Sellers Beware...

There’s a fundamental risk asymmetry in commercial contracts which is not often called out.

If you are a supplier, you face the major risk. If the widgets you are contracted to supply are defective, or aren’t delivered at all, so that the customer’s factory shuts down for two weeks, you are on the hook (other things being equal) for the profit the customer loses from the two-week shutdown.

As a supplier, a claim against you is a claim in damages. Damages are inherently open-ended (subject to various rules on foreseeability etc) and there is no necessary correlation between the price you are charging and the amount of damages you might end up paying.

But if you are the buyer, then your primary (and often only) obligation is to pay the price. If you don’t pay the price, then the primary liability you are exposed to is debt, not damages, and that liability is not open-ended. It’s the price you promised to pay.

If you are a buyer then, unlike the seller, your liability is necessarily constrained. Unlike the position of the seller, there’s a necessary correlation between the price you promised to pay and the liability you are exposed to.

What’s the moral? Sellers should take into account the risk to which they are exposed, and ask themselves two questions:

  1. to what extent have I mitigated the risk (by limitations of liability etc)?
  2. to what extent does my price have a component which adequately reflects the remaining risk?

If you are a buyer then, unlike the seller, your liability is necessarily constrained.