Buying essential technology for the operation of your business can involve significant capital expenditure. This may well require financing by a third-party funder and the costs can be high.
Under a typical arrangement, you will be purchasing hardware (equipment) and software (licences for use). Where the technology is a telecommunications system or requires data storage, you may be buying network access or a cloud service (or both). There may also be maintenance to be provided for. Ensuring you know precisely what is included in the technology package at the outset can be very important.
Things to think about before you commit:
- To manage working capital you may decide to fund the purchase on term finance. Where this is not by a fixed term working capital facility, but through lease financing (which may include terms for purchase at end of term), it is important to identify exactly what will be included in the lease. The finance will commonly be limited to the equipment – the hardware, though it may include software that is integral to the use of the equipment and is under perpetual licence. However, it will not ordinarily include software that is subject to periodic renewal, network access/data storage packages or maintenance.
- A supplier may introduce the finance to you, but that does not mean they are the same organisation as the funder. They are invariably not, even if there is a brand association. In any event, most finance contracts are assignable and you may well find that the company with whom you are initially in contract, changes over time. The terms of finance you started with should not change however (irrespective of a change of finance house) unless this is permitted by the original terms. This point is worth checking at the outset.
- When agreeing to finance the technology, a funder will heavily rely upon declarations by you that the equipment being financed is identifiable (everything the finance contract describes exists) and that you have inspected it and are satisfied with its condition, quality and fitness for purpose. This is comprehensible as the finance company that will become the hirer to you of the equipment will not have been able to assess the equipment they are buying. These declarations have legal implications for you, particularly if problems with the technology arise in course of the contract. Making sure that the descriptions of the items in the supplier quotation and the order (that is, those to be financed) are the same as the descriptions in the finance contract is vital.
- Although the owner of the equipment will become the finance company when it is taken under hire, it is important to check the terms to ensure you know who has the obligation to insure. Normally it will be your duty to insure the equipment and make sure that the finance company’s interest is noted on the policy.
- Bear in mind that as the finance company has relied on you to be satisfied with the equipment at the outset and then use it appropriately, the opportunities to depart the contract early without cost (for example, if the equipment ceases to operate) will be very limited. The finance company will have calculated its return on its funding over the duration of the hire term and it will be difficult to avoid the ‘liquidated damages’ provision in the contract for an early termination if things go wrong. You will have made declarations about the technology on which the finance company will have relied when funding the purchase and I return to this point below on the matter of ‘redundancy’.
- The finance terms are only one of the legal ingredients in the technology supply arrangement. You, or technically, the finance company, will be purchasing the technology from the retail supplier (the supplier will invoice the finance company). For its part, the supplier may well have purchased the hardware and software from a manufacturer or its distributor (possibly from a company in its own group, perhaps from another country). The software that is being supplied with the equipment and any associated network access and cloud data storage services may well be provided by different companies – ‘third parties’. With that in mind, it is important to ensure that the necessary licences and contracts are in place for the use of the technology and that you know who are providing them.
- Making sure that you have satisfactory warranties in place from the supplier and ideally, the manufacturer, will be important. If the technology fails, the finance company with whom you are in contract, will not be that interested in helping. Their interest is in the finance model supporting the purchase. The supplier may well sell you a maintenance agreement for assurance. There can be some overselling here, but such a contract could be prudent where continuity of operation of the technology is fundamentally important and a failure, potentially catastrophic to your business. These contracts are not commonly renewable year to year, so it is worth checking the price increase mechanism for subscription charges at the outset. Because technology retail, as a sector, tends to be unstable, it is also sensible risk management to weigh in the balance whether to purchase technology from an established market leader instead of an impressive and exciting new entrant to the market. This is a commercial decision.
What else do I need to consider?
- It is also worth checking the duration of the licences and service agreements of these collateral but essential elements of the purchase and any continuing charges that are specifically attached to the licences and services (e.g. network charges), as well as any terms for renewal on expiry. Ensuring that the durations of the licences and service contracts align with the term of the finance you are agreeing is something to check carefully. In any event, again, the terms for price adjustment in respect of these third-party elements of the supply should be considered.
- Another aspect that warrants thought before buying technology is the matter of ‘redundancy’. There are a number of dimensions to this. The first is that an ingredient of the technology may cease to be usable as the requirements of the business or sector, or the context of its operation, change over time. Although the technology may of itself have inherent longevity, the functionality of the equipment and supporting software may become redundant in its operating environment. Secondly, advanced technologies are almost always complex and are commonly comprised of numbers of components of one nature or another, the operabilities of which are interdependent. The redundancy of any one of these components might render the technology unusable. Thirdly, advances in many technologies have been accelerating in recent times, so much so that ‘state of the art’ technology can very soon become ‘out of date’ in market terms. Where a competitive edge in business is to be maintained, the need to be responsive to advances in technology can be important.
- The ‘rate’ of redundancy can materially vary depending on the technology concerned, and it is therefore important to give thought at the outset to whether the finance model for funding the purchase that you are settling on sits comfortably with the potential for redundancy in any of the above dimensions. Will you have given yourself the flexibility to move in response to developments in your business or technology? Practically, this means doing some research. Ask around and canvass views in the sector.
What are the key take-aways?
The take-away here is that when you are investing in key and expensive technology for your business, particularly under finance terms, it is prudent to look at the detail of what is being proposed and think ahead. Expect to be handed plenty of small-print contracts to sign. These documents should be read carefully and understood before signing. If you are in any doubt, contact one of the experienced commercial lawyers in our Technology Team.