Equipment Purchase Contract 101
Equipment purchase contracts are quite literally contracts that allow you to buy equipment at one point in the future. Buying equipment can be one of the most significant capital expenses that a business will make, and many businesses do not have the budget to pay the entirety of the purchase upfront. Whether you’re purchasing new equipment for your startup, ordering more equipment for your growing business, or need to replace old equipment so it can be used as collateral, equipment purchase contracts allow you to make payments over time in order to lock in the cost of your equipment.
As with other types of commercial contracts, the purchase of equipment is often composed of a number of individual parts, making it even easier to justify the use of contracts to specify how the purchase will be financed, managed, and what will happen if something goes wrong. Because businesses often rely heavily on the protection of contractual terms to stay out of financial trouble , equipment purchase contracts allow a smoother transaction.
Even though the purpose of equipment purchase contracts may seem fairly self-explanatory, they require careful navigation as there are a number of nuances involved that can make or break the deal. In general, equipment purchase contracts involve the buyer (also known as the "lessee") purchasing equipment from the seller (also referred to as the "lessor"). Although it is much simpler to have one party create a contract, it is not uncommon for equipment purchase contracts to be a complex agreement between multiple parties. In addition to creating the contract, the parties must also agree on key terms, including who shall be responsible for maintaining the equipment, insurance requirements, and what will happen if a party fails to meet a key obligation.
Essential Elements of an Equipment Purchase Contract
A comprehensive equipment purchase contract will include various components that are aimed at defining the parties, the item or items being purchased and the terms of the purchase. Broadly speaking, the contract should include:
Parties
The names of the parties involved in the purchase agreement.
Terms
The total purchase price, as well as any additional fees that will or may be added, such as taxes, fees, interest payments and late fees.
Payment details
All details regarding delivery of the equipment, such as whether you are paying for shipment, whether the equipment will be delivered across state lines, whether there is a designated delivery location, whether the delivery must occur by a certain date, etc.
Delivery
This will outline when delivery will occur, who is responsible for deliveries and whether there is a grace period for delays.
Condition of equipment
This section will also address the condition of the equipment at the time of purchase. This will help you avoid frustration with equipment that may have existing damages that you had not originally noticed. The contract should also address any warranties in case of mechanical failure or damage to the equipment after purchase.
Indemnification
This is a very important section, as it will protect you from losses here. It will detail how any injury or damage will be handled.
These are just a few examples of elements that should be included in your equipment purchase contract. As this is likely a major investment, you should ensure you have a thorough understanding of the contract you’ll be signing before you commit to buying the equipment.
Typical Terms in Equipment Purchase Contracts
Like all contracts, equipment purchase contracts are generally drafted to articulate each party’s rights and obligations. While the specific clauses in any given agreement will depend on the relevant commercial and legal considerations of the particular situation at hand, there are a number of common clauses. Below is a brief discussion of some of the more essential clauses found in equipment purchase agreements.
Warranties Equipment purchase contracts generally include warranties. These may either be express, in which the seller expressly warrants certain characteristics regarding the fitness and suitability of the goods, or implied, meaning that certain characteristics are assumed by operation of law. The sale of goods article of the Uniform Commercial Code ("UCC") implies that supplied goods are fit for their ordinary purpose and merchantable. Additional warranties may be expressly added in the contract.
Indemnities Indemnities are used in contracts to protect parties from the harm suffered due to defects in the supplied materials. The general rule is that the party benefiting from a contract must suffer the loss. Indemnities are useful because they permit a party to recover damages or liabilities on the basis of a breach of contract theory, rather than tort.
Limitation of Liability Limitation of liability clauses are provisions that prevent a party from being liable for certain losses or damages. Most limitations of liability in equipment purchase contracts only limit a party’s liability for consequential damages. UCC § 1-305 provides: (d) Consequential damages resulting from the seller’s breach include (1) any loss resulting from general or particular requirements and needs which the seller at the time of contracting had reason to know, and which could not reasonably be prevented by cover or other reasonable means. (2) Injury to person or property proximately resulting from any breach of warranty (Section 2-314). (e) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. When the buyer is a commercial loss, the court may limit the aspect of the remedy considered as liquidated damages, but only if the limitation is not manifestly unreasonable (UCC § 2-719).
Legal and Regulatory Compliance
Equipment purchase contracts must comply with a variety of federal, state, and local laws. Federal regulations such as the Truth in Lending Act (TILA), the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), the Equal Credit Opportunity Act (ECOA), and the Fair Labor Standards Act (FLSA) can all affect the agreement in one way or another. Depending on the structure of the business and its entrance into new jurisdictions, compliance with local and international trade laws may also be necessary.
Equipment that is to be exported must meet the requirements of both the country of origin and the destination location. The United States Bureau of Industry and Security (BIS) determines which items are regulated under the Export Administration Regulations (EAR) and which countries represent an export limitation.
Trade restrictions may also include tariffs, quotas, embargoes, customs duties, and more. For example, it may not be legal for a US-based company to purchase goods from a country that represents an embargo to the United States, or it may be more difficult and expensive to purchase goods from that country. Likewise, the country receiving the export may have a limit on how many items can be imported over a certain period of time, or it may impose a heavy duty on the items.
