Before you sign on the dotted line; Things to consider when negotiating equipment purchase and sales agreements
QUESTION: I’m considering buying some equipment from a manufacturer with whom I haven’t dealt with before, and I’m anticipating they will be asking me to sign some sort of “standard” purchase and sales agreement. I’m wondering what should I be looking for? What should I negotiate?
Answer: Your apparent skepticism about what a “standard” agreement might consist of is well-founded.
Generally, over the years, I’ve found that the notion that some sort of “standard” agreement exists is a convenient and dangerous myth that, in most cases, just invites a buyer to sign an agreement without reading it.
There are, however, a few terms that should appear in every agreement to buy and sell equipment. As you might guess, there are many more that are included solely for the purposes of protecting the manufacturer or seller and limiting or eliminating claims for refunds and damages, even when such claims arguably are valid. After all, these agreements are virtually always written by the seller’s attorney
The other side’s perspective. We understand and appreciate the reasons equipment sellers pursue these limitations with such vigor — they shoulder enormous potential liabilities and losses for manufacturing and design defects, negligence, provision of inadequate or incorrect instructions and/or warnings, delivery failures, delays, post-delivery breakdowns, defective third-party parts and supplies, warranty claims, recalls and a wide range of other issues. So, anything they can do to limit or avoid claims without alienating enough customers to materially impact their bottom lines makes legal and economic sense, to a point.
The buyer side’s perspective. These agreements can, and often do, push the boundaries of fairness. Ultimately, many cross the line from aggressive to unfair, and in some cases, even become predatory. When financing terms are added, the risk can grow exponentially. That, however, doesn’t mean you have to walk away. Despite the thunderous protestations of many a salesperson, I rarely come across sellers who are entirely unwilling to negotiate their sales and/or financing terms, perhaps in part because refusing to negotiate can yield subsequent claims that the agreement should be wholly or partially ignored as a “contract of adhesion,” which is a contract with respect to which a buyer in a relatively weaker negotiating position is told to “take it or leave it.” If the contract’s terms prove unreasonable, a court will generally have the power to deem it unenforceable.
The response from buyers. In recent years, larger and more sophisticated buyers have begun pushing back more effectively. Many, in fact, now require equipment sellers to sign these buyers’ own purchase contracts or addenda, which drastically modify the terms of the buyer-seller relationship, in part, because these buyers have greater negotiating leverage. Whatever the reasoning, buyers who negotiate their contracts generally succeed in getting at least some of the concessions they seek, and virtually always fare better when something goes wrong. Unfortunately, overcoming the natural inclination to passively accept the manufacturer’s terms without negotiating — or in many cases, even reviewing — their terms of sale usually involves getting burned at least once.
What are these terms, and what should be negotiated or left alone? The answer is that it varies widely based largely on the size and level of sophistication of the seller. Not surprisingly, larger and more sophisticated sellers tend to do a good job of protecting themselves — though some tend to overreach and may walk a very fine line between aggressiveness and unreasonableness. Smaller manufacturers and dealers, on the other hand, can be far less predictable as some include almost no protections for themselves, while others write documents that are so unreasonable as to make it difficult to imagine a judge or jury who would be willing to enforce them.
Because it usually is impossible for a buyer to predict which terms will or will not be deemed enforceable by a judge or jury, astute buyers should be prepared to negotiate all of them, or at least those that are obviously unfair.
The basics: As a starting point, let’s first look at some provisions that should be included in every contract for the purchase and sale of equipment:
- Offer: The seller’s offer to sell, or the buyer’s offer to buy, the equipment, setting forth in reasonable detail the following:
a. Item Description(s): A reasonable description of each item being purchased, including year, make, model, part #, serial #, and other identifying information, as applicable.
b. Price: The price(s) or other consideration to be paid for the equipment.
c. Payment Terms: When, where and how, such as in what increments or installments payments are to be made.
d. Title Transfer: A definitive statement indicating that good and marketable clear title is being, or upon payment will be, transferred to the buyer.
e. Delivery: At a minimum, location and timing.
f. Taxes: Any sales, use, excise or other applicable taxes. g. Warranty (if any): Any express written warranty(ies).
- Acceptance: Acceptance of such offer by the recipient.
- Consideration: Something of value given by either side in exchange for the other’s promises.
- Intent: The intent of the parties to create a legally binding agreement.
Although any number of additional provisions can be, and usually are, included in the purchase and sale agreements signed by most buyers and sellers, an enforceable contract for the purchase and sale of equipment could theoretically be made just from the above, perhaps less if the parties are willing to risk having a court “imply” necessary terms.
The rest. So, why are so many additional terms included in most sellers’ contracts? Simple, the rest of the terms are almost exclusively protections for the sellers. One of the most effective means of protecting a seller is to shift liability to the buyer. It’s possible to do that in most cases because your purchase is considered a business-to-business (B-to-B) transaction. Although legislatures and courts tend to go to great lengths to protect individual consumers, often voiding contracts that violate consumer protection laws, most of them do little or nothing to protect businesses — even tiny businesses with few or no assets.
