10 Mistakes Made in Goods Contracts: Practice Points

Understand the transaction before you look at the paper. Krista said her answer to "what's the first thing you look at when you get a contract" is that she does not look at it. She asks questions about the deal first, because reading the paper first lets the other side's drafting influence how you think. Ask what you are buying, why you are buying it, what happens when it does not arrive on time, and whether you can get it anywhere else. Keep asking the what happens if it doesn't questions layer by layer, and you will find where the problems are.

Watch the gap between what you promised your customer and what your supplier owes you. Krista pointed to that mismatch as the biggest opportunity for a gap in the whole arrangement. Vendors push to cap and disclaim everything they can, our customers refuse to sign unless we absorb the exposure, and we end up holding the bag in the middle. That gap gets closed by people more than paper. Get the business teams running both sides of the house aligned on how that risk gets managed, so a sales VP is not giving away the farm downstream while procurement is accepting caps upstream.

Define delivery precisely and buy yourself early warning. Krista looks for four things. A crystal clear date, early warning from the supplier written into their scope of performance, a recovery plan and escalation path, and a meaningful alternative when the supplier cannot perform. Delivery sounds like a simple word until you ask whether it means shipped, received, cleared customs, inspected, or accepted, and who at your dock is doing the accepting. As Krista put it, "I care almost as much about when you tell me you're going to be late as I do about how late you are."

Keep liquidated damages tied to a defined window. Laura's first in-house job included a $3 million piece of equipment with liquidated damages capped at 10 percent. The vendor blew through the cap, the project stalled, and nobody could declare default because the LD was the sole remedy for that breach. The equipment showed up nine months late and the lawyers had nothing left to work with. Draft the LD to cover a stated period, say up to 30 days late, and preserve termination and other damages after that. Follow the court requirements precisely, keep the exclusive remedy language in, and never call it a penalty.

Write an acceptance period your team can actually run. Ten days sounds reasonable to two lawyers on a call. It stops being reasonable when your warehouse is working through a 30 day backlog and the clock runs whether or not anyone opened the box. Krista separates receipt from inspection from acceptance and makes the language match how her business actually operates. Then she assigns an owner in the factory or the warehouse, because a reasonable period nobody can administer becomes deemed acceptance.

Guard your rejection rights BEFORE you accept. The law gives customers far more room before acceptance than after. Reject a non-conforming good at the dock and no money is due until a conforming good shows up. Accept it and you are down to a warranty claim, where the burden sits on you to prove the non-conformance and payment attaches even while the vendor takes months to fix it. Vendors will tell you a short acceptance period is fine because you can always make a warranty claim. That trade is worse than it sounds.

Push quality control upstream into the manufacturing process. You can contract for more than a conforming good landing on your dock. Reserve the right to inspect the vendor's manufacturing process, hire an independent consultant to review their quality control, and limit production to a facility you have already approved. Require notice and sign off before they change processes, materials, or named items on the bill of materials. Test the first article off the line so a defect surfaces before the whole order gets built.

Tie every payment to measurable performance. Krista said 50 percent at signature is a financing arrangement rather than a payment for performance. Every payment should answer what you got for it, and a prepayment covering long lead items raises its own question about who owns those items when things go wrong. Define what each milestone means and how you know the supplier hit it. Hold something back until the end. As she put it, "When you follow the cash, you usually find where the leverage is."

Get title and security interests right. Under US law a vendor does not keep title after delivery in a sale of goods, no matter what their contract says. Language claiming otherwise creates confusion over who insures the goods and throws off your own financial records. When you are carrying real money upfront, take a security interest, put the grant in writing, and comply with the UCC requirements. Then check whether the UCC-1 actually got filed, because Laura saw vendors fight hard for security interests and then almost never perfect them.

Keep warranty and service coverage in separate lanes. A warranty covers defects, meaning the product does not do what it is supposed to do. Service covers ongoing maintenance and keeping things operational. Krista compares it to a new HVAC unit or a new car, where the manufacturer handles the defects and you pay someone else for the oil changes and filter replacements. Vendors will try to start a paid service plan on day one, which quietly charges you for coverage the warranty already gives you for free. Your rights under a warranty are stronger, so protect that period and be clear about which document controls.