If sales are covered by contracts, which not all are, most direct sales are covered by Terms and Conditions, the famous Ts & Cs which adorn invoices, RFQs and the like. Online sales, of apps and the like, are typically covered by website Ts & Cs, a variant of their paper cousins.

Product sales are also made indirectly to the ultimate customer, through Distribution Agreements, Value-Added Reseller Agreements and the like. In these indirect sales, the key commercial question is who gets what margin on the sale, manufacturer or distributor, and for assuming what responsibilities.

The key issue from a legal perspective in direct and indirect product sales is allocation of risk. A company which thinks that it is obtaining a good price for its products may lose its margin if it does not limit its liability arising out of the sale.
These limits are defined in different ways. Even if something goes accidentally but badly wrong, a seller may want assurances that it will not be on the hook for any more than the amount it received from the sale. As this amount is significantly higher than the profit on the sale, this limitation of liability seems reasonable.

An illustration from my career of “consequential damages” will show why sellers typically insist on excluding them from their potential liability. My client was a chip manufacturer (as in computer chips) which had engaged a contract manufacturer for a line of chips that it was selling. The contract manufacturer made a mistake with the internal insulation in one batch of these chips. As a result, some of these chips installed in servers deployed by my client’s customers in downtown Tokyo, and only downtown Tokyo, failed in the heat.

Doesn’t sound too bad, right? My client could exchange the failed chips for new ones with insulation that worked, and then obtain warranty coverage from its contract manufacturer.

Of course, the contract manufacturer balked at first, needing more proof that it was the source of the problem, and then the customer which had installed the servers incorporating the client’s chips in downtown Tokyo sued my client, and not just for the replacement cost of the chips that failed.

No, they sued for consequential damages as well. In this case, that meant the cost of removing the server, shipping it back to them, and reinstalling it after replacing the chip and shipping it back to Tokyo, as well as the cost of the downtime that they had to pay because the server was unavailable to its customer for a significant period. The list went on. The customer sued my clients for all of its arguably related costs incurred as a result of the chip failure.

Needless to say, such enormous potential costs of product failure are not manageable in a commercial marketplace, and are systematically excluded in sales contracts and Ts & Cs.

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