Question: If a piece of my equipment breaks down on a jobsite, how can I make sure I don’t get sued by my customer (not to mention everyone else on the jobsite), especially if someone is injured or their property is damaged as a result?
James Waite’s Answer:
This is America. With few exceptions, virtually anyone (even “traumatized” bystanders) can sue you if your equipment breaks down and injures someone or damages someone’s property. Frankly, there isn’t much you can do to “force” them not to sue you, but there is a great deal you can do (legally) to “persuade” them not to (i.e., by making it time consuming, uncomfortable, expensive and risky for them).
Let’s consider some of the things that can make it less appealing for someone to sue a rental operator:
Broadly speaking, the plaintiff will need to show two forms of “causation” in order to prevail:
- Cause of Malfunction: That the rental operator can be held legally responsible for the malfunction (i.e., the malfunction did not result from some external force that the rental operator could not anticipate – for example, a sudden storm, or the customer’s intentional abuse of the equipment). In effect, if the cause of the malfunction is indeterminate, the plaintiff is likely to win a “products liability” lawsuit based on the duty of the rental operator to place only reasonably safe products into the “stream of commerce.”
- Cause of Injury or Damage: That the malfunction was at least a “producing” cause of the plaintiff’s alleged damages. In other words, the malfunction doesn’t have to be the sole source of the plaintiff’s damages; rather in most cases, the plaintiff need only show that the damages would not have occurred “but for” the malfunction. Importantly, even proving “causation” is often not necessary in “strict liability” lawsuits, which may only require proof that an “unreasonably dangerous” product was rented, and that the customer suffered a personal injury and/or property damage.
As one might guess, the majority of claims involving malfunctions are made by customers. But, other parties (for example other contractors on a jobsite, or even the project owner) might also have the right to bring suit against you if they suffer damages, such as delays, resulting from a malfunction of your equipment. Fortunately for rental operators, both the law and the courts (to varying degrees) around the country now recognize a host of contractual protections, enabling rental operators who use properly written rental contracts to avoid, or shift to their customers (whose misuse of the equipment they rent is, candidly, one of the most common causes of malfunctions anyway) many of the liabilities arising from such malfunctions.
Following is a short list of some of the most effective of such provisions:
- Inspection and Examination: A written acknowledgment that the customer inspected and examined the equipment upon receipt eliminates implied warranties regarding defects under UCC Section 2A-214(3). Thus, it also arguably shifts to the customer any responsibility for subsequent related malfunctions.
- Instructions: Various courts throughout the U.S. have held that “a rental operator generally cannot be held liable for a customer’s misuse of the equipment if that misuse was the cause of the customer’s injury; provided that, the rental operator made available to the customer adequate instructions.” Consequently, the inclusion in the rental contract of a written acknowledgment that the customer received adequate instructions regarding the proper use (and as applicable, transportation, storage, servicing, maintenance and/or repair, etc.) of the rented equipment can drastically reduce the rental operator’s malfunction-related liability.
- Warnings: In addition to providing instructions, rental operators have a “duty to warn” customers of potential hazards associated with “foreseeable” misuse of the equipment. Obviously, identifying the many types of “foreseeable” (a term that has been debated at many levels) misuse that might be made of the hundreds of different types and models of equipment would be impossible in most cases. Nonetheless, by including a conspicuous, significant and emphatic warning that the customer should use the rented equipment only for its intended use (i.e., the use intended by the manufacturer) arguably makes all other uses “misuses” (and therefore, breaches of the rental contract as outlined in the next paragraph), thereby further reducing the rental operator’s malfunction-related exposure.
- Use, Protection, Servicing and Maintenance: The customer’s agreement to properly use, protect and service (and in some cases, maintain) rented equipment makes any failure to do so, or do so “properly”: (i) a breach of the rental contract and (ii) possibly the source of the alleged malfunction. If the malfunction can be credibly attributed to the customer’s failure to properly use, protect, service and/or maintain the equipment, liability generally shifts to the customer.
- Warranty Waiver: A proper warranty waiver (the customer’s written waiver of all express and implied warranties) should be included in all rental contracts, at least those provided by rental operators. This is important not only because it helps rental operators avoid liability for malfunctions generally, but also because the inclusion of such a waiver is necessary in order to avoid the “implied” warranties that burden all rental operators under UCC Article 2A-Sections 211 through 213, even if the rental operator never says a word regarding warranties. Note: Such waivers must specifically comply with the requirements of UCC Article 2A in order to be enforceable. For example, they must be “conspicuous” (typically bold, underlined, italicized and/or capitalized) and specifically mention words like “merchantability” and “fitness”.
- Hold Harmless: “Hold harmless” means effectively “you agree not to sue me.” Thus, including the customer’s agreement to “hold the lessor harmless” can be immensely helpful to the rental operator, particularly if the hold harmless clause specifically mentions malfunctions.
- Indemnity: Similarly, the word “indemnify” means “pay for.” Hence, including a proper indemnity clause in the rental contract gives the rental operator the right to claim that the customer agreed to “pay for” any claims (whether made by the customer or by any other party) arising from alleged malfunctions in the rented equipment.
- Defense: Critically important, but often overlooked, is the obligation to “defend” (hire and pay for an attorney to defend any claims arising in connection with alleged malfunctions). Including a “defense” obligation in the rental contract can enable the rental operator to shift this often considerable expense to the rental customer. Among other things, this can radically alter the negotiating leverage between the rental operator and the customer (in favor of the rental operator), particularly with respect to settlement negotiations.
- Waiver of Consequential Damages: “Consequential” (a/k/a “special”) damages are those that result from or as a consequence of a breach of contract, such as the losses or “delay damages” suffered by third parties, perhaps other contractors on the jobsite, as a result of (at least as claimed by your customer) malfunctioning rented equipment. These damages can amount to hundreds of thousands of dollars, making the inclusion of a “waiver of consequential damages” essential for most rental contracts.
- Claim Limits: Courts around the country have proven surprisingly (though not uniformly) receptive to contractual claim limits. Essentially, “The customer agrees that, regardless of cause or fault, the rental operator will not be liable to the rental customer for more than $X” (the most commonly used determinant for “$X” being “the amount of the rent received by the rental company”). Where enforced, these types of provisions can be immensely helpful when customers seek large damage awards based on claimed malfunctions.
- Exclusive Remedies: Lastly, the rental contract should limit the customer’s remedy for any legitimate malfunction(s) that do occur and are not the fault of the customer, to repair, replacement or termination of the rental and proration of the rent. To do so effectively, those remedies should be made “exclusive” (make this exclusivity “conspicuous” as well), with all other remedies being expressly waived by the customer.
Equipment malfunctions can create enormous liability for rental operators. Fortunately, their rental contracts can be tremendous sources of protection, but only if they include carefully considered protections. The above referenced provisions are a good start, but they are just that, a start. Many other provisions should be considered depending on a wide range of factors, including your equipment mix, customer base, geography, weather conditions, local competitive and regulatory environments, and other factors. Feel free to contact us if we can help.
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 Damage Waivers), 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. He can be reached at (866) 582-2586, or via email at firstname.lastname@example.org.