Question: We recently got sued after providing maintenance and repair services for a customer who claimed the parts and services we provided were defective. We settled the claim even though we continue to believe we weren’t at fault (and it cost us a lot of money just to get out of it). Should I be using a separate contract for my maintenance and repair services? What else can I do to limit my exposure and enhance my negotiating leverage? I’d really like to avoid having to go through this again.
James Waite’s Answer: Yes, you should be using a separate maintenance and repair contract for a number of reasons, not least of which is the fact that there simply isn’t room in most rental contracts to include the necessary protections. Among other things, a properly written maintenance and repair agreement should include:
- Limitations on the provider’s potential liabilities for defects (both in the services themselves and also in the parts provided);
- Charges for services to be provided;
- Charges for parts, supplies and consumables (e.g., oil and fluids);
- Charges for other items (e.g., storage, security, shipping, etc.);
- Identification of, and limits on, the amount of maintenance, parts, supplies, consumables and other items to be provided, particularly if you intend to charge the customer on a flat-fee basis;
- The timing of the work to be performed (for instance, the date by which it must be completed);
- Timing of payments (for example, whether a deposit will be required, and whether payments be due upon delivery, prior to pickup, within 30 days after provision, or at some other time?);
- Limitations on warranties (both express and implied) and the customer’s acknowledgment that you, the provider, make no warranties regarding items provided by third parties;
- A “default” provision (which may be very different from the “ordinary” default provision) found in most contracts. For example, you may want to include a “cross-default” provision whereby a default under the Maintenance Agreement constitutes a default under the Rental Contract (and vice versa). Among other things, this enables you to terminate the rental and retrieve your equipment (perhaps several different rentals) in the event your customer defaults under your Maintenance Agreement; and
- Limits on recoveries available to customers (for example, limiting the amount a customer can recover from you for alleged defects to the amount(s) actually paid by the customer for the parts and services provided).
You should also consider whether the above referenced parts and services (“Deliverables”) will be offered only on your own rented equipment or also on other items you don’t own (e.g., equipment customers bring to you solely for repairs and/or maintenance). For example, if you provide repair and maintenance services on equipment you don’t own, (a) your potential liability increases significantly (remember, the customer keeps that equipment, and defects can manifest themselves long after you’ve completed the work); and (b) you may want to claim a mechanic’s lien for payment (Note: Under the applicable mechanics’ lien laws of most states, you must retain possession of the equipment in order to maintain your right to a mechanic’s lien on that equipment; if you let the customer take it off of your premises before your receipt of payment in full, you typically waive your mechanic’s lien rights).
Some Additional Issues to Consider
After dealing with the basic “operational” concerns, a number of legal and collection issues should also be addressed, as they can significantly impact the service provider’s ability to both collect the amounts owed and avoid being sued. Following are some of the more important considerations:
- Proper Warranty Waiver: Warranty waivers can be crucial, particularly where parts manufactured by a third party are provided (as is so often the case). At most, the service provider should agree to “pass through” all assignable manufacturers’ warranties and provide a time-limited (usually 6 months to a year) warranty regarding any defective services.
- Indemnity, Defense and Hold Harmless Provision: This provision requires the customer to indemnify (“pay for”), defend (“hire and/or pay for legal representation”), and hold harmless (“not sue”) the service provider for defects and damages, as well as third-party claims, arising from or in connection with the equipment, parts, materials and services provided (Note: Some courts are more willing than others to uphold these provisions, and state laws often differ regarding the extent of their enforceability. But it virtually always makes sense to include them, not only for legal purposes, but also because they tend to discourage customers from filing lawsuits against service providers in the first place.
- Mechanic’s Lien Grant: Mechanics’ liens for provision of services (and in many cases, storage) are typically implied in favor of the service/storage provider, but it’s a good idea to include an express (affirmative written) grant, rather than relying solely on a given state’s mechanic’s lien statute, on the chance that a jurisdictional anomaly might otherwise result in waiver. Important Note: As noted above, such liens are “possessory” in most cases, meaning that, if you surrender the item(s) to the customer before you receive payment in full, you will likely waive your lien rights (though you may be able to reclaim them if the customer voluntarily brings the item(s) back to your facility).
