Wednesday, October 19, 2011

High Risk Applications

Many supplier specifications, especially those for products that have broad potential uses, will contain language like the following:

“SUPPLIER products are not authorized for use in high-risk applications (such as life support) where a failure of the SUPPLIER product would reasonably be expected to cause severe personal injury or death, unless officers of the parties have executed an agreement specifically governing such use.“ “Buyer must fully indemnify SUPPLIER and its representatives against any damages arising out of the use of SUPPLIER products in such high-risk applications”.

In some cases the supplier may be truly seeking to avoid the use of their products in those types of applications simply because they do not want to be exposed to the potential liability that could occur. In other situations a supplier may be willing to assume the risk provided they can know and agree when its being used in that manner. The requirement for agreement by officers allows for both different terms and different pricing to be negotiated for sales into those applications. In times of shortages of certain electrical components for computers we would find that suppliers had inventories of virtually the same component with a different part number that was being sold in the medical products business for three (3) times the price.Whenever you encounter these types of provisions where the supplier is insisting on including such terms, always involve your lawyer.

Companies know how their product was designed, and how they intended it to be used. They don’t know how their customer may use it or how it may be used by subsequent owners. Those are things the buyer can’t control. A product could be cannibalized for parts and those parts could be used anywhere. So the first problem with such a provision is it makes the buyer liable over potential use that they can’t control. The mere fact that the product ends-up in that use makes the buyer liable. The best the buyer may be able to commit is that they will not knowingly sell the products in those uses.

Even is a supplier would agree to having the buyer be liable only if they knowingly used the product those applications, most language is still far too broad. The problem with the language
above is they that didn’t define a high risk application. They gave one example (such as life support) and then combined that with a very open ended statement (combined where a failure of the SUPPLIER product would reasonably be expected to cause severe personal injury or death”.
Under that definition any item that failed and caused a fire which caused personal injury or death,would be considered high-risk. Any item that failed and caused a short circuit that could severely injure or kill someone would be considered high risk. For electrical components that would mean that every component that had high voltages running through it would be high-risk. I don’t think that’s the goal of high-risk. To agree you would need to clearly define exactly what high risk uses are, so that you could understand when you were selling into those applications and could get your customer to agree to indemnify you.

I like to avoid these negotiations. The tactic I use is when the supplier is selling the same or similar products through distribution, I will ask them how are they managing the risk in those situations. They are not the supplier to the end customer, the distributor is. They do not have privity of contract with the distributor’s customer. How do they enforce something that’s not part of any agreement with the customer? The reason why I do this is if they can’t prove to me that they can manage and enforce it through that channel, I tell them don’t ask me to agree to do something they can’t do. Most of the time that ends it.

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