Things You Didn't Bargain For - Terms the Law Includes in Your Agreements"

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Most of us acknowledge that written agreements have a place in business.

In the IT industry, we have seen a shift away from manufacturer's representatives and hardware suppliers to an industry of VAR's, system integrators and cloud-based service providers. Clients are looking more for solutions than hardware. All of which increases the likelihood of unmet expectations and the resulting disputes.

As a lawyer, my job is to help parties reach and document their agreements. I believe that any agreement has to meet the needs of all parties to the transaction. It is tempting in the face of a potential sale to avoid a full discussion of all of the purchaser's needs. My belief is that a full discussion of the issues can only enhance the chances that a project will be successful, and that reducing the parties' respective commitments to writing increases the likelihood that the commitments will be kept. As you would expect, I encourage contracting parties to follow this strategy on the basis that "an ounce of prevention is worth a pound of cure."

But not every arrangement is fully or even adequately documented. And disputes can and do arise. When they do, the law often includes terms in the agreement by implication.

Before reviewing them, a bit of the basics. A dispute can be based on specific terms of an agreement, or on terms (implied) by law. The latter are not actually included in the written portion of the agreement. Most commonly, these arise from the Sale of Goods legislation in your jurisdiction or, in the United States of America, from the Uniform Commercial Code (UCC).

The most common Sale of Goods implied warranties arise when the goods are sold on description, or if the purchaser relies on the skill and knowledge of the vendor. When goods are sold based on their description, an implied warranty that they will meet the description arises. Additionally, an implied condition that the goods will be of merchantable quality might also apply. This means that the goods will pass the test if, after examination and knowing of the defects in the goods, a reasonable person would still purchase them. Lastly, if the purchaser can shown that she relied on the skill and knowledge of the vendor, an implied warranty that the goods will be fit for the purpose they were purchased for will apply.

If your project is characterized as a sale of goods, there can be an implied warranty that the system will be fit for the purpose that the purchaser specified.

If the purchaser does inspect the goods, and then accepts them, she can lose the protection of some of these implied warranties.

A sale of goods is distinguished from other arrangements, such as agency relationships and contracts for the provision of work and materials. To the extent that all or a portion of a contract is characterized as a contract for services, your obligations might be limited to having to perform the work with reasonable skill and care, and in a good and workmanlike manner.

What this means is that if you are selling work and materials, you must use a reasonable amount of effort to succeed, assuming that you are competent in the first place, but the outcome need not work exactly the way the purchaser wants it to. On the other hand, if you represent to the purchaser that you can provide a solution, you might find yourself in a Sale of Goods transaction where the system must be fit for the purpose for which it was purchased.

Implied terms can apply even if your agreement is not in writing.

Some examples.

A building supply business contracted for the design of an inventory control, point of sale, and accounts receivable system. As it turned out, the system as designed could not handle the complexity or amount of inventory. The defendant was also accused of not providing the necessary assistance. In other words, the system was not fit for the purpose the business wanted it for. Damages were awarded sufficient to put the business in the position it would have been if the contract had not been entered into.

In another case, also involving inventory control and point of sale equipment, the store owner also claimed that the system sold to it was not fit for the intended purpose. It turned out that in addition to requiring a system that could handle the functions of a retail store, the store owner ran a substantial jewellery manufacturing business. In this case, the court reminded us that the burden of proof is on the store owner to prove that it made its purpose known. The court went on to say that the store owner knew all about the requirements of its business and was under an obligation to communicate this information. The action was dismissed based on the failure of the store owner to provide this information.

In a third case, the defendant was commissioned to design and install a system for use in a retail cookware store business. The owner of the business knew that the defendant had never designed a retail computer software system before. The defendant wanted to get into this part of the software business, and was prepared to do the work for a significantly discounted price. The defendant gave strong assurances that it would be able to accomplish the task. The system never did work, for many reasons. Again, the court decided that the defendant failed to supply goods reasonably fit for the purpose intended. The court went on to say that the owner of the business never agreed to participate in an experiment that would disrupt its business. The owner of the business was awarded all of its expenses flowing directly from the basic agreement between the parties.

A full discussion of risk allocation before starting a project can avoid terms being implied into your agreement that were not bargained for or that are different than you intended.

The message is the same, regardless of the amount of customization involved. To the extent that the purchaser wishes to rely on the supplier, there is a obligation on the purchaser to clearly set out the purpose for which the products are purchased. And in the case of the supplier, there is an obligation to deliver a system that meets the purchaser's needs as they are expressed. In a Sale of Goods transaction, it is not enough to give it your best shot and then fail.

To put it another way, it is usually in both parties interest not to cause damage to the other. If both parties recognize that beyond their own self interest they have an obligation to fully explore the issues, the temptation to just make the sale and grind the best price can be avoided - and the relationship can do nothing but improve in this light.





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