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Nov 2012
12
November 12, 2012

Are Your Progress Payments At Risk?

Occasionally you may contract with a supplier to build and sell you an expensive machine, and it may be necessary for you to finance the manufacture of the machine by making progress payments of the purchase price. When that happens, you are really acting as the seller's bank, and you should protect yourself in the same way that a bank would.

If the seller gets into financial difficulty, then you will want to be able to credit your progress payments against the price of the machine, obtain possession of it and transfer it to another seller to complete. If the seller will not voluntarily give you the machine, then you will have to seek a court order that compels the seller to turn the machine over to you.

If it becomes necessary to seek a court order, then you will want to obtain the machine free and clear of any security interest that the seller has granted to its bank or other creditor. This will require you to establish that you are a "buyer in the ordinary course of business." However, proving that may be somewhat time consuming and expensive. Following are the requirements that you must satisfy to be a buyer in the ordinary course of business:

  • You must be buying the machine "in good faith."
  • The seller must be in the business of selling machines of the kind that you are buying.
  • The seller's sale of the machine to you must comport either with the usual or customary practices in the type of business in which the seller is engaged or with the seller's own usual or customary practice.
  • Either of the following must apply:
    • You must have offered to pay the unpaid portion of the purchase price, and the seller must have become insolvent within 10 days after it received the first installment of the price.
    • After reasonable effort, you are not able to effect "cover" for the machine (i.e. purchase the same machine elsewhere) or the circumstance reasonably indicate that such an effort will not be successful.

To avoid having to establish that you meet all of these requirements for a "buyer in the ordinary course of business," you should obtain from the seller an agreement that recognizes your ownership of the machine and, as a precaution, grants you a security interest in the machine. You should also file a UCC financing statement to give notice of and "perfect" your interest in the machine.

You also need to obtain a financing statement search that will tell you whether anyone else has a prior security interest in the machine or whether it is subject to a tax lien. For example, the supplier’s bank may have a security interest in all of the seller’s inventory, which includes your machine. If the bank or other creditor has a previously filed financing statement covering the seller's inventory, then you will want to obtain the bank's or other creditor’s written agreement that your interest in the machine will have priority over the bank's or other creditor’s security interest.

These documents, as well as your purchase order, must be carefully worded to preserve your right to recover possession of the machine without having to pay twice for it. Warner Norcross & Judd LLP has prepared documentation for this situation many times and can assist you in putting together a document package and procedures to protect your progress payments for the construction of an expensive machine.

The Warner Norcross & Judd Commercial Transactions Group deals with the legal aspects of buying and selling goods and services. Members of the group have extensive experience with the important documents that buyers and sellers need, such as standard terms of sale and purchase, dealer/distributor agreements, sales representative agreements, license agreements, consignment and bailment agreements and tooling agreements. We can offer fixed prices and package arrangements for commercial transactions work. If you need assistance in any aspect of buying or selling goods or services, contact Jim Breay, chair of the Commercial Transactions Group, at 616.752.2114 or jbreay@wnj.com.

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