- Waiver of Claims Pertaining to Equipment Seizures: The service provider may want to use the “cross-default” provision referenced earlier in this article to support terminating one or more rentals of equipment (be it the equipment with respect to which the services were provided, or perhaps other equipment) to a defaulting customer. In that event, a waiver of the customer’s potential claims arising in connection with such termination(s) and/or equipment seizure(s) can be immensely helpful, both for purposes of avoiding being sued (e.g., for breach of contract, trespass, tortious interference, property damage and/or other claims – see below) and for purposes of enabling the service provider to maintain its right to recover the amounts owing under both the Maintenance Agreement and the terminated Rental Contract(s) (without which, the customer might be able to avoid paying by claiming the service provider committed the initial breach of such contract(s) by seizing the equipment).
- Waiver of Incidental and Consequential Damages: On the chance that, despite all of the other protections referenced above, the customer is somehow able to prevail in a lawsuit against the service provider, a waiver of incidental and consequential damages (damages that indirectly result from the service provider’s alleged breach of the Maintenance and Repair Contract) can be a lifesaver. Such damages can include, for example, lost income or profits, delay damages, storage, packing, shipping and other costs the service provider never anticipated. Fortunately, waivers of incidental and consequential damages, when included, are generally upheld by courts throughout the United States.
- Interest on Unpaid Amounts: If the service provider is forced to sue the customer for amounts due but not paid under the Maintenance and Repair Contract, he/she will typically want to be able to recover interest on the amounts that went unpaid while the lawsuit was pending (which may be years in some cases). “The lesser of 18% per annum or the highest rate permitted under applicable law” (remembering that, if the service provider is in a jurisdiction in which the maximum legal rate is less than 18%, charging 18% would constitute a usury violation) has become the standard in most jurisdictions. It also creates an incentive for the customer to expedite payment of the amount(s) actually owed.
- Attorneys’ Fees: It is generally best to include a provision permitting the service provider to recover attorneys’ fees if suing the customer proves necessary. State laws differ with respect to such provisions; some (for example, Colorado) generally require inclusion of such a provision if attorneys’ fees are to be recovered on contract claims; some (for example, North Carolina) require the provision to be reciprocal (benefit both sides); and others (for example, Texas) award attorneys’ fees to the prevailing party in most breach of contract cases whether or not such a clause is included. Ultimately, it almost always makes sense to include such a provision if the service provider hopes to be able to make a full recovery, particularly with respect to smaller claims, which can otherwise quickly become economically unviable (as the attorneys’ fees required to pursue the claim approach or even exceed the amount of the claim itself).
One Last Thought on Limiting Your Liability Exposure: Consider setting up a separate s-corporation or limited liability company to house only your maintenance and repair operation. Your accountant will grumble about this, but doing so would both limit your liability exposure and enhance your negotiating leverage with potential claimants by: (a) exposing only the assets of your maintenance and repair company to most lawsuits; and (b) helping you avoid exposing the assets of your rental company (essentially, all of your rental equipment) to potential judgments arising from your repair and maintenance activities. Most courts are reluctant to “pierce the corporate veil” (of limited liability) except in cases of clear fraud or “alter-ego” (essentially using the two companies and their respective assets interchangeably). That means you can effectively dictate exactly how much exposure you have to such claims simply by limiting the value of the assets you place in your maintenance and repair company (and leaving your rental assets out of it).
As noted above, understanding and documenting the obligations, including legal liabilities, associated with providing maintenance and repair services can be much more complicated than it first appears – the objective being to limit the rental operator’s liability for defects while enhancing its ability to collect payment in full – without the necessity of pursuing expensive and time-consuming litigation whenever possible. Doing so, however, requires a clear understanding of the law and what you’re trying to accomplish. Ultimately, a little planning and some careful writing can be invaluable sources of protection as well as negotiating leverage. Conversely, failing to consider the issues and plan carefully can be an expensive mistake.
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 maintenance and repair agreements), 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 email@example.com.