Legally speaking: Tier 4 Issues

Question:  My customer ruined a Tier 4 engine and then claimed it was my fault because, he says, I didn’t explain well enough how he was supposed to maintain it.  What can I do to avoid this in the future?

James Waite’s Answer:

This question has been coming up with much greater frequency since the beginning of the year, as more Tier 4 equipment has found its way into rental fleets, and we don’t expect the number or severity of the issues to diminish anytime soon.  Let me start with some observations about the nature of the problem and then address how best to deal with it:

  • Tier 4 Generally: As most rental operators know by now, on January 1, 2015, the last of the EPA’s Tier 4f environmental regulations went into effect, mandating substantial reductions in pollutant emissions generated by “non-road” diesel engines.  These “final” requirements affected the last two categories of such engines (75-173hp and over 751hp), meaning that, going forward, all new diesel engines manufactured in, or for use in, the United States must be in compliance, failing which manufacturers and users will be subject to potentially severe penalties (the recent Volkswagen debacle should resolve any doubts as to whether the EPA is taking this seriously).  
  • Tier 4 Technologies: The technologies being used to achieve compliance fall into two broad categories: (1) advanced engine design (using new combustion technologies, intake filtration systems, variable geometry turbochargers, crankcase filters, and exhaust gas recirculation (“EGR”) systems, for example); and (2) exhaust gas aftertreatment systems (for example, particulate matter filters and selective catalytic reduction systems).  OEMs are generally free to use any combination of technologies they deem appropriate, as long as they meet the applicable emissions standards.
  • Service and Maintenance Requirements:  Not surprisingly, incorporation of these technologies has resulted in some important additional servicing and maintenance requirements. For example, Selective Catalytic Reduction [“SCR”] systems require relatively frequent Diesel Exhaust Fluid [“DEF”] refills; Particulate Matter [“PM”] filters require periodic ash removal and/or replacement along with periodic “regeneration cycles” to burn off excess carbon was wasn’t burned off during the initial combustion phase; and Closed Crankcase Ventilation [“CCV”] filters require replacement at predetermined intervals. Complicating matters, these systems, and their respective service and maintenance requirements, may be substantially different from manufacturer to manufacturer, making it important to understand not only how complex and expensive any required maintenance is likely to be, but also how much employee training and follow-up support will be made available by the manufacturer and/or dealer.
  • What’s the Worst that Can Happen?  Overriding these systems, or failing to properly service and maintain them, whether intentional or as a result of inexperience, can result in catastrophic (i.e., expensive) engine failures as well as heavy EPA fines. These invariably result in disputes with customers regarding which party, the rental operator or the customer, is ultimately responsible.

A Short To-Do List for Rental Operators

Fortunately, rental operators can do several things to protect themselves from large and uncompensated equipment losses as well as the lawsuits that so often follow from equipment failures and malfunctions:

  1. Plan for Customer Training Issues.  As most rental operators know, in certain cases (for example, longer-term rentals), they are likely to be forced to rely on their customers for the performance of some types of Tier 4 servicing and/or maintenance (for example, refilling DEF and allowing machines to oxidize particulate matter [a/k/a “regeneration”] that might otherwise clog PM filters). Customers, however, will often be unfamiliar with such requirements, at least in the early stages of Tier 4 implementation.  This makes educating them critical to maintaining the health of your valuable equipment.  Plan for that by: 
    1. making it a regular practice to familiarize each customer with all applicable Tier 4 technologies and servicing/maintenance requirements before each rental; and
    2. advising customers of the need to adhere strictly to the manufacturer’s guidelines regarding such servicing and maintenance at all times.
  2. Legal Documentation:  Ordinarily (in cases that don’t involve such new and unfamiliar issues), the standard rental contract provisions requiring compliance with all manufacturers’ instructions and warnings as well as applicable laws, rules and regulations, could be expected to adequately address most servicing and maintenance issues.  However, because Tier 4 technologies are, as yet, so new and unfamiliar, it seems inevitable that customers will claim an exception to the “standard practice” should apply (it also seems likely that a judge or jury would agree in some cases, particularly if the rental operator can’t prove the customer was separately and specifically advised of these new and unfamiliar Tier 4 requirements). Therefore, we have been advising our clients to obtain each customer’s:
    1. specific written acknowledgement of Tier 4 servicing and maintenance requirements;
    2. written agreement to comply with such requirements at all times during the rental term; and
    3. written agreement to indemnify, defend and hold harmless the rental operator for, from and against any failure to comply with such requirements (and all associated losses and damages).  

This can be done relatively easily by having the customer sign a “Tier 4 Addendum” to your Rental Contract (Note:  Showing up with this document, signed by your customer, at your customer’s attorney’s office can mean the difference between: (i) getting paid immediately either by your customer or by your customer’s insurer, and (ii) spending perhaps the next several years (and thousands of dollars in legal fees) in litigation trying to determine whether the customer was responsible for Tier 4 compliance at all (and whether the price of learning the answer might be you having to pay your customer’s attorneys’ fees as well as your own).

 

Which party (the rental operator or the customer) will be responsible and pay [for Tier 4 Compliance Issues] hasn’t been decided yet in most jurisdictions, making  your contract documents critical . . .”

 

Conclusion:

As is almost always the case with new technologies, you can expect a number of new legal issues to arise over the next several years involving Tier 4 compliance (for example, equipment damage and shutdowns, fines, penalties, worksite restrictions, and others).  Which party (the rental operator or the customer) will be responsible and pay for them hasn’t been decided yet in most jurisdictions, making  your contract documents critical (they will likely be the deciding factor in the absence of prior case law and/or specific legislation addressing these issues).  But, after the damage has been done and/or the fines have been assessed it will be TOO LATE. The opportunity to protect yourself will have been lost.  Fortunately, you have the opportunity to protect yourself beforehand by simply having your customers sign a properly drafted Tier 4 Addendum.  Many of our clients, having apparently recognized the urgency, have been requesting Tier 4 Addenda in recent months, and we expect such requests to continue.  For those who haven’t yet taken the opportunity, I recommend establishing a protocol for Tier 4 familiarization that includes obtaining customers’ signatures on a proper Tier 4 Addendum before one of these issues results in a large uncompensated loss.

About the Author:

James R. Waite, Esq. is a business lawyer with over 20 years in the equipment rental industry. He authored the American Rental Association’s book on rental contracts, and represents equipment lessors throughout North America on a wide range of issues, including corporate law, employment issues, negotiating and drafting rental contracts, purchase options and other rental-related agreements (including Tier 4 Addenda), as well as buying, selling and financing rental companies and their equipment.  He is a veteran of the United States Air Force, has a BBA in Finance from the University of Texas at San Antonio, a Juris Doctor from St. Mary’s University, and an MBA from the Kellogg School of Management at Northwestern University in Evanston, IL.  He can be reached at (866) 582-2586, or via email at j.waite@wwlegal.net.