ERAI Blog

When Your Parts Fail to Perform

Kristal Snider
ERAI Inc.

The accidental circulation of counterfeit goods is a very real issue facing distributors today and one that can potentially produce significant legal and economic consequences. It is vital for distributors to understand the risk of accidentally distributing counterfeit goods, how to minimize that risk and what will happen if those risks are not addressed.

On March 19, 2014, Snell & Wilmer and L/B/W Insurance & Financial Services held a dynamic conversation with Keith Gregory, Partner at Snell & Wilmer, and Howard Miller, Vice President–Director of Tech Secure® Division for L/B/W Insurance & Financial Services. Summaries of the presentations follow:

When Your Parts Fail to Perform: A Risk Management Solution for Component Distributors

Summary of presentation by Keith Gregory of Snell & Wilmer

A common issue requiring legal counsel involves documentation with conflicting terms and conditions between Buyers and Sellers of electronic components. This “Battle of the Forms” many times revolves around Universal Commercial Code (UCC) 2-207, Additional Terms in Acceptance Confirmation, whose terms can have minor variations from state to state. Problems can arise when additional terms are included in one of the party’s terms and conditions, such as when a Seller provides terms to the Buyer after the Buyer has provided their initial terms and conditions.

Disputes occur frequently with regard to Sections 2316 and 2319 which cover limitation of warranties and damages, including express and implied warranties. Typically, Sellers provide terms and conditions which have a limitation of warranties provision, many times with a defined time period (e.g. 30 days, 60 days, 90 days, etc.) during which the Seller will accept product returns and issue replacements or refunds. Sellers may also limit damages, not just compensatory, but also consequential damages. This covers the Seller by providing arguments in your favor if an issue would arise. Sellers are also recommended to include terms and conditions as part of the initial offer and should require signatures by the other party to demonstrate acceptance of the terms and conditions.

Another important factor is whether or not a company has the right type of insurance coverage. With the correct insurance, a company can be more empowered and have legal defense fees taken care of by the insurance company. This may also enable the parties to agree to a settlement more easily and can maintain the relationship between the two parties. Lack of suitable insurance coverage leaves companies with fewer alternatives, significant legal fees and potential loss of business relationships.

Mr. Gregory concluded that companies should include terms and conditions into their documentation, vet their suppliers and deal only with reputable companies, strengthen customer relationships so that each transaction can be negotiated between the parties and obtain and regularly audit insurance policies to protect their company.

Managing Risk – Risk Management for Component Distributors

Summary of presentation by Howard Miller of L/B/W Insurance & Financial Services

ERAI INSIGHT:

Acceptance of product by a Seller is at delivery of product. Rejection can be delayed many months due to factors such as the parts sitting on the shelf or parts that are placed into assembly but a problem arises later.

When trying to obtain insurance policies, the more a company can demonstrate they are covering their bases, the more likely a company will be able to obtain a policy and get a better price.

When obtaining a signature to your terms and conditions, ensure that the person executing the document has the authority in their company to do so. Ask the individual if they have the authority to sign on behalf of the company and if so, obtain their confirmation in writing. If a company later disputes that the individual did not have the authority, you will have proof to defend yourself in court.

Properly vet your customers and suppliers, ensure that your parts are properly tested before shipping and provide appropriate training to your employees.

To obtain the right insurance coverage, identify what you are up against and try to match your insurance to your terms and conditions as much as possible and involve your legal counsel in the process.