Consequential Damages; An International Perspective

Question:  My name is James Oxenham.  I am the CEO of the Hire and Rental Industry Association of Australia (“HRIA”).  The HRIA is looking into producing guidance for our members on how best to approach consequential loss issues with their customers.  I was wondering if American rental companies faced similar issues, in particular when dealing with the larger construction companies and their terms and conditions around consequential loss?  

Mr. Oxenham:

 

Yes:  You raise a good question.  Contract drafters in the U.S. face very similar issues.  In fact, both countries’ means of dealing with consequential damages trace their origins the same British case, Hadley v. Baxendale (1854), 9 Exch. 341.  This common heritage spawned similar lines of legal precedent in both countries (and indeed, throughout much of the former British Empire).

How We Got Here:  The legal systems of the U.S. and Australia (both former British colonies) were founded on Great Britain’s.  Consequently, they are similar in many respects, not least of which is that each is largely comprised of a combination of statutory and case (or “common”) law, with varying degrees of assistance from academia and standard-setting bodies.  Importantly, the legal systems all three countries permit aggrieved lessees to recover both “direct” and “indirect” (e.g., “consequential”) damages from equipment lessors.  This makes it critical for equipment lessors in each country to limit, eliminate and/or transfer away from themselves as many of these liabilities as possible.

Generally, in all three countries (the U.S., Australia and Great Britain), a party who breaches a contract can be held liable to the non-breaching party for at least two broad forms of “damages”:

  1. “Direct” Damages:  Those that arise “naturally” or “according to the usual course of things” from the breach, such as refunds of rents and delivery charges previously paid by a lessee; and
  2. “Indirect” Damages:  Additional losses that the parties would, when they entered into the contract, have reasonably expected to arise as a “consequence” of the breach, such as site damage, “delay damages” and/or lost profits suffered by a lessee (or perhaps by others on a jobsite, some or all of whom may sue the lessee) as a result of an alleged equipment malfunction.  These “consequential” damages are often sought by lessees from lessors in addition to “direct damages.” And as you undoubtedly know, such “indirect” damages often vastly exceed the associated direct damages.   

Protecting Lessors:  All three systems also permit contracting parties to waive (to varying degrees) consequential damages in contracts.  The U.S. has adopted the “Uniform Commercial Code” which specifically addresses such waivers (UCC, Article 2A, Section 503); whereas the legal systems of the U.K. and Australia appear to achieve largely the same result through a combination of statutory and common (case) law.  As discussed in more detail below, outcomes are thus likely to be similar in many cases, though my general impression is that Australian laws tend to be more forgiving than U.S. laws when dealing with small businesses. All three countries’ laws are significantly more protective of individual consumers.  

Given these similarities, it is also not surprising that the means of waiving such damages in all three countries are quite similar.  The critical issue for contract drafters is ensuring that both “direct” and “indirect” damages are, to the extent legally permissible, waived by their lessees (knowing that, for example, consequential damages may not be waivable for personal injuries suffered by individual consumers).  As you might guess, effectively waiving these damages requires the inclusion in the rental contract of a clearly worded, legally enforceable waiver which specifically addresses the types of damages sought to be waived, as well as the fact that the lessee is knowingly, intelligently and voluntarily waiving them.

 

Indemnity Provisions:  Regarding indemnity provisions (those which call for one side to indemnify or “pay” the other party for something):  These, along with warranty waivers and assumption-of-risk provisions, tend to be hotly negotiated when dealing with large business customers (they are also often unenforceable against governmental entities), meaning that their inclusion in rental/hire contracts can create more issues than they resolve.  Nonetheless, whenever possible, a rental company should include an indemnity provision in its rental contract calling for lessees to indemnify the rental company as broadly as possible, knowing that such provisions will be subject to certain statutory and common law limitations, and will likely be negotiated and/or modified by larger customers (Note:  Such modifications usually shouldn’t be viewed as a lessee’s “final, take-it-or-leave-it” position, but rather, attempts to modify the parties’ risk profiles [“bargains”], and as such, invitations to lessors to respond with their own modifications).

