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Machinery and equipment suppliers manufacture and sell the machinery that other manufacturers use to produce all manner of manufactured goods. The “Great Recession” has been, in general, a very bad time for machinery and equipment suppliers in North America. However, there is reason for optimism in 2011.
The tax package recently enacted into law includes a provision allowing customers to write off many machinery purchases immediately. Machinery and equipment orders in Germany (a major supplier of machinery and machine tools) surged in 2010. Many international companies are recognizing that it is economically viable (if not economically superior) to establish manufacturing operations in the United States rather than manufacturing goods overseas and then transporting and importing them to the United States and Canada.
Machinery sellers typically sell equipment with a long expected-useful-life that will allow the customers to manufacture and sell their own products ' and hence make a lot of money ' for many years. Machinery and equipment sellers are often smaller than their customers and operate at modest profit margins.
This does not stop many customers from proposing terms and conditions that ask their suppliers not only to provide equipment, but also to be, in effect, their liability insurer, their business interruption insurer, and their general security blanket for anything bad that might happen.
Particularly in an economy recovering from weak demand, it may be tempting to machinery and equipment sellers to avoid the cost of legal review of sales contracts, or, worse yet, to sign whatever terms the buyer provides. Needless to say, this is not a good idea. Having negotiated and drafted supply contracts throughout the United States and Canada, as well as other parts of the world (with the help of local counsel), I have observed that the key legal issues are usually the same. Four of the most fundamental are: 1) getting paid; 2) warranties; 3) indemnities; and 4) limitations of remedies.
This article considers these issues, but with two important caveats: First, this article is written from the seller's point of view. Second, this article deals with general U.S. legal principles, and I am a lawyer licensed in Georgia. One should always consider the legal issues in the particular jurisdiction and should consult with local counsel as necessary.
General Considerations
Equipment sales in the United States are almost always governed by Article 2 of the Uniform Commercial Code (“UCC”). The UCC was first published in the 1950s and has since been adopted by almost all states. The basic philosophy of the UCC is to provide a general framework for commercial transactions. In the area of the sale of goods, the default provisions of Article 2 are quite buyer-oriented.
Another basic philosophy of the UCC, however, is freedom of contract. Particularly when sales are between merchants (commercial parties, as opposed to consumer parties), as almost all machinery and equipment sales are, the buyer and the seller are free to vary the default provisions of Article 2 by agreement.
A prudent seller of machinery and equipment, therefore, will not want to rely on the default provisions of the UCC, and should make sure that the contract of sale contains terms and conditions that appropriately limit and define the seller's responsibility.
Getting Paid
Machinery and equipment orders often involve expensive goods that are customized for the customer. Thus, if the buyer defaults on payment, the seller may be left with expensive goods that are not easily re-sold, likely leading to a large economic loss. Here are some of the basic steps that can help avoid such a scenario:
Warranty Issues
Negotiating the warranty for a machinery sale is usually one of the more involved and complicated issues. The buyer, obviously, wants the longest warranty possible with the widest possible protection. Most machinery sellers readily stand behind their equipment, but cannot afford to offer the more generous warranties often provided for consumer goods, where, for example, it is not so difficult to change out a malfunctioning camera or television. It is not feasible to change out machinery that has been bolted to a specially made foundation and that may occupy half a football field or more. Here are some of the key points:
The implied warranty of fitness for a particular purpose may well come into play in machinery sales. This implied warranty arises when the seller has reason to know of the buyer's purpose for the goods, and provides that, in such circumstances, there is an implied warranty that the goods will be suitable for the buyer's purposes. Because the sales process for machinery is complex and may last for several months or longer, the seller's sales personnel may well have knowledge of the buyer's purpose. Again, the problem with the implied warranty is that it is very vague, and, in litigation, the buyer's attorney can use 20/20 hindsight to “define” the buyer's purpose after a problem has arisen. Again, this implied warranty can be disclaimed through language that is conspicuous.
Note: It is especially important to check the particular state law regarding the disclaimer; i.e., that state's version of the UCC.
