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Purchase Order Terms and Conditions-Part III: Limiting Liabilities, Indemnification and Insurance

October 19, 2020

Frank P. Nagorney, Brent M. Buckley and Theodore M. Dunn Jr.

This is the third advisory in our four-part series covering purchase order terms and conditions. Specifically, we will focus on indemnification for liabilities that are more than just a product warranty claim.

How can Contract Language Limit the Risk? 

UCC 2-710 to 2-715 establishes that buyers and sellers can be liable for all damages incidental to a breach of contract, such as seller's non-delivery, buyer's repudiation, as well as consequential damages such as injury to person or property. These risks can be modified and limited by agreement of the parties (UCC 2-719). This is why a seller will want to disclaim or limit liability for consequential damages by adding language such as "in no event shall seller be liable for consequential damages, including loss of use, income or profit, or losses sustained by reason of injury or death" to its standard terms. However, a buyer may insist that the seller provides indemnification with language such as "seller shall indemnify, hold harmless and defend buyer against all loss on account of claims of injuries to persons or damage to property based upon a defect in the goods". This divergence of interests makes consequential damages among the most highly negotiated terms in a purchase contract.

Can the Risk be Insured?

While the costs to remedy warranty breaches generally are manageable, the costs to cover a claim for consequential damages can threaten the financial viability of a company, especially if the claim is for death, personal injury, or a product recall. Insurance provides a good solution to resolve this problem--insurance premiums for claims is much less expensive than paying damages for general and product liability, or completed operations, and will mitigate the risk to both buyer and seller. As a procedural matter, contracts often require the parties to exchange certificates of insurance as proof of coverage. This is a good practice.  Not all risks are insurable, so take caution in drafting the contract terms for uninsured risks.