Tuesday, January 25, 2011

Protection Against Seller’s Actions

There are several reasons why Buyer’s contracts need protection against Supplier’s actions or inaction.

The first reason is potential product liability claims for personal injuries. If a third party is injured by a product or the product causes property damage, any one that was part of the sales chain may be sued for negligence. Actions such as buying and reselling a Supplier’s product as is or using the Supplier's product as part of the Buyer’s product would make Buyer part of the sales chain. Reselling any excess would also make the Buyer part of the sales chain.

The second reason is potential third party claims that the Supplier’s product infringes their intellectual property rights. The third party may sue both the Supplier and Buyer for both damages and to prevent further use.

The third reason is protection against personal injury or property damage caused by the Supplier, the Supplier's Subcontractors or their employees. A Buyer / Supplier relationship may be interpreted as a form of agency. Under the law of agency, the Principal may be held liable for the acts of their Agent. So if the Buyer / Supplier relationship was viewed by the courts as a form of Agency, the Buyer would be the Principal in the relationship and the Supplier would be the agent making the Buyer potentially liable for the Supplier’s acts.   

As a result of these potential sources of liability for the Buyer, most Buyer generated contracts will include indemnifications: 

  • A general indemnification or hold harmless and indemnification provision will require the Supplier to “defend, indemnify, and hold the Buyer harmless against any third party claims for personal injury or property damage caused by the Supplier to a third party. 
  • An intellectual property indemnification will requires the Supplier to once again “defend, indemnify and hold harmless” the Buyer from such claims and will include specific remedies in the event of a claim is made for infringement of Intellectual Property rights. 
To ensure that there is substance behind the Supplier’s promise, most contracts may also include requirements to provide insurance that would be used to protect against the financial losses of such claims.

In an attempt to avoid claims under the concept of Agency, contracts may also include "independent contractor" provisions that attempt disclaim any form of agency from existing.  
That alone won't protect you as the court would be free to consider the actions of the parties. The more the Buyer managed or controlled the actions of the Supplier, or provided instructions to the Supplier, the more likely a court would be to establish that a form of agency existed.


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