That places smaller companies at a huge disadvantage relative to often enormous manufacturers and other sellers who hire legions of attorneys who do nothing but write and negotiate contracts for a living. Ironically, those same sellers’ representatives are often the first to tell rental operators two things: “We never modify our contracts” and “Don’t get your attorney involved or he/she will mess up the deal.”
To attempt to give you, the rental operator, a fighting chance, following are a few suggestions regarding which terms to negotiate and how:
Price. Get the best deal you can but try to include “most-favorednations” pricing in case you are part of a network of dealers, some of whom might be offered better pricing without your knowledge. “Most-favorednations” pricing essentially means nobody gets a better deal than you do.
Payments and terms. Measure the first payment’s due date from the date you receive and accept the equipment, rather than the shipping date. Be extremely careful of leases, particularly those with automatic renewal terms. We are aware of cases in which finance lessors have included advance notice-of-buyout requirements in what appear to be “dollar-buyout” leases. If the required notice is not timely given, these leases automatically renew for the entire original term, meaning you pay twice for the same equipment.
Title. Upon transfer of title, the agreement should require the equipment to be free and clear of any and all liens, claims and security interests other than any security interest that might be retained by the seller in connection with seller-financing.
Warranties. In addition to any express warranties pertaining to repairs and/or replacements of defective items, include a warranty stating that, upon delivery to you, the equipment will conform to the order specifications and be complete, in new condition, of good material and workmanship, free of defects, merchantable, fully operational, fit for its intended use, operation and environment, and fully compliant with all applicable laws, rules and regulations, including without limitation, applicable emissions standards.
Warranty waivers. Warranty waivers should be deleted whenever possible, the argument being that they are inappropriate where new equipment is concerned. Sellers often will argue the point, some more vigorously than others, but buyers of new equipment should arguably be entitled to any and all warranties, rights and remedies that might be available, including those implied under the Uniform Commercial Code (UCC), so you don’t need to write them into your purchase and sale agreement; you just need to make certain they are not waived.
Products liability. The buyer should demand that the agreement include the agreement of the seller to indemnify the buyer with respect to third-party claims arising from defects, including any defects in the design and/or manufacture thereof.
Service and replacement parts. The buyer also should require that the agreement include the seller’s commitment to continue to provide parts and spares at their current list prices for an extended period, such as three years after delivery and, if possible, for a further extended period at most-favored-nations pricing.
Liability during transportation. Include free onboard (FOB) destination and, if possible, freight prepaid, delivered duty paid (DDP) or landed duty paid (LDP) rather than ex works (EXW) or FOB shipping point. Doing this means the seller will remain responsible, rather than the buyer, for shipping costs as well as damage to the equipment, until it reaches its destination.
Taxes. Include any and all federal, state, provincial and local taxes — other than sales, value added or similar turnover taxes or charges, which should be invoiced separately — in the purchase price and require the seller to identify any other taxes and provide reasonable documentation and assistance to you in your efforts to later recover any of the above referenced taxes.
Deemed acceptance/waivers of claims. Delete language that “deems the buyer to have accepted the equipment” after the expiration of some, often short, inspection and acceptance period. You may not have the time or the manpower to inspect and test all items immediately and defects sometimes manifest themselves well after delivery.
Defective/non-conforming equipment. Delete any language that waives the buyer’s right to reject defective or non-conforming goods. Make certain the buyer retains the right to either reduce the order or require the seller to replace the defective/non-conforming equipment with conforming equipment that meets the requirements of the contract; recover from the seller all of the buyer’s reasonable losses, costs, expenses and damages resulting from such defect(s) and/or nonconformity(ies); and pursue any and all other available rights and remedies.
Force majeure. Events beyond the reasonable control of either party can justify delays in performance, but they should not permit unlimited delivery delays. Thirty days is generally considered reasonable, depending on the circumstances.
Software and intellectual property. . If any software code is incorporated into or included as part of the equipment, the buyer should demand a perpetual, paid-up, royalty-free, non-exclusive right and license to use such software for the purpose of operating the equipment. Separately, the buyer should require that the agreement include an obligation of the seller to indemnify, defend and hold harmless the buyer with respect to claims of infringement of the intellectual property rights of others, including patent, copyright, trademark, moral, industrial design and other proprietary rights as well as misuse or misappropriation of trade secrets.
Training. If training is required to safely and properly use, service and/or maintain the equipment, the buyer may want to include in the agreement the obligation of the seller to provide reasonable initial training at no, or reduced, cost.
Rights in the event of a breach by the seller. Among other rights and remedies, the buyer should have the right to terminate the contract in the event the seller breaches or threatens to breach its obligation to deliver the equipment on time and in compliance with the contract; fails to fully and timely perform any associated services; breaches any other obligation or warranty owing to the buyer; or becomes insolvent or bankrupt though the effectiveness of such bankruptcy clauses has been challenged successfully in the past.
These are just a few of the provisions that buyers should consider negotiating whenever they purchase equipment.