If equipment is purchased across international bounds, it may be necessary to comply with trading laws in each individual country. In such cases, it is advisable to hire a lawyer who practices in international or cross-border trade law.
Negotiations of Equipment Purchase Contracts
The first thing to keep in mind is that the party with power and leverage in a business transaction is not always the party with more money. Perhaps the vendor with whom you are negotiating is publicly-traded and can more readily absorb a particularly burdensome or onerous term and condition. In such a case, the party with less money (the buyer) is in the position of greatest leverage, however, the party with the most to lose (the seller) may nonetheless request even the most ridiculous terms and conditions. Thus, the fundamental rule for analyzing your relative leverage is to always remember that the party requesting a given contractual provision may not be in a position to enforce it.
Even before reviewing an equipment purchase contract to determine its provisions, you can and should already have an idea of the risks that you are willing to take in negotiating the provisions of the contract based on the type of equipment that you are purchasing. Once you do this analysis , you will have a baseline from which to negotiate specific provisions. Again, remember that your vendor may not make the concession that you want because it is not susceptible to being enforced, but, that does not mean that you cannot negotiate it, and that it cannot be removed from the contract to the disadvantage of your vendor.
The only terms that are always worth negotiating for exception are a party’s rights to terminate the contract or to amend the contract. Although contract language can often be overly broad, and, thus, compliance with such overly broad language can be costly, you are generally better off adhering to the terms of a contract that allow a party to unilaterally terminate or amend its obligations under the contract than to be bound to contractual terms that you may be legally obligated to comply with despite the fact that such a provision should never be necessary.
Equipment Purchase Contracts and Dispute Resolution
Equipment purchase contracts typically include a dispute resolution provision that describes how any disagreement should be resolved. The most common methods of dispute resolution are mediation, arbitration, and litigation.
Mediation is a process whereby a "neutral third party" attempts to get the parties to voluntarily resolve their dispute. If an agreement cannot be reached, the mediator usually ends up by suggesting a resolution.
One of the biggest advantages of mediation is that it allows the parties themselves to control how their conflict is resolved. The main drawback of mediation is that if the parties can’t agree, that process has been exhausted and the parties must then resort to other forms of dispute resolution.
Arbitration is another form of alternative dispute resolution, in which the parties submit their dispute to a neutral third party who will make a binding decision, usually as an "arbitrator". Arbitration is similar to a trial, and the arbitrator plays the role of judge and jury. Typically, the parties first conduct pre-trial discovery, and then submit their case, including any witnesses, documents, and other evidence, to the arbitrator.
The major advantage of arbitration is that it allows a final, binding determination without the need for a court trial. The main disadvantages of arbitration are that it is typically a more expensive process, the parties have little control over the outcome, and parties usually have no access to courts to appeal bad or unreasonable decisions. Also, the arbitration process has no discovery or trial capabilities.
The last, and most commonly understood method of dispute resolution, is litigation. Litigation is trial in court before a judge and/or jury. The major disadvantage of litigation is the lack of control of the outcome by the parties. In addition, litigation is frequently the most costly method of dispute resolution.
After learning your options, the next question is usually which form of dispute resolution is best for you. This is always a fact and circumstance specific answer, but the following are general recommendations:
• For the business that does not want any conflict, mediation is your best choice;
• For the business that wants some control over its dispute, arbitration is often the best choice;
• If you want to use courts and jury trials whenever possible, and this is acceptable under your contracts, then you should favor keeping litigation as your dispute resolution process.
Typically, parties would prefer to have disputes resolved by litigation, usually because they have concerns about the neutrality of arbitrators, and believe that having neutral judges or juries decide their case will result in a better resolution of that conflict. However, litigation should never be so favored so heavily that it defeats the purpose of the contract. This is particularly true where companies have designed their business model to favor arbitration.
Best Practices Guide for Buyers and Sellers
Best Practices for Buyers
Before you buy a piece of equipment, make sure you review all of the parts and components to ensure that you are getting everything that you’re paying for.
Buyers should be aware of any industry-specific terms related to basic components of the machine, i.e. cutting widths/seamer widths, solid wood versus plywood substrate, thickness, etc.
When negotiating your purchase agreement, be sure to have an attorney review the agreement to ensure that payment terms, inspection protocols, delivery, and risk of loss are clearly defined. If there is an assumption of risk of loss upon shipment, consider whether the value of the equipment warrants obtaining insurance.
Finally, before signing, check state and federal equipment integrity requirements to make sure you can comply .
Best Practices for Sellers
Many sellers are now selling exclusively through financing companies, and do not write their own purchase agreement.
For sellers who write their own agreements, review your agreement carefully with respect to clearly defining the named buyer and, if applicable, the final end user.
When selling to a buyer based in another country, remember that the laws of the seller are generally not enforceable against the buyer. Put in provisions for arbitration in a neutral location with terms that provide flexibility to accommodate both parties.
Also, take steps to make the performance of the contract easier. For example, require the buyer to post a payment and/or performance bond. If the buyer is required to obtain insurance or post a letter of credit to protect the seller against any damages, be sure to structure those terms favorably.
