Tomorrow's Legacy is Created by Today's Sale

Paul R. Gary
February 14, 2009
COLUMN : Legal | Management

The last couple years have seen staggering decreases in building starts. It seems a generally benign “downturn” has progressed through a much-debated “recession,” with some fearful prospects of a “Depression” now on the minds of our pessimistic colleagues. While many economists doubt the potential for the economic downturn to stumble into a depression, the impact of fear on the economy—most notably the credit and stock markets—cannot be denied.

But for the makers and sellers of windows and doors, like other companies, fear does not keep plants open. Sales pay. And with all companies hunting for sales, some window and door companies are venturing beyond their usual markets and project commitments. Installation agreements and direct involvement in project design are becoming more commonplace as companies work to give themselves a sales advantage. Caution is needed, however, because an overextension to get sales has the real potential to generate net losses that far outstrip the temporary value from a project.

Consider Installation Services
Installation services have begun to become a routine service offering for many window and door manufacturers. Admittedly, in this time of increased competition, installation service can prove a valuable incentive when the developer’s dollars are being allocated. For those dollars, the developer often expects quality product and completed installation. Sure, window and door companies know how their products should be installed but this is not the same as knowing how to supervise an installation crew.

Also, legal impacts from installation agreements stretch far beyond the product itself. For example,
window and door companies contracts for worker's compensation insurance in place for their manufacturing activities. But when a manufacturer steps into the role of installer the considerations and risk analysis are much broader. For example, most insurance policies written for manufacturers exclude installation services, if only as it is considered "your work." Others exclude insurance coverage for installation in condominiums or multi-family housing units. This means that if there is a product claim or construction defect action a manufacturer could be liable for all costs—defense costs and indemnity costs—in future litigation when their insurance carrier walks away from a claim because of installation. This nightmare scenario is rivaled by the worker’s compensation implications for employees actually performing the installation.

The implications attendant to a contractual agreement to install are equally weighty. Consider the recent case of Crawford v. Weathershield, where a window and door manufacturer was forced by the California Supreme Court to pay a developer’s attorney’s fees even though it was found not negligent. Let me repeat that for emphasis—not negligent.

In other words, even though it did nothing “wrong,” the manufacturer’s contract included a provision making it responsible for the developer’s attorney’s fees in the event of a construction defect claim. From an even more practical perspective, this meant it was forced to bear hundreds of thousands of dollars—dollars likely well in excess of the original sale value—because of its dealings beyond the simple manufacture of the product. (How’s that installation contract looking now?)

Involvement in the design process is another way a manufacturer or seller can overextend to get a sale. Unique product configurations, certification and ratings can result in unintended costly warranty issues. Pushing a rating "to the limit" needs to be balanced with contractual protection. Product claims and eventual litigation that develop because of rating issues are complex and can devolve into long, expensive fights. This can be avoided by upfront controls and a clear response to certification and compliance requirements.

So, does this mean that companies should run from sales, hide their heads in the proverbial ground, and only come out when there is no chance of exposure? Obviously, no. The risk-reward question is an everyday process in all companies. Keeping a keen eye toward extracting maximum value from a sale, however, must consider the potential future costs. Have your contracts evaluated not only for obligations of the agreement, but what may be required of your company in the future. Ensure that expectations regarding product performance are clearly communicated and documented in a way that provides a later defense to later claims.

Control product claims through an Early Claim Assessment approach and response model. Be ready to stand behind your warranty in the bad times as well as the good. These general points are sound principals that should be observed at all times, but especially when market forces are stressed and sales even more important.

As the credit and market crunches have taught, issuing subpar credit today for larger debt tomorrow is ill-advised. While risk is a component of business, no company would knowingly accept sales proceeds today in exchange for an eventual claim that dwarfs the value of the sale three or four years later. Despite tough times, sticking to sound business models and getting help to avoid downstream claims and problems allows companies to extract maximum value from today’s sales, with less potential for simply having to give it back. With this careful eye, and long term goal, companies can be well positioned when the market turns around.
 

Paul R. Gary is the prinicipal of The Gary Law Group, a law firm based in Portland, Ore., emphasizing legal issues facing manufacturers of windows and doors. He welcomes feedback about articles published in Window & Door and can be reached at 503/227-8424 or paul@prgarylaw.com.