Think Big

Capitalize on capital expenditure transactions
Matt Johnson
May 15, 2018
COLUMN : Legal | Codes & Standards

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The manufacturing issue provides a chance for manufacturers to think big and, in the manufacturing world, this typically means capital expenditures. As any GlassBuild America attendee can attest, these large purchases tend to be sources of excitement. 

Capex transactions themselves, however, remain complicated and detailed. They demand multiple strategic decisions regarding suitability, installation, acceptance and ongoing maintenance—not to mention, price. The layers of legal risk management for these purchases tend to fall late in the process, and that is not always best. 

Not to put a damper on the excitement of a big investment, but paying attention to a few of the risk-management items that are inherent in any capex transaction may help big-thinking buyers realize the big efficiencies of their expenditure.

Responsibility

In the context of capex, accepting responsibility means being responsible for paying for the claim, maintenance or other costs that come with the investment. It is equally important to identify the points where responsibility shifts from the vendor to the purchaser, because legal liability shifts. 

Issues often arise in freight damage and assembly/installation costs for the capital improvement. In addition, if there is a lease agreement in place, essential capex considerations identify responsibility transfer points and the ability of the lessor to shift that responsibility to the lessee. Pay careful attention to the points where responsibility shifts to a purchaser or lessee, because the cost burdens transfer as well.

Performance clauses/guarantees

How many? How much? How fast? Performance expectations in capex transactions are regularly used to encourage the investment. Often, these performance expectations are simply taken from marketing literature. Just as often, a waiver of any guarantee or warranty to meet the marketing representations is buried within the transactional documents. 

If performance metrics and delivery targets are key to the capex, ensure these thresholds are within the actual contract documents. This need to clearly establish performance expectations in the sales agreement applies whether the anticipated capex is a physical production tool (e.g., units-per-hour) or IT-related systems (e.g., uptime warranties). Performance clauses should identify these targets, but also specify opportunities to fix them and present reasonable remedies if they are not met.

Safety, labeling and policies

New capex means new items or systems coming into a business. Inherent within that process is a need to weigh and evaluate integration of the capex into existing policies and procedures. While many capex items have safety precautions installed, development of proper training and safe-use guidelines may be left to the purchaser. 

Further, before the capex transactions are finalized, consider the need for new disclosures and labeling for integrated systems and physical hardware. For example, will the item need to be relabeled so warnings are in appropriate languages? Proactive attention to capex integration can mean that policies and warnings are ready to go on day one, helping limit gaps in proper workforce preparation.

Intellectual property rights

Patents, trademarks and other intellectual property protections are inherent to the items at the heart of a capex transaction. Usually, the capex purchaser has very little access to information underlying these protections and must rely on the vendor. 

This reliance, and protections for the purchaser from any intellectual property challenge, should be spelled out in the capex transaction documents. Even purchasing from large, well-established companies is not, unto itself, a protection from the prospect of a lawsuit contesting intellectual property rights. Before finalizing any capex, pay attention to and consider terms addressing this prospect.

Warranties and support

Most companies ensure warranties and support contracts are within a capex transaction, but only to the extent that they are present. The scope of coverage, applicable exclusions and available remedies within warranties and service support agreements are often not considered within the full context of the transaction. 

For example, for manufacturers that secure a significant capex to produce millions of lineal feet, a warranty that only offers a replacement cost for 10,000 feet might not prove adequate. Likewise, a support agreement that caps service hours at insufficient levels may not protect the capex investment or the expected deliveries. Pay careful attention to the coverage and remedies within warranties to help avoid later unanticipated losses.

Insurance

Bringing in a large capex investment has the potential to change the value of the protections required of your insurance company. Large increases in property, auto or workers-compensation premiums may accompany physical capex acquisitions. Involving a broker prior to finalizing a capex transaction can assist in developing a more complete appreciation for the spectrum of costs within a capex transaction.

Legal review

This article should make clear that risk management and liability concerns that come with capex warrant a legal review. In any purchase, there are a host of business-judgments that need to be made and legal issues touch on many of them. While a legal review should not dull the excitement accompanying a capex transaction, it may help the value of the transaction to remain in your pocket. 

Matt Johnson is an attorney with The Gary Law Group, a law firm based in Portland that focuses on legal issues facing manufacturers of windows and doors. Contact him at 503/620-6615 or matt@prgarylaw.com.