I recently read with interest the LBM Journal feature on Davis-Hawn Lumber entitled “From lawyer to lumberman.” My story is the opposite. I grew up in the lumber business, and now have a practice in construction law.
My father, Al Nelson, purchased a lumberyard in Litchfield, Minnesota in 1956 and renamed it Ideal Lumber (as in “What do I do? I deal lumber.”). My lumberyard experiences evolved from stacking wood for delivery during the summer after seventh grade, to earning my Class B commercial driver’s license and delivering materials during high school. To this day, I am very good at using my mirrors. I worked at the yard every summer until graduating from college. With age came more “skilled” labor. I still recall cutting my hands and almost flying off the roof of a chicken barn one windy day when helping to install a corrugated steel roof.
In high school I knew I wanted to be a lawyer, and Ideal Lumber put me through college. Once I graduated from law school, it seemed the most natural thing in the world to pursue a career in construction law.
One of the most common issues that I’ve encountered when working with lumberyards in my construction law practice is the failure to require customers to sign a comprehensive sale agreement or credit application. I recommend that customers be required to sign a master agreement that covers future purchases, and that purchase orders, sales tickets and invoices contain a statement that all sales are subject to the master agreement or credit application on file.
If a customer fails to pay in the future a good customer agreement can greatly increase the chances of collecting payment. The first question I usually ask a client (after “how much are you owed?”) is, “do you have a signed agreement, and what does it say?”
Here are the top five clauses I recommend that a credit application contain:
Top 5 Clauses
1. Payment terms
Clearly state when payments are due and when are accounts considered overdue. I also recommend the right to accelerate the customer’s duty to pay in full if you are forced to store products for more than a certain period of time after they are ordered. For example, if payment is due 30 days after delivery but the contractor asks you to hold off delivering the materials, at some point the clock should start ticking regardless of when the materials are delivered. Also capture banking and other asset information on the credit application so you have that information if future collection action is needed.
2. Collection costs and finance charges
The customer should be liable for all collection costs, including employee time and expense and all attorneys’ fees and other costs that you incur in collecting the amounts due or in protecting your rights, whether or not legal proceedings are actually commenced. The customer should also be required to pay interest or finance charges on overdue balances at the highest rate allowed under state law.
3. Disclaimer and limitation on warranties
Always include your specific warranties, or exclusions from warranties, and disclaim all other warranties. This should include a statement that the buyer will rely exclusively on the warranty of the product manufacturers, and that the buyer’s sole remedies are the manufacturers’ warranties. Also provide that your maximum liability under any circumstance is either replacing the product or refunding the purchase price, and you will never be liable for any additional actual, consequential or incidental damages. I recommend also stating these warranties and disclaimers on your website.
State that you have no liability for what the customer does with the products after pick-up or delivery, and that the customer will indemnify and defend you and hold you harmless against any damages, claims, suits or other issues resulting from or related to the customer’s use of the products. For example, if a contractor’s customer makes claims or starts a suit alleging defective work or products and includes you as a party, you could force the contractor to indemnify you and pay for your attorneys’ fees and other costs.
5. Personal guarantee
I can’t count how many times a client has been unable to collect an account because the contractor who ordered the materials went out of business or otherwise had no assets. Requiring one or more owners of the customer to sign a personal guaranty when the relationship starts can allow you to pursue the guarantors personally if the business does not make payment.
This list is not exhaustive and a good customer agreement will often contain other provisions, including some that might be unique to your business or geographic area. A solid agreement up front can eliminate many headaches down the road and greatly improve your prospects of collecting payment and recovering your costs in doing so.