Don’t let something like the Newlands / DME receivership cost you your money. Here are some ways you can protect your funds from a supplier that doesn’t (or can’t) deliver.
Recent news of the DME/Newlands receivership doesn’t just impact the many breweries that are now left wondering what will happen to the deposit and advance payments they made on systems and equipment yet to be delivered. There are many brewers with DME or Newlands systems under warranty, employees who’ve lost jobs, and other creditors who are potentially out of luck on invoices left unpaid. Additionally, as an group, brewers, distillers, and vintners looking to make large purchases (sometimes a substantial portion of the funds available to a business – a make or break type scenario) must now ensure they plan for this potential contingency in making such an equipment purchase. As this letter from Portland Kettle Works shows, these types of situations impact an entire industry and create an awareness that requires a new way of doing business.
Just like good business practices, good contracts develop over time. For many, a large equipment purchase for a brewhouse, or a still, will not amount to a common occurrence. It is potentially the largest single purchase a business might make outside of land. Taking the time to craft an actual equipment purchase agreement that can protect you from having a manufacturer/fabricator/supplier go into receivership or bankruptcy, potentially winding-up the business and leaving your order unfinished, can make all the difference between losing the funds you’ve advanced and recouping your advance payment to apply it to equipment with another manufacturer.
With the Newlands/DME receivership fresh on the minds of every brewer, here are a few tips – contractual and otherwise – regarding provisions and other actions that might keep you from losing the money you advance in a similar situation:
- Ask for proof of solvency in the purchase agreement. This is a commonplace term in many different industries and should not take a manufacturer by surprise. Including a term that will allow a purchaser to review bank records or other financial documentation to ensure your supplier is not on the verge of receivership. In the construction industry, this has been a standard part of form agreements for over a decade. It is time other industries caught up and recognized that part of proving yourself as a business partner entrusted with funds before producing an actual commodity or product is showing you’re worthy of that trust to begin with.
- Request and obtain a letter of credit or bank guarantee. These devices are generally in the amount of the money you’ve paid to your supplier. Your equipment purchase agreement should recognize that you are entering into one of these agreements and the terms of the guarantee or letter of credit should state that you can draw upon it or enforce it if the equipment you’ve ordered isn’t delivered by a set date or if some other event occurs such as a bankruptcy or receivership of the equipment manufacturer. DO NOT let your vendor tell you this is a cost-prohibitive item – it’s not. It is common for a company, especially a vendor to acquire either of these items and they are inexpensive. What it may to to a vendor’s line of credit is deduct the full amount that can be recovered under the instrument until the job is finished and the instrument cancelled.
- Obtaining insurance or a surety bond from the vendor is another potential route in line with these – asking the bonding company to step in where a bank would in the LOC/guarantee situation. An advance payment bond, or, if available where you are located, advance payment insurance (sometimes called non-payment insurance which can cover risk of a supplier not delivering in addition to other business risks), can afford coverage or protection against the loss of your down payment or the continuing progress payments that you make for the equipment while it is fabricated.
- Obtain a security interest or full ownership in the materials purchased with your funds. For the security interest you’ll need a simple clause in your purchase agreement where the vendor grants you the right and then you’ll likely need to perfect the interest through a filing. Each of these is commonplace and shouldn’t take much time nor be much of an additional cost. The security interest will give you the right to at least look to the materials to recoup the funds you’ve paid. It’s possible that your manufacturer might have a line of credit or another loan with a lender that requires them to have a priority interest in the business assets in which case, the best security interest you receive might be a secondary (subordinate) one. In that case, you should amend the terms of your purchase agreement and ensure that title to the materials transfers to you as soon as they’re purchased with your money. The same with any work in progress and finished equipment pieces – even if they’re part of a greater whole. Even better, after adding this contractual provision, have a provision that requires documentation of the materials and weekly updates/progress photos and confirmation of the work being performed. Today’s ubiquitous use of phone photography and instant messaging makes this easy for a manufacturer to supply and gives you proof later on regarding which equipment is actually yours given the transfer of title in your purchase agreement and the proof delivered by the manufacturer during fabrication.
- One other thing to remember is that your purchase agreement should contain a favorable forum selection clause allowing you to get to court or arbitration in a timely and expedient fashion in your own backyard to obtain a judgment in case you need to then go and enforce it. Having a clause that has the manufacturer/supplier acknowledge minimum contacts in the jurisdiction (or just pick an arbitration location and a fast-track system like JAMS) should help preclude a challenge and allow you to begin the process of a suit in case you need to.
Hopefully, this helps and you’re able to craft a decent equipment purchase agreement and obtain some protection. As DME/Newlands is now just the latest fabricator to incur this kind of problem, it would border on negligence for a beverage manufacturer to order this type of large purchase with a substantial majority of the company’s funds and not put protection in place to ensure recoupment of advance payments if the manufacturer goes under.