Tennessee Commercial Contracts: Avoid Costly Risks

Why Tennessee Contract Law Matters for Your Deal

Commercial contracts in Tennessee are governed by a mix of common law and statutes, including the Tennessee-adopted Uniform Commercial Code (UCC) for the sale of goods. The terms you draft—and the ones you omit—can determine whether a court enforces a clause, how damages are calculated, and who bears unexpected losses. Careful planning can prevent supply chain disruptions, payment disputes, and litigation. See Tenn. Code Ann. Title 47, Ch. 2 (Sales).

Formation and Enforceability Basics

Tennessee recognizes contracts formed through offer, acceptance, and consideration, and generally enforces written agreements that show mutual assent. For sales of goods, the UCC can recognize a contract even if one or more terms are open so long as the parties intended to contract and there is a reasonable basis for a remedy (Tenn. Code Ann. § 47-2-204). Certain agreements must be in writing to be enforceable—e.g., sales of goods at or above the statutory threshold and agreements not performable within a year (for goods, see the UCC statute of frauds at § 47-2-201). Ensure signatures (where required), clear parties, and a defined subject matter. Use integration (merger) clauses to limit reliance on prior negotiations.

UCC vs. Common Law: Know Which Rules Apply

Transactions for goods fall under Tennessee’s UCC Article 2, while services and many other commercial arrangements follow common law. Mixed goods-and-services contracts are often analyzed by the transaction’s predominant purpose. This matters for issues like battle-of-the-forms (additional terms between merchants) under § 47-2-207, warranty disclaimers (§ 47-2-316), and remedies (Art. 2 remedies). Under the UCC, additional terms in an acceptance may become part of the contract between merchants unless they materially alter the deal or are timely objected to; under common law, the mirror-image rule is stricter.

Key Clauses That Prevent Disputes

• Scope and specifications: Define deliverables, quality metrics, and change procedures.
• Price and payment: Address pricing models, adjustments, taxes, and invoicing requirements.
• Delivery and risk of loss: Align delivery terms with Incoterms or UCC shipment/destination terms; clarify title transfer and insurance.
• Acceptance and rejection: Set inspection periods, nonconformance standards, and cure rights.
• Warranties and disclaimers: State express warranties; if limiting implied warranties, use conspicuous language and the term “merchantability” (see § 47-2-316).
• Limitation of liability: Cap damages; consider excluding consequential damages where appropriate, subject to law (see § 47-2-719).
• Indemnity: Allocate third-party claims risk (IP, product liability, data/security, employment claims).
• Confidentiality and IP: Define ownership, licenses, and permitted use of data and deliverables.
• Term and termination: Provide for convenience and cause; tie termination assistance and transition duties to payment.
• Force majeure and supply chain: Include defined triggers and notice duties; require mitigation.
• Governing law and venue: Choose Tennessee law and a forum; consider mediation, arbitration, and—where enforceable—jury trial waivers.
• Records and audit: Allow verification of compliance and pricing where needed.

Warranties and Disclaimers Under Tennessee’s UCC

Tennessee’s UCC recognizes implied warranties of merchantability and fitness for a particular purpose in sales of goods unless properly disclaimed (§ 47-2-314; § 47-2-315). To disclaim merchantability, the disclaimer must mention “merchantability” and be conspicuous; a fitness disclaimer must be in writing and conspicuous (§ 47-2-316(2)). Express warranties arise from affirmations of fact, descriptions, and samples that become part of the basis of the bargain (§ 47-2-313). State warranty periods, procedures, and exclusive remedies clearly.

Limitation of Liability and Liquidated Damages

Courts in Tennessee generally enforce negotiated liability caps and exclusions of incidental or consequential damages in commercial contracts, subject to statutory and public-policy limits. For sales of goods, the UCC permits limitation or alteration of remedies and exclusion of consequential damages, but a limited remedy may not stand if it fails of its essential purpose (§ 47-2-719). Liquidated damages provisions are generally enforceable—particularly under the UCC for sales of goods—when they are a reasonable estimate of anticipated harm and not a penalty (§ 47-2-718(1)). Consider separate caps for specific risks (e.g., data breaches, IP infringement) and draft to avoid a remedy failing of its essential purpose.

