minimizing legal risks associated with sales contracts

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SU_BUS3055_W3_A3_Armenta_S 1

Risk Avoidance Report:

Minimizing Legal Risks Associated with Sales Contracts

Product Liability and Performance on Sales Contracts

Sandra Armenta

South University Online

Professor Karin Bogue

April 23, 2011


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Risk Avoidance Report: Minimizing Legal Risks Associated with Sales Contracts,

Product Liability and Performance on Sales Contracts

Legal risks can be found in every area of the business environment. A risk avoidance plan

should be well developed to include all possible legal risks. These issues can also be addressed in a

good risk management program. Some additional areas where legal risks can occur are sales contracts,

product liability and the performance on sales contracts. There are ways to minimize or avoid overall

risks.

One way to generally avoid or minimize many of the legal risks is an intensive training

program. This training can be performed in-house by the Executives or managers that have an

extensive background in the area being taught. Training can also be provided by an outside firm that

specializes in risk avoidance. A final option is seminars or conferences. Continuous training and

review is essential due to the changes in business environments and laws. However, there are specific

ways to address individual risks.

For BGP Technologies, sales contracts can create legal risks since they are a worldwide

organization. When dealing with different countries one of the main risk factors in sales contracts is

which countrys laws will apply, the buyers country or the sellers country (McPhillips, 2004, para. 3).

In 1986 the United States ratified the United Nations Convention on Contracts for the International

Sale of Goods (McPhillips, 2004, para. 4). It is important to become familiar with the differences

between the Convention and the UCC when writing contracts.

One important way to avoid legal issues in sales contracts is to have a written contract.

Although the Convention permits oral contracts, the UCC requires all sales contracts over $500 to be

in writing. In addition, some countries still require written contracts for agreements to be binding

(McPhillips, 2004, para. 9).


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Another helpful tool is to include an arbitration clause in the contract. This can help U.S.

companies avoid the risk of being sued in foreign courts, under foreign rules, by a judge that is

speaking in the language of that country (McPhillips, 2004, para. 32). The arbitration clause should

include where the arbitration would be held, the language used at the hearing and the number of

arbitrators that should be present (McPhillips, 2004, para. 43).

An additional area of concern for BGP would be product liability. With an increase in the news

media reporting on cases of product liability there is a higher risk of product liability today (Ross,

2010, para. 1). The crucial function of product liability prevention is to identify and quantify

potential legal problems and prevent or minimize the risk of their occurring and also to be prepared to

deal with them if they occur (Ross, 2010, para. 5).

The ideal solution would be to obtain legal counsel experienced in product liability. They can

not only help after an incident, they can help develop a risk assessment program to minimize risks

before an incident. BGP can also develop their own risk management program. A risk management

program for product liability should focus on minimizing the potential for incidents, complying with

all laws and regulations, providing a good defense, and evaluating incidents to help prevent future

incidents (Ross, 2010, para. 16). All employees would benefit from training in product liability,

regulatory law and product safety (Ross, 2010, para. 17).

Other ways to minimize product liability legal risks deal with manufacturing, design, and

warnings and instructions. When manufacturing products it is critical to ensure that they meet all

design and manufacturing specifications (Ross, 2010, para. 23). During the production process

performing quality inspections and testing can help to identify any problems. Defects in the product

design can be the biggest risk in product liability. This can be minimized by a risk assessment. A risk


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assessment can be a costly process so an alternative would be for engineers to use various software and

checklists (Ross, 2010, para. 27).

The most important way to minimize the legal risks relating to product liability is identifying

any possible hazards and if they cant be removed, they must include a warning. Manufacturers need

to establish warning label guidelines that will allow for the creation of legally adequate warnings

(Ross, 2010, para. 31). Some products require warning labels be on the product in a specific place,

while others only require warnings to be in an instruction manual (Ross, 2010, para. 33).

Performance on sales contracts can be another area of concern regarding legal risks. Failing to

carry out obligations on a sales contract can have a negative impact on the buyers business creating

legal action against the seller for non-performance (Risks in international, n.d., p. 1). Some

examples of ways to minimize these risks are making sure the contract has no terms or conditions that

can be the subject of future disputes, be knowledgeable in document preparation, be aware of and

respect the cultural differences of the buyer, have sufficient insurance and have a contingency plan.

Repudiation of a contract is the result of a buyer or seller refusing to perform the contract as

stated (Twomey & Jennings, 2010, p. 582). This can include failing to deliver the product, delivering

late or delivering part of the order, and/or delivering damaged or defective goods or goods that do not

meet the specifications of the contract (Rutter, 1996, para. 37). These risks can be avoided by making

sure that the terms of the contract are reasonable for both the buyer and the seller. This is especially

important when doing business with other countries (Rutter, 1996, para. 41).

Using a trader that is experienced in the specific country is another option for delivery of the

product. This can help in avoiding the risk of non-performance of the contract (Rutter, 1996, para. 43).

However, when using a third party as a trader it is advisable to get a guarantee to protect yourself in

the event the trader fails to perform. The guarantee can be a standby letter of credit, performance


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bonds, bank guarantees, cash deposited in an escrow account, product delivered to a neutral party, or

government guarantees (Rutter, 1996, para. 48).

The legal risks involving sales contracts, product liability and the performance of the sales

contract can lead to costly lawsuits. Avoiding or minimizing these risks can be very easy with the

knowledge and/or training. Being familiar with contract law under the UCC or the Convention for

international transactions can help to create a sales contract that can avoid any legal risks.

The manufacturing of the goods should include quality inspections and testing. This legal risk

may not be avoidable, but by placing the appropriate warning and instructions the risk can be

minimized. The performance of the sales contract can be minimized by having a well written and

reasonable contract. The key to minimizing the risks in all these areas is the sales contracts, including

disclaimers.


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References

McPhillips, C.V. (2004, January/February). Buying and selling overseas: Dealing with contracts in a

foreign world. Business Law Today: American Bar Association, 13(3). Retrieved

fromhttp://www.americanbar.org/publications/business_law_today_table_of_contents/buslaw_

blt_2004_01_02_mcphillips.html

Ross, K. (2010, August 25). Product liability risk management. The Hennepin Lawyer. Retrieved

from http://www.productliabilityprevention.com/images/HCBA-

Product_Liability_Risk_Management_Aug2510_.pdf

Rutter, N. K. (1996). Part 1: Managing risks in countertrade transactions.BarterNews, 37. Retrieved

from http://www.barternews.com/managing_risks.htm

Twomey D., & Jennings, M. (2010). Andersons business law and the legal environment (21st Ed.)

[Vital Source Digital Bookshelf]. Retrieved from www.myeclassonline.com

Risks in international trade and mitigating measures. (n.d.). United Overseas Bank Limited Co.

Retrieved from

http://www.uob.com.sg/assets/pdfs/corporate/corporate/TradeTutorials_RisksinInternationalTra

de.pdf

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