Planning Tools: Contractual Agreements

My father always taught me that the easiest way to prevent many arguments is to come to agreement on the issues involved before the problem arises. People are typically more clear-headed, logical and amenable to rational discussion when given the opportunity than when a crisis or problem thrusts itself upon them on its own timetable and agenda. Product manufacturers, distributors, suppliers and purchasers are no different. Contractual agreements made between any of the various parties involved in the chain of manufacture, distribution, sale and use of a product can set forth the respective responsibilities, duties and protections of the parties, subject to governing law, in the event a product liability claim arises.

This approach is impliedly endorsed in the new Restatement Third, Torts: Product Liability. Its Section 18, entitled “Disclaimers, Limitations, Waivers and Other Contractual Exculpations as Defenses to Products Liability Claims for Harms to Persons”, generally prohibits a direct bar by way of package or product disclaimer for responsibility for personal injury. However, Comment a. to that section specifically states that “Nothing in this Section is intended to constrain parties within the commercial chain of distribution from contracting inter se [between themselves] for indemnity agreements or save-harmless clauses.”

Insuring agreements are one well-known form of contractual agreement to shift risk. To the extent that they concern arrangements between the insured and its insurer directly, that is a topic for a later column and one on which all of us have some experience. But how about contractual agreements with suppliers, distributors and customers?

Suppliers of materials or component parts and their manufacturer/assembler may have separate written supply and specifications contracts between them which do not address respective product liability responsibility. Many times the only terms are those contained on the invoice and the purchase order, which may be conflicting. A past course of dealing may be enlightening on some points but rarely very conclusive on product liability responsibility. Agreements should require the supplier to warrant as part of the agreement that the product [or service] being supplied meets the specifications and performance expectations which have been reached between the parties. The supplier may be required to accept the risk and responsibility of defending and indemnifying the manufacturer for any claims in the event that it does not. The supplier should either have adequate insurance protection or sufficient financial resources to make good on this kind of representation if the need arises.

Distributors may be named as additional insureds on the manufacturer’s insurance policy by vendors endorsement protecting those distributors with respect to distribution and sale of the manufacturer’s products in the regular course of business. Alternatively, distributors may contractually defend and indemnify manufacturers for their actions over and above mere distribution of the product which are alleged to have caused or contributed to plaintiff’s harm. Those actions may consist of repacking, relabeling, demonstrations, installation, service or repair.

In larger ticket or more complex products, purchasers/customers may need by agreement to defend and indemnify manufacturers for those injuries or damages which are caused by their own negligence or improper actions rather than product defect. Such provisions knowingly negotiated between the parties will likely reduce the occurrence of accidents giving rise to claims against either party.

The least favorable context in which to determine the status of your own contractual arrangements is in the course of responding to a summons and complaint. Whatever contractual protection you may have (or not have) has already been determined to a great extent. To be first learning it at this juncture is much like scratching off the protective coating on a state lottery instant winner ticket. You have already paid your money and don’t know whether you have a winner or a loser.

Periodically reviewing the existence and terms of your contractual agreements and upgrading where appropriate will make the days smoother and the nights more restful if litigation unfortunately does arise. This is a call to action now. It’s going to be a little late - and possibly a lot more time-consuming, expensive and anxiety producing - after suit. Accumulate and review all your contractual agreements with suppliers, distributors, vendors, customers, etc. Have counsel work with you to address apparent and potential trouble areas. Deal with this issue before it deals with you.

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