Indemnities
Indemnity provisions are often contentious and highly negotiated. In general, an indemnity provision, also known as a hold harmless provision, provides that one party will pay for any loss sustained by the other party under specified circumstances. Such clauses are risk-shifting provisions and should be approached by a seller with great care.
Unfortunately, it has become quite common for buyers to propose standard indemnity provisions that essentially provide that the seller will indemnify the buyer for anything bad that happens once the seller (or its equipment) comes on to the buyer's property, regardless if the seller was in any way at fault.
Essentially, the buyer proposing such clauses is asking the seller to become an insurer, except without any limitations on the scope of liability. Most buyers proposing these terms would never accept them if they were on the receiving end, and sellers should reject them out of hand. It is important to remember that most large buyers have (or should have) sophisticated risk management and insurance programs. It is fair to ask buyers, for the most part, to insure their own risks.
Here are some additional points about indemnity provisions.
General Remedy Limitations
Unless limited by contract, the UCC provides for some fairly generous remedies or potential remedies for buyers. Some of these remedies, most of which are likely uninsurable, could potentially put an equipment supplier out of business. It is important, therefore, that the parties agree to appropriate general remedy limitations.
Punitive damages are awarded not as compensation, but to punish and deter future bad conduct. Punitive damages typically require a showing of intentional or at least reckless conduct, and are often not permitted in breach-of-contract cases. In order to avoid any prospect of punitive damages, it is a good idea to exclude them specifically in the contract.
Conclusion
Machinery and equipment sales will, it is hoped, rebound in 2011. As sales rebound, it is important for sellers to remember the basics in negotiating and drafting their sales contracts. Equipment sales contracts, by their nature, involve unique risks and issues that are not present in the sale of consumer goods or commodity products. Sellers need to pay as much attention to the commercial terms and conditions and legal risks as they do to the technical specifications and other issues that surround industrial projects.
John L. Watkins is a partner in the Atlanta office of Barnes & Thornburg LLP and a member of the firm's Litigation Department. He may be reached at [email protected].
Machinery and equipment suppliers manufacture and sell the machinery that other manufacturers use to produce all manner of manufactured goods. The “Great Recession” has been, in general, a very bad time for machinery and equipment suppliers in North America. However, there is reason for optimism in 2011.
The tax package recently enacted into law includes a provision allowing customers to write off many machinery purchases immediately. Machinery and equipment orders in Germany (a major supplier of machinery and machine tools) surged in 2010. Many international companies are recognizing that it is economically viable (if not economically superior) to establish manufacturing operations in the United States rather than manufacturing goods overseas and then transporting and importing them to the United States and Canada.
Machinery sellers typically sell equipment with a long expected-useful-life that will allow the customers to manufacture and sell their own products ' and hence make a lot of money ' for many years. Machinery and equipment sellers are often smaller than their customers and operate at modest profit margins.
This does not stop many customers from proposing terms and conditions that ask their suppliers not only to provide equipment, but also to be, in effect, their liability insurer, their business interruption insurer, and their general security blanket for anything bad that might happen.
Particularly in an economy recovering from weak demand, it may be tempting to machinery and equipment sellers to avoid the cost of legal review of sales contracts, or, worse yet, to sign whatever terms the buyer provides. Needless to say, this is not a good idea. Having negotiated and drafted supply contracts throughout the United States and Canada, as well as other parts of the world (with the help of local counsel), I have observed that the key legal issues are usually the same. Four of the most fundamental are: 1) getting paid; 2) warranties; 3) indemnities; and 4) limitations of remedies.
This article considers these issues, but with two important caveats: First, this article is written from the seller's point of view. Second, this article deals with general U.S. legal principles, and I am a lawyer licensed in Georgia. One should always consider the legal issues in the particular jurisdiction and should consult with local counsel as necessary.
