GRAND RAPIDS — A contractual dispute over a $1.125 million equipment purchase has resulted in legal action between Mill Steel Co. and Illinois-based steel processor The Material Works Ltd.
In the case, Grand Rapids-based Mill Steel sued Material Works, alleging the company deliberately withheld a deposit Mill Steel paid on two pieces of steel-processing machinery in the fall of 2015 after finding “the equipment was substandard,” according to filings with the U.S. District Court for the Western District of Michigan. Mill Steel also alleges that Material Works “demanded” it still pay the full amount for the equipment, despite it not meeting Mill Steel’s expectations.
However, in a counterclaim, Material Works maintains that Mill Steel conducted and completed an inspection and verification of the equipment prior to signing the purchase agreement. Moreover, after a series of delays in picking up the equipment by Mill Steel, Material Works claims the company falsely cited non-performance as a reason to back out of the transaction before switching its reasoning to quality concerns.
Mill Steel declined to comment on the pending litigation. Material Works did not respond to requests for comment.
While contractual disputes like this are not uncommon between merchants, the lawsuit could have easily been avoided, according to West Michigan attorneys not involved with the case but who were familiar with the filings.
Ben Zainea, a partner at Grand Rapids-based Mika Meyers PLC, sees the dispute stemming from the initial purchase agreement and contract, which failed to spell out in detailed language the terms of inspection rights and other factual concerns.
“At the end of the day, the takeaway (from this case) is that these types of disputes can be avoided by ensuring there is clear language in the purchase agreement over inspection rights, testing, financing and whatever other contingencies you put in the deal,” Zainea said.
‘PENNY WISE AND POUND FOOLISH’
Zainea said these types of lawsuits are common as companies grow and handle more legal matters in-house. Although most times these types of purchases are completed without incident, it only takes one rushed contract during a quick decision-making process to derail the deal and spark litigation, he said.
To prevent the risk of a lawsuit down the road, Zainea recommends that companies use outside counsel to look over their purchase agreements.
“I’m sure this is a situation where both businesses did not want to incur the cost of an attorney on the front end to secure the language on the document,” he said. “Sometimes they’re sensitive to fees, and that’s understandable, but it’s a little penny wise and pound foolish, as in the long term, it could cost much more.”
According to the court documents, Mill Steel originally considered purchasing the equipment from Novi-based Lee Steel Corp. in the summer of 2015, following the company’s Chapter 11 bankruptcy earlier in the year.
Lee Steel’s Wyoming facility and working capital from the company’s Romulus facility was acquired by Illinois-based Union Partners I LLC in August 2015, as MiBiz previously reported.
However, a portion of Lee Steel’s assets were also liquidated to Hilco Global LLC during the bankruptcy process. Hilco Global initially entered into a purchase agreement with Material Works. During this process, Mill Steel reached out to the company to purchase the equipment.
Material Works alleges that after Mill Steel received technical specifications, the company sent a signed offer of purchase for the equipment for $1.125 million to be paid in two installments — a 10 percent deposit due Sept. 14 with the remaining 90 percent due by Oct. 30, according to the court documents.
Following the purchase agreement, Mill Steel completed an equipment inspection on Sept. 9 and paid the deposit on Sept. 14, according to the court documents. But after numerous delays in picking up the equipment, Mill Steel informed Material Works that it was “not ready to meet the timeline.” In response, Material Works demanded payment by Dec. 2.
Material Works alleges that on Nov. 23, Mill Steel first claimed the equipment’s poor mechanical condition as the reason it was backing out of the sale. The following day, the seller threatened legal action against Mill Steel if it did not pick up the equipment by Nov. 30.
In turn, Material Works alleges that Mill Steel took its own legal action first.
“In a direct response to an imminent lawsuit by [Material Works] for the remaining installment payment, Mill Steel initiated this lawsuit against [Material Works] on November 30, 2015,” the company stated in its court filings.
While the majority of contractual disputes are resolved outside of court, it remains unclear if this lawsuit will go to trial, said Zainea of Mika Meyers.
“These are the kinds of cases that would be much more efficient and cost effective for the parties to sit down and pursue an alternative resolution instead of a trial,” Zainea said.