Most suppliers require their customers to sign credit applications at the beginning of the sales relationship. However, since suppliers rarely need to enforce the terms of that document it is common to forget what it says or to periodically review it. A client recently asked me to pursue an overdue account. When I reviewed its customer agreement, I saw that it had a number of holes in it and my client did not know exactly what the document said. He had been using it for years as just another part of opening a new customer account. If you take the time to review and refresh your customer agreement, here are 12 key provisions I recommend:
1. PERSONAL GUARANTY: Make the owners of your customer personally responsible for overdue balances. It is simple to add a personal guaranty section to a standard credit application and most contractors are not surprised to see this requirement.
2. PAYMENT TERMS: Eliminate outdated payment terms. Also consider creating different payment terms for orders that exceed a certain dollar amount. For example, orders exceeding $10,000 require a 50% down payment.
3. COLLECTION COSTS: Always obligate the customer to pay your attorneys’ fees, collection costs, and other expenses to enforce the credit application and collect overdue balances.
4. RETURNS & RESTOCKING FEES: State that custom- ordered materials may not be returned, and payment is due regardless of whether the contractor uses the materials. Also charge a restocking fee if standard materials are returned.
5. DELAYS: You should not be responsible for delays because the property owner or contractor failed to provide access to the delivery site, or for bad weather, strikes, or other circumstances beyond the supplier’s control. Also consider a daily or weekly storage fee if the contractor orders materials but does not take delivery for a substantial period of time and forces you to store them.
6. WARRANTY DISCLAIMERS: In most cases you are not manufacturing the products and are only a selling them. All warranties for the products should be clearly disclaimed and the customer’s only remedy should be the manufacturer’s warranty.
7. OTHER DISCLAIMERS: Consider including special disclaimers for special products. For example, disclaim responsibility for flooring that is laid over in-floor heating where the temperature exceeds a certain level or where there are sharp temperature changes over a short period of time (such as 24 hours).
8. NOTIFICATION OF BREACH: Require the contractor to notify you within a short period of time after he discovers a problem with materials you supplied. If he does not send you a written notice within that time period (for example within five days), he has waived the claim.
9. LIMITATION OF REMEDIES: Limit the customer’s remedies and state that you will not be responsible for any indirect, incidental, consequential or special damages. Another aggressive clause would state that your liability is limited to the amount the contractor paid for the products at issue. Also provide that any action against you must be commenced within one year from the date the issue arose.
10. DELIVERY & RISK OF LOSS: Clearly state that a) your responsibility for the products ends when they are delivered to the job site; b) your only obligation is to drop the product outside at the project site; and c) it is the contractor’s responsibility to take delivery of the product at the job site and to move it inside the property.
11. INDEMNIFICATION: The customer should agree to indemnify and defend you if you are dragged into any disputes. For example, if you sell windows to the contractor and the homeowner later sues everyone because the windows leaked, the contractor should be required to indemnify you and pay your attorneys’ fees in defending against the action.
12. DISPUTE RESOLUTION: Choose whether you wish to use litigation or binding arbitration as your method of dispute resolution. However, if you choose arbitration consider still allowing claims under a certain amount to be pursued in small claims court. Also state that all legal action must take place in the county in which your main office is located.
These are just some of the provisions that I recommend when I review and draft customer agreements. If you have other provisions that you have found useful in your own agreements, please feel free to drop me a line and let me know about them. I am always looking for extra tools for my toolbox.