Managing Legal Risks in the Supply Chain: A Note on Terms and Conditions of Sale

Supply chain considerations for firearms industry members break down into two key relationships: your customers and your vendors.  Ensuring that you have the components and other supplies you need and ensuring that you can successfully deliver them to your customers are largely logistics issues.  But, when things do not go as planned, the legal documentation you had in place ahead of time becomes critical.

Most legal issues arising out of the supply chain involve the law of the sale of goods.  All 50 states have adopted the Uniform Commercial Code, or UCC.  The UCC’s Article 2 is a comprehensive body of law governing the terms under which goods are bought and sold, unless the parties to a sales contract agree to other terms.

UCC Article 2 is comprehensive, but it is still general in many respects.  Contracting parties therefore benefit from employing terms and conditions of sale specific to their transaction.  These can include terms such as price and quantity of goods and the conditions under which price and quantity may change; obligations regarding delivery of the goods and risk of loss in transit; warranty exclusions, liability limitation, and limitations on when claims may be brought; intellectual property rights and indemnification obligations upon infringement; and choice of law, attorney’s fees, forum, jurisdiction, and related issues.  If the parties do not spell out their legal rights with terms and conditions, their rights might not be entirely clear when a dispute arises, and it is likely that at least one of the parties will have rights different than what it anticipated.

There are different ways to spell out and enforce terms and conditions of sale.  For larger transactions and ongoing relationships with vendors and customers, many parties employ a Master Sales Agreement or similar contract.  A Master Sales Agreement is a multi-page contract that memorializes the legal relationship between buyer and seller, anticipates potential issues that may arise during the relationship, and offers the parties certainty by setting in stone the basic rules of the relationship.

The more common method for setting terms and conditions of sale is to provide them in sales documents such as purchase orders, order confirmations, or invoices.  UCC Article 2 embraces this model, and contracting parties are able to establish their contract rights by simply including terms and conditions in a sales document.  Despite this ease, however, a party must be careful to follow procedures that permit the counterparty to confirm its acceptance of the terms and conditions so that both buyer and seller have agreed to the same contract terms.

One key aspect of UCC Article 2 is flexibility, and Article 2 is intended to allow contracting parties maximum latitude in defining their legal relationship.  Although this principle was adopted decades ago when the UCC was first drafted, it supplies the needed flexibility in today’s e-commerce driven market.  All the rules that apply to old-fashioned exchange of paper forms apply equally to contemporary sales of goods, in which parties exchange sales documentation electronically or simply agree to terms when clicking through the sales portal on a website.  Parties must be aware of internet-specific issues, such as privacy and data security, but core sales terms can be agreed upon and enforced fully when transactions are entirely electronic.

When managing your vendor and customer relationships, having no specified terms and conditions leaves a great deal to chance.  Granted, a company can conduct purchasing and sales for years without terms and conditions in place and without any problems.  But one bad sale or bad purchase with no terms and conditions to protect the company’s legal position can upset years of success.  For example, if you purchase a component part that infringes another company’s patent and you haven’t established the vendor’s responsibility for indemnification in a contract document, you are left with less-than-certain rights to recover from the vendor.  The better course is to ensure that your legal rights are known and understood ahead of time.

A number of other legal issues are involved with the supply chain, particularly with commerce in firearms.  We will discuss these issues and other regulatory and compliance topics during the 2022 Firearms Industry Conference (FIC), April 26–27 in Atlanta, Georgia.  Registration is open.

This alert is not intended as, and should not be taken as, legal advice.  The use of the information provided here should not be taken as establishing any contractual or other form of attorney-client relationship.  Do not act or refrain from acting based upon information provided here.  Instead, consult with a qualified attorney about your factual and legal circumstances.