September 2005

New technologies - avoid claims of misrepresentation by documenting the deal

Selling and purchasing new technology or equipment presents a range of challenges for both the customer and supplier.

There is often a sense of urgency from both parties. The supplier is keen to sell its new technology and 'showcase' it in a commercial environment as soon as possible, to attract other potential customers. The purchaser wants immediate delivery and installation to gain the edge on its competitors. This desire for speed can lead to important issues being overlooked. For example:

  • What are the real capabilities of the equipment and its benefits for the purchaser's business?

  • Is the purchaser's business large enough for the investment in the equipment?

  • Will the business be able to operate the equipment efficiently and profitably?

Bartier Perry acted for a well known supplier of digital printing technology in defending Supreme Court proceedings brought by a global marketing communications company in respect of the supply of two digital printing presses in 1998 and 1999. The case was typical of a dispute arising out of the supply of new technology.

The Case

The customer realised the negative impact which the emergence of desk top printing would have on its business, and sought to expand into short run digital printing. The customer purchased the supplier's press. Eighteen months later an updated model of the same press was purchased by the customer to replace the original press.

About 15 months after installation of the second press the customer ceased operation of the machine and sued the supplier for $8 million in respect of both presses claiming it had misrepresented the capabilities of both units and that the presses were so unreliable that they were unfit for commercial purpose. The customer relied heavily on the number of service calls made in respect of both presses as evidence of the validity of its claims.

The supplier denied that any misrepresentations had been made regarding the presses and that any defect in their operation (including the apparently high number of service calls) was as a result of a failure to service or operate the presses as specified in the supplier's operations manuals.

The matter was heard before a Technical Referee appointed by the Supreme Court. Despite objections by the customer, the supplier sought and obtained orders for the testing of the press. The press was transported from the customer's premises and installed and used in a digital commercial printing business in Canberra to determine if it was able to operate as represented by the supplier. So far as we are aware this was the first order of its kind.

The Result

The referee was asked to determine 29 questions concerning the accuracy of representations made by the supplier regarding the equipment and the equipment's suitability for commercial operation. None of the questions were resolved in the customer's favour. The report was adopted by the Supreme Court.

Why did the Supplier Win?

The supplier was able to prove that it advised in writing prior to the sale of the equipment that:

  • the unit would be a financial failure if there was an insufficient volume of work for the presses;

  • the profitability of the presses relied on the skills of it's operators; and

  • the customer was advised to test the applications it thought the presses could do before deciding to purchase the press.

In addition the supplier established:

  • that it had properly trained the customer's operators; and

  • by testing the press, that it could do all the types of work that the supplier represented the press could do in a commercial environment and in a profitable manner.

In essence the supplier was successful because it had documented the key features of the deal and then was able to demonstrate that the equipment it supplied worked as promised.

The Key Lessons

  • The expectations of a customer regarding the technology should be ascertained in presale meetings and these expectations and any limitations of the equipment which could prevent the equipment meeting the expectations of the customer should be confirmed in writing.

  • Any prerequisites as to the amount of business the customer would need to make the machine profitable should be outlined in writing.

  • If the equipment is installed with an ongoing service regime regular review meetings should be conducted, minutes of the meetings should be kept and a copy of those minutes should be sent to the customer.

  • Service technicians should be instructed to report any failures by the customer to properly maintain equipment as required and confirmation of such reports should be sent in writing to the customer.

  • If litigation follows the strategies employed to defend the claim must be carefully tailored to suit the case.

An important factor in the supplier being able to successfully defend the claim made against it was its ability to produce documentation to support its defence. If it had not been able to do this the supplier may have been exposed to millions of dollars in damages.