Protect Yourself Before Sending a Deposit or Down Payment

Sometimes you, as a buyer, are required to turn over large sums of cash as a down payment or deposit on a purchase. Typically, this occurs with expensive assets such as a piece of machinery, a boat or a construction project. It's not much of a concern when you have been dealing with the same supplier for years, or you know that the vendor is well known and well capitalized. But it can be a source of stress and even serious risk when you deal with a person or firm that you have little experience with and/or that is not well known. Depending on the type of purchase, there are several ways to protect yourself.

If the deposit is a down payment on a future construction project, you might insist that part or all of the deposit be placed in an escrow account that requires authorization by both your and the contractor's lawyer to release funds.

If the amount is substantial and the project will take a long time to complete, e.g., six months or longer, obtain a performance bond from the contractor. For reputable contractors, this is a normal procedure. They can obtain a performance bond from their insurance brokers. But if the contractor can't produce a bond -- beware! Protect yourself by making payments only as progress is made on your project (i.e., progress payments).

If your supplier's supplier requires a deposit (e.g., as part of a machinery order), insist on seeing the receipt from your supplier's order, or better yet, make the payment yourself. This assures you that your supplier isn't using your money to fund other purchases.

For large-dollar purchases, have your attorney review the order form or purchase agreement before signing it, even if the supplier says he's using a standard order form. Be sure the document clearly lays out all important terms, such as when the product (or service) is to be delivered, terms of payment, and what specific work is to be completed.

If "time is of the essence" on the delivery, this should be indicated in the contract along with a specific must-have delivery date and penalties or cancellation rights for late delivery.

If your purchases are stored in facilities not owned or leased by you, such as at your supplier's place of business, be sure that all parties can easily identify, at all times, which assets are yours and which are owned by other parties. Check with your lawyer about perfecting legal title (by a UCC filing). For example, make sure that if the supplier becomes insolvent, creditors of the supplier don't seize your property under the assumption that it actually belongs to your supplier.

In all cases, use your good judgment. If the deal sounds too good to be true, it probably is. Do the terms pass the smell test? Is the firm well established?  Do you know other persons or firms that have used this vendor? Have you checked references? Is the vendor's representative unusually pushy or in a hurry? Are there "missing links"?

If your instincts say "something's fishy," pull back. You always have alternatives. Resist the thought that you have to take the risk because of time pressure or because there are no other vendors. There are always alternatives.

If your good judgment tells you that there is unreasonable risk in sending the deposit, find a firm that gives you a higher level of comfort.