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Ten common contract problems encountered by moldmakers
August 16, 1999
6 Min Read
Of all the players in the injection molding supply chain, moldmakers are traditionally the least formal when it comes to drafting contracts. But the days of building tools on a handshake are waning.
A solid, well-constructed contract can help a project run smoother and protect a moldmaker when relationships sour. Mark S. Mahoney is a Pacifica, CA attorney who at one point worked at moldmaker Stoesser Industries. Knowledgeable about how the law applies to the molding community, Mahoney offered the following tips about problems found in many mold contracts at Moldmaking ‘99 in May in Columbus, OH.
1. Inadequate documentation. Given the rapidity with which employees change jobs and product lines change hands, often the only thread that holds a moldmaking project together is the documentation that goes with it.
Change orders usually introduce the most ambiguity in a project. Change orders given over the phone should be immediately followed by a confirming memo to all interested parties. If a confirming memo contradicts the phone order, the moldmaker should protest immediately in writing. In most states, change memos must be objected to immediately or they are otherwise considered accepted.
Mahoney recommends that every moldmaker assign one person in the shop through whom all correspondence flows before it’s distributed to any other department or personnel. This person would be responsible for reading all change memos, confirmations, and purchase orders, and would generate written objections when necessary.
Pay close attention to state law regarding additional terms in a purchase order, compared to the quote. Typically, if the quote is not limited to its own terms and the additional terms do not make a material alteration to the agreement, the additional terms are included in the agreement—unless the moldmaker objects in writing.
Finally, says Mahoney, all correspondence may become an exhibit in a lawsuit (see United States v. Microsoft, for example). This includes e-mails, memos, and letters. He recommends moldmakers keep communications formal and terse, avoiding jokes, side issues, and extraneous topics. Salutations should be formal, even if a personal relationship exists.
2. No provision for interest on the debt. If you want your customers to pay on time, you should include an interest provision in the contract. Most states provide a legal rate of interest that will apply to an award after judgment. Mahoney recommends a provision that states the monthly interest rate “or the maximum amount otherwise allowed by law.” Also include a provision that the remaining payment is due upon approval of first articles or 10 days after delivery of tooling for sampling, after which interest shall accrue.
3. No provision for attorney fees. First of all, says Mahoney, “Your job is to make molds, not file lawsuits.” A provision for attorney fees should be included only if the moldmaker is certain he or she would win a lawsuit. In contracts the American Rule is usually invoked, which states that each party pays its own legal fees unless provided for in the contract. Another option is to include a provision for arbitration to resolve disputes up to a certain dollar amount. In a large metro area, Mahoney recommends arbitration for disputes of $25,000 or less; in a rural area he recommends it for $10,000 or less.
4. Jurisdiction, venue, choice of law. If you get stuck in a lawsuit, you might as well make it as homey as possible. Mahoney recommends a provision in your contract that specifies all legal action will be filed in your home county and state. Also, send an objection immediately to any purchase order you receive that contradicts this provision.
5. No reference to trade and industry standards. Many moldmakers are not aware that references to other publications can be incorporated into a contract. Two such documents that Mahoney recommends are “Customs and Practices of the Moldmaking Industry” from the SPI (www.socplas.org) and “Guidelines for Part Prints, Databases, and Communication” from the AMBA (www.amba.org). If you do reference a trade publication, Mahoney says to be sure to exclude, define, or clarify any terms in that publication that are not part of the agreement.
6. Confusion over time of performance. Some molders complain heartily when a mold is delivered late, but they may fail to consider how change orders can affect the moldbuilding cycle. Mahoney says a moldmaker should have a provision in the quote that conditions delivery on complete drawings, specifications, source code (if necessary), and payment. Also, all quotes should state that all changes will affect delivery. And, when change orders are issued, your written confirmation should include a specification as to how delivery will be affected.
7. No limitation of implied warranty. A moldmaker makes molds, but he’s not a designer of finished products or an injection molder, says Mahoney. In most cases, a moldmaker can only render an opinion of what a mold’s capability, cycle time, or life span might be. It is common for statements that are intended as opinion to be misinterpreted as an express warranty of performance. Protect yourself with language that states that there are no warranties that extend beyond the description, and never promise a cycle time or life span. Also, check with your attorney regarding state laws on the topic as they vary significantly from state to state.
8. No provision for imposition of lien on tooling. Most states have statutory liens for moldmakers to assert upon tooling. The lien can be specific to the tooling used to create the debt, or it can be general for all tools held in the moldmaker’s possession. The contract should also have a provision to create a lien on the tooling to secure payment. Get a UCC financing agreement to perfect a security interest in tooling, and renew UCC financing statements every five years. A statutory lien usually depends upon possession. If there is a concern that the amount of the final payment will be a problem, consider the use of a third party for inspection and sampling.
9. Confusion over identity of the parties to the agreement. Remember this simple rule when it comes to identifying parties in the contract: Ambiguities in a written document are interpreted against the author. All agreements should clearly state which entity owns the tooling and which entity is obligated to pay the bill. Mahoney warns moldmakers to watch closely for relationships between corporations and their subsidiaries when ascertaining ownership. In all cases, if a purchase order comes from an entity other than the owner of the tool, then the owner must be notified of the lien before the work begins. Double-check state law as variations exist.
On change orders, make certain that any individual giving a change for a tool has purchasing authority, and confirm change orders to the whole company, not just the engineer who called it in.
10. No limitation of remedy. A moldmaker who does not limit the measure of damages recoverable can be held liable for consequential and incidental damages caused as a result of a defect, such as a customer’s lost profits or downtime. Include language that declares the buyer’s remedy is limited to refund of purchase price or replacement of defective parts, and disclaim consequential damages. Whatever you do, the provision should be conspicuous and should not come as a surprise to the buyer. As with other provisions, it is important to check with your attorney to see what the state law says.
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