. Problems like this are easily avoided by making sure specific employees are listed, if not in the formal contract, then in some sort of letter, e-mail or other communication from the company.

Specify Terms for Late Payments

Do your contracts provide for interest or finance charges on past due balances and for the customers’ obligation to pay collection costs and attorneys’ fees if their accounts are referred to an attorney for collection? Typically, interest is charged on past due balances, at the rate of 1.5% per month, and that goes into effect as of the date the invoice is in default. Even in the absence of an agreement as to interest, in breach of contract cases, a creditor is statutorily entitled to interest at the state-mandated rate (often between 6% and 9% per annum) from the time payment was due. A business owner or manager isn’t forced to collect the interest, and may not want to from a valued, long-time customer, but the company’s policy is clear.

Make Sure Your Contract Trumps Others

Do your sales and credit contracts’ terms and conditions provide that they supersede any terms and conditions on your customers’ purchase orders, and that your acceptance of your customers’ purchase orders is expressly conditioned on their acceptance of your terms and conditions? For example, a customer’s purchase order may try to impose liability on you for incidental or consequential damages if delivery is not made by a certain deadline, or if the goods are defective or non-conforming. But yours may limit the remedy for defective goods to repair or replacement of the goods. Your contract should be clear that your terms apply to all orders.

Check With Your Attorney

Your lawyer should periodically review the language used in your standard sales and credit agreements, as well as any other contracts you regularly employ, such as lien agreements, and personal guarantee documents (if you require buyers who aren’t creditworthy to provide you with a personal guarantee of payment). After all, if you want terms to govern your sales agreements that are favorable to you, they must be detailed in your sales contracts. A seller who accepts — or doesn’t object to — terms detailed on a buyer’s purchase order may find himself stuck with unfavorable provisions.