General Considerations
Equipment sales in the United States are almost always governed by Article 2 of the Uniform Commercial Code (“UCC”). The UCC was first published in the 1950s and has since been adopted by almost all states. The basic philosophy of the UCC is to provide a general framework for commercial transactions. In the area of the sale of goods, the default provisions of Article 2 are quite buyer-oriented.
Another basic philosophy of the UCC, however, is freedom of contract. Particularly when sales are between merchants (commercial parties, as opposed to consumer parties), as almost all machinery and equipment sales are, the buyer and the seller are free to vary the default provisions of Article 2 by agreement.
A prudent seller of machinery and equipment, therefore, will not want to rely on the default provisions of the UCC, and should make sure that the contract of sale contains terms and conditions that appropriately limit and define the seller's responsibility.
Getting Paid
Machinery and equipment orders often involve expensive goods that are customized for the customer. Thus, if the buyer defaults on payment, the seller may be left with expensive goods that are not easily re-sold, likely leading to a large economic loss. Here are some of the basic steps that can help avoid such a scenario:
Warranty Issues
Negotiating the warranty for a machinery sale is usually one of the more involved and complicated issues. The buyer, obviously, wants the longest warranty possible with the widest possible protection. Most machinery sellers readily stand behind their equipment, but cannot afford to offer the more generous warranties often provided for consumer goods, where, for example, it is not so difficult to change out a malfunctioning camera or television. It is not feasible to change out machinery that has been bolted to a specially made foundation and that may occupy half a football field or more. Here are some of the key points:
The implied warranty of fitness for a particular purpose may well come into play in machinery sales. This implied warranty arises when the seller has reason to know of the buyer's purpose for the goods, and provides that, in such circumstances, there is an implied warranty that the goods will be suitable for the buyer's purposes. Because the sales process for machinery is complex and may last for several months or longer, the seller's sales personnel may well have knowledge of the buyer's purpose. Again, the problem with the implied warranty is that it is very vague, and, in litigation, the buyer's attorney can use 20/20 hindsight to “define” the buyer's purpose after a problem has arisen. Again, this implied warranty can be disclaimed through language that is conspicuous.
Note: It is especially important to check the particular state law regarding the disclaimer; i.e., that state's version of the UCC.
Indemnities
Indemnity provisions are often contentious and highly negotiated. In general, an indemnity provision, also known as a hold harmless provision, provides that one party will pay for any loss sustained by the other party under specified circumstances. Such clauses are risk-shifting provisions and should be approached by a seller with great care.
Unfortunately, it has become quite common for buyers to propose standard indemnity provisions that essentially provide that the seller will indemnify the buyer for anything bad that happens once the seller (or its equipment) comes on to the buyer's property, regardless if the seller was in any way at fault.
Essentially, the buyer proposing such clauses is asking the seller to become an insurer, except without any limitations on the scope of liability. Most buyers proposing these terms would never accept them if they were on the receiving end, and sellers should reject them out of hand. It is important to remember that most large buyers have (or should have) sophisticated risk management and insurance programs. It is fair to ask buyers, for the most part, to insure their own risks.
Here are some additional points about indemnity provisions.
General Remedy Limitations
Unless limited by contract, the UCC provides for some fairly generous remedies or potential remedies for buyers. Some of these remedies, most of which are likely uninsurable, could potentially put an equipment supplier out of business. It is important, therefore, that the parties agree to appropriate general remedy limitations.
Punitive damages are awarded not as compensation, but to punish and deter future bad conduct. Punitive damages typically require a showing of intentional or at least reckless conduct, and are often not permitted in breach-of-contract cases. In order to avoid any prospect of punitive damages, it is a good idea to exclude them specifically in the contract.
Conclusion
Machinery and equipment sales will, it is hoped, rebound in 2011. As sales rebound, it is important for sellers to remember the basics in negotiating and drafting their sales contracts. Equipment sales contracts, by their nature, involve unique risks and issues that are not present in the sale of consumer goods or commodity products. Sellers need to pay as much attention to the commercial terms and conditions and legal risks as they do to the technical specifications and other issues that surround industrial projects.
John L. Watkins is a partner in the Atlanta office of
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