Thursday, December 15, 2011

Adjusted Basis

In yesterday’s post about the cheap way out I mentioned the use of the words "adjusted basis" as
another thing that provides the supplier with cheap way out. Today I want to explain what that means.

The term “adjusted basis” is something that suppliers may seek to insert into a term where the Supplier is obligated to refund the buyer the purchase price. For example, if the Supplier was unable to get a license in the event of an infringement of a third party’s intellectual property rights, they may be obligated to refund the price. If a product failed to meet agreed performance specifications and that could not be corrected, they may be obligated to refund the purchase price.When they attempt to insert language that says that the refund will be on an adjusted basis, what they are saying is that the refund will not be what you paid, it will be less taking into account depreciation, wear and tear, damage to the product or other things that reduce the asset’s value.

The important thing for you to consider is what will be the impact to you of not being able to use the product in the future. For example if you licensed software and you could no longer use that software what would be the impact? If it was used on a stand alone basis and you can simply use another program the impact is small and maybe getting a refund on an adjusted basis may be reasonable. What if you wrote a large amount of code that was linked to using that program which you will no longer be able to use? How would you then fee about getting back less than you paid?
What if you paid to have a piece of capital equipment delivered, and rigged to the site of use and now you’ll have to have that removed, Do you really want to get back only a portion of what you paid?

Those other costs you incurred you may not be able to recover as they would probably be considered as incidental damages and may be precluded by the limitation of liability. The one thing you can control is the amount they will refund. If I was going to incur all those other costs without any ability to recover them,I know that I wouldn’t want the refund to be on an adjusted basis.While you did have the use of the product for a certain period, you also incurred all those other costs that you will not be able to get full value on those investments because of a problem the supplier caused.Using "adjusted basis" in a commitment to provide a refund is just another cheap way out of a problem that the supplier caused.