Indemnity and Risk Allocation

Draft indemnities with precision: identify covered claims (e.g., bodily injury, property damage, IP infringement), define procedures (notice, defense control, settlement consent), and address required insurance. In vendor and supplier arrangements, align indemnity with warranty and performance obligations. For subcontracting, require flow-down indemnities and appropriate insurance endorsements.

Payment Security and Performance Assurances

Use purchase-money security interests (PMSIs), letters of credit, guarantees, and performance bonds where warranted. Under Tennessee’s UCC Article 9, perfect security interests by filing a financing statement in the correct jurisdiction and accurately naming the debtor (§ 47-9-503; § 47-9-506). Choice of law for perfection and priority is governed by Article 9 (see § 47-9-301 and debtor location rules in § 47-9-307). For PMSIs, follow Article 9’s priority rules—e.g., inventory PMSIs generally require advance notice to conflicting secured parties (§ 47-9-324).

Change Management and Supply Chain Resilience

Use structured change orders for scope, specifications, and pricing. Include substitution rights, alternate sourcing, safety stock, and business continuity plans. Tie changes to documented approvals. Use tiered dispute escalation to keep operations moving while disagreements are resolved.

Data, Privacy, and Cyber Risk in Contracts

Allocate responsibility for safeguarding confidential information and personal data. Incorporate reasonable security standards, audit rights, incident response procedures, and prompt notice obligations. Require subcontractor flow-downs and deletion/return of data at termination. Consider cyber insurance and alignment with your incident response plan.

Dispute Resolution and Remedies

Choose governing law (Tennessee) and venue to reduce uncertainty; consider mediation, arbitration, or court litigation based on the deal’s needs. Specify injunctive relief for misuse of IP or confidential information. For sales of goods, the UCC provides buyer remedies such as cover and damages for non-delivery (§ 47-2-711, § 47-2-712, § 47-2-713) and seller remedies including resale and lost profits where appropriate (§ 47-2-703, § 47-2-706, § 47-2-708). Include notice and cure provisions and define when termination and acceleration rights apply.

Common Pitfalls We See

• Vague scopes and acceptance criteria leading to nonconformance disputes.
• Inconspicuous warranty disclaimers that fail under the UCC.
• Overbroad or under-scoped indemnities that misallocate risk.
• Missing or misfiled UCC-1 financing statements jeopardizing priority.
• No audit or verification rights in cost-plus or usage-based deals.
• Silence on data security and subcontractor controls.
• Liquidated damages that read like penalties.
• Conflicting documents (SOWs, POs, T&Cs) without a clear order of precedence.

Practical Steps Before You Sign

• Map the transaction to UCC or common law and confirm the predominant purpose.
• Align documents: master agreement, statements of work, purchase orders, and change orders.
• Make disclaimers and limitations conspicuous (headings, ALL CAPS, bold).
• Tighten acceptance testing and objective criteria.
• Tie payment milestones to verifiable deliverables.
• Confirm insurance certificates and required endorsements.
• Verify security interest perfection details and calendar continuation filings.
• Add escalation, mediation, and notice procedures.
• Run a redline reconciliation and create a deal summary for stakeholders.

When to Get Counsel Involved

Engage Tennessee counsel early for high-value deals, cross-border supply chains, highly regulated data, material IP licensing, complex warranty/indemnity structures, or where secured transactions and priority rules affect financing. Early review can surface negotiable risk and avoid costly disputes. Contact our team to discuss your transaction.

FAQs

Does the UCC apply to mixed goods and services contracts?

Courts generally apply the predominant purpose test. If goods predominate, Article 2 typically governs; if services predominate, common law applies.

How do I make a warranty disclaimer enforceable in Tennessee?

Use conspicuous language and, for merchantability, expressly use the word “merchantability.” Put disclaimers in writing and ensure they stand out.

Are liability caps and exclusions of consequential damages enforceable?

Often yes, if negotiated and not unconscionable. Under the UCC, exclusions are permitted but may fail if the limited remedy fails of its essential purpose.

What is needed to perfect a security interest?

File a UCC-1 in the correct jurisdiction with the debtor’s exact legal name and describe the collateral, following Article 9 rules.

When should I involve counsel?

Early, especially for high-value or high-risk deals, secured transactions, regulated data, or complex IP and indemnity structures.

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Disclaimer

This blog post is for general informational purposes only and is not legal advice. Laws change and outcomes depend on specific facts. Reading this post does not create an attorney-client relationship; consult qualified Tennessee counsel about your situation.