 

Liquidated Damages:  I agree with your Australian counsel’s comments regarding liquidated damages (i.e., damages that are explicitly agreed upon prior to a breach) – in particular, that contract provisions calling for payment of liquidated damages are fairly unusual in the equipment rental/leasing industry.  I do, however, note that: (a) a provision allowing a rental operator to retain a “non-refundable” deposit (something we commonly include in rental contracts that call for advance reservations and/or significant preparation on the part of the lessor) arguably constitutes a form of “liquidated damages”; and (b) one relatively popular means of dealing with late returns is to adjust the rent charged for overtime. For example:  “Overtime will be charged at a rate equal to 1/6 of the daily rental rate” – usually an effort to motivate a customer to timely return rented equipment scheduled for a subsequent rental. These are, in effect, less obtrusive liquidated damages provisions that seem to work well within the industry.  In all cases, in order to be enforceable, the liquidated damages provision must, itself, be reasonable and should not call for payment of a damage amount that is out of proportion to the overall transaction, lest it risk being deemed a “penalty” and therefore unenforceable under the law.  

Rental companies, on the other hand, should rarely, if ever, agree to pay liquidated damages in the event of an alleged breach (I say “rarely” leaving room for the possibility that an unusually important and/or profitable project might justify a carefully limited liquidated damages provision). 

About Fairness:  “Fairness” issues are also dealt with similarly among the three countries.  Each, for example, permits rescission, limitation and/or deletion of “unfair” contracts, in whole or in part, on the basis of unfairness (or “unconscionability”), particularly where two contracting parties negotiate from significantly disparate bargaining positions (size, age, sophistication, circumstances, finances, etc., can all be factors).  Again, the U.S. accomplishes this through the Uniform Commercial Code (Article 2A, Section 108), as well as the Restatement (Second) of Contracts (Section 208) and the related cases; whereas, U.K. and Australian courts appear to do so largely through case law and other statutes, such as Australia’s Consumer Law (ACL), and the U.K.’s Unfair Contract Terms Act of 1977 and Consumer Rights Act of 2015 – again, often with similar results.

 

This raises two questions in addition to your initial inquiry:  

 

  1. Should rental companies deal differently with customers based on such customers’ size and/or sophistication?  

In my opinion, you have no choice; you must.   Some rental operations use different rental contract forms (we see more Master Rental Contracts used with large customers, who not surprisingly, tend to negotiate those contracts more vigorously than ordinary, daily rental customers do).  Other rental operators elect to negotiate from a single form, and do so with varying degrees of flexibility based on the customer and the relationship.

 

  1. If so, how can doing so be made to work within the boundaries of a pre-printed rental contract?

This is more nuanced; the answer tends to involve a combination of provisions that: (a) properly and fairly notify/educate the customer regarding the potential risks associated with renting/using the equipment; (b) disclaim (on the part of the rental company) liability for such risks; (c) obtain the customer’s “knowing and voluntary” agreement to assume such risks; (d) waive the customer’s associated claims (including “consequential” damages); and (e) obtain the customer’s agreement to indemnify (wherever possible), defend and hold harmless (not sue) the rental company for as expansive a list of potential claims as can be legally (and diplomatically) included.  Accomplishing this requires input from the rental company regarding a number of issues, including the types of equipment being rented, to whom, where, when and how.  Ultimately, and again, unsurprisingly, these provisions tend to look very much the same in countries with common legal ancestries, such as the U.K, the U.S. and Australia (not to mention, Canada, New Zealand and many other members of the British Commonwealth).  But as with so many legal issues, “the devil is in the details.”  Knowing when to give a little, and when to stand your ground can be difficult to determine, and can be expected to change with each prospective lease and lessee.

 

With all that in mind, in an effort to provide you with something useful on a practical level, following is a link to an article I wrote for Rental Management Magazine in October of 2015 which contains a list of negotiating “Do’s and Don’ts” which many of my clients seem to find useful (see: http://www.rentalmanagementmag.com/Art/tabid/232/ArticleId/23958).  The guidelines set forth in that article provide a basic reference point for those who wish to negotiate their own agreements or perhaps just use them in evaluating whether a prospective lessee’s efforts to negotiate lease provisions are reasonable.

 

I hope you find this helpful.  Please don’t hesitate to contact me if I can be of further assistance.

 

Kind Regards,

 

James Waite

James Oxenham is the Chief Executive Officer of the HRIA (Hire and Rental Industry Association of Australia). Mr. Oxenham previously served as its National Operations Director, overseeing internal operations for the three inter-linked industry bodies, the HRIA, EWPA (Elevating Work Platform Association), and the TSHA (Telescopic Handler Association).  Mr. Oxenham, a native of Great Britain, became an Australian Citizen in 2012, is a Graduate of the Australian Institute of Company Directors, and is fluent in English, French and Spanish.

James R. Waite 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 the world on a wide range of issues, including corporate law, employment issues, negotiating and drafting contracts, 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 Northwestern University.  He can be reached at (866) 582-2586, or via email at j.waite@wwlegal.net.