Credit agreements limit parties’ remedies and damages

  • By Patrick Hussey Business of Law
  • Tuesday, May 28, 2013 1:48pm

It’s common in many industries for a supplier of goods and its buyers to enter into a written agreement at the time they first start transacting business.

Typically, this is called a Commercial Account Application and Agreement. Even if it’s called something else, they all work basically in the same way. The agreement usually provides credit information on the buyer, with bank references, and a personal guaranty by the owner if the buyer is a corporate entity. These agreements typically contain provisions on when invoices are due, any discount arrangements and interest charges on past-due invoices. Typically these agreements are filed away and the parties sell and buy goods over the course of many years simply by phone orders with back-up purchase orders.

A recent Washington case illustrates the importance of these initial legal documents. In this case, a construction company placed an order with its long-time lumber supplier for a certain grade of Douglas fir 4x4s it needed to build scaffolding for a bridge project. Instead of delivering the specified grade or better, the lumber company delivered a lower grade lumber. The bill of lading reflected that the order had the specified grade or better, but the lumber delivered was “standard” and the construction foreman did not notice the discrepancy upon accepting the lumber. The construction company’s work crew used the lumber to build scaffolding; within hours, the scaffolding failed and two construction company employees fell 20 feet and were injured. The injured workers’ claims were settled.

Four years later, the construction company sued the lumber company for its losses related to the workers’ injuries. It alleged that the defective product breached the parties’ contract order by failure to deliver the specifically ordered lumber.

The Commercial Account Application and Agreement, which the parties signed three years before the construction company ordered the lumber, contained all-caps language that basically stated that the lumber company was making no express or implied warranties concerning any sold goods, and expressly disclaimed every type of implied warranty under the law with respect to the sale of the goods. The purchaser’s remedy for any defects was also limited to the purchase price of the defective goods.

The construction company’s suit against the supplier was dismissed. The court determined that a trial was not necessary because of the binding legal effect of the provisions in the agreement. It ruled that the agreement unambiguously and conspicuously disclaimed any warranties and limited the remedies.

Even when the construction company showed the court that the owner of the lumber company said, “We sent the wrong stuff. We’ll be responsible for the consequences” and would make the construction company whole, the court determined that these oral statements did not legally waive the binding provisions of the parties’ written agreement.

It ruled that for a waiver to be legally effective, it must be shown that the statements were clearly inconsistent with any other intention other than a pure waiver. The construction company could not prove that the lumber supplier owner’s intention must have been to clearly and unambiguously relinquish his company’s right to disclaim responsibility for damages.

There are two morals to this story. First, the provisions of that initial Commercial Account Application and Agreement, which may have been entered into years ago, still apply to oral orders backed up by invoices in the event problems arise. Secondly, if someone does admit something, or promise a course of action when such a problem arises, those statements and actions need to be put in writing and signed in order to be legally effective.

Patrick Hussey is a partner at the Anderson Hunter Law Firm, P.S., in Everett practicing in the areas of commercial transactions and business insolvency. The discussion in this column is not intended to be a substitute for specific legal advice in this area of the law. The law firm provides representation in all civil matters. Hussey may be reached at 425-252-5161 or phussey@andersonhunterlaw.com.