Peace through strength and getting people to see things your way

QUESTION: I’m reading the rental contract and addenda you sent me, and I’m struggling to understand all of it. Although I appreciate your apparent effort to include every five-syllable word in the dictionary, I’m wondering if it can be simpler? Can’t you just say all of this in a few sentences, and just include something at the end that says something like, “The rental company isn’t liable for anything?” It sure seems like the customer would have an easier time understanding that and so would I.

Answer: That’s actually a very good question, one I get fairly frequently. As you read, my answer, consider this question: What’s the point of preparing and signing a contract?

About a year ago, a client of mine asked me almost exactly the same question — “This seems like overkill. Can’t we simplify this somehow?” The client had been asked to rent a large and extremely expensive piece of equipment to an unfamiliar subcontractor by the general contractor on a project on which the equipment would be used. The client wasn’t entirely sure of the subcontractor’s skills or, for that matter, its ability to pay — not only the rent, but also any amounts that might accrue for damage done to the equipment.

So, we wrote a contract, and included an addendum and a separate guarantee agreement in order to add a few protections for the lessor based on the equipment type, the parties, the project and the relationships. In hindsight, those protections proved critical.

The protections included:

  • Broad insurance requirements.
  • A robust “indemnity, defense and hold harmless” agreement.
  • A personal guarantee by the owner of the subcontractor.
  • A corporate guarantee by the general contractor.
  • A personal guarantee by the owner of the general contractor.
  • Reciprocal waivers of priority with respect to claims made against any one or more guarantor(s) (i.e., no single guarantor would be able to claim that claims must first be made against any other guarantor(s)).
  • Multiple representations and warranties by the three guarantors effectively bolstering their respective guarantees.
  • A non-discharge provision waiving any rights of the guarantors to claim that any of their obligations had been discharged as a result of any action by my client.
  • A subordination of the subcontractor’s other obligations owing to the other guarantors (subordinating them to its obligations to my client — in other words, the subcontractor’s obligations to my client would be paid first and in full before the subcontractor had to pay any other obligations owing to the other guarantors).
  • A waiver of all setoffs, reductions and counterclaims by each guarantor, for example, claims that the equipment was defective or malfunctioned that might otherwise support a reduction in their respective obligation(s) to pay my client.

As it turned out, the subcontractor’s employees were, in fact, not properly trained and the subcontractor did not, in fact, have the ability to pay the amounts owing to my client. Worse, the subcontractor’s employees severely damaged the equipment and the subcontractor was ultimately terminated by the general contractor and replaced. In addition to the lost rent, my client found he needed to recover tens of thousands of dollars in order to repair the damage to the equipment. Less than surprisingly, the subcontractor didn’t immediately offer payment in full.

Thus, my client was left with two options: Submit the claim to his own insurer, which would have resulted in a recovery only for the equipment damage, not the lost rent or downtime, and in all likelihood, a subsequent insurance premium increase or perhaps even a cancellation, as the claim was large, or pursue recovery from the parties who had signed the contracts.

Fortunately, the client had gotten signatures on all of those contracts, including the addendum and the guarantee agreement. Thus, the client found himself ideally positioned to pursue recovery from everyone involved. I received the following email, reprinted here with his permission:

James,

I have been meaning to thank you for the last [contracts] you drafted for me [pulling] in the contractor as a personal guarantor in the event my lessee defaulted. That was a good thing because things went from bad to worse! The lessee got in over his head … and the guarantor had to make most of his payments. Then the machine was damaged when they badly misused it, resulting in tens of thousands of dollars’ worth of damage! Fortunately, the lessee’s insurance stepped in and handled the claim rather quickly. The contractor ended up firing the lessee, returned the machine and settled up with me with a mutual agreement to end the rental. I was glad to get my machine out of that mess and they were, too.

I felt like you needed to know and so do your clients! Thanks again!

The client recovered everything he was owed and he didn’t have to sue anyone. That means he won’t spend the next three to five years or more arguing, responding to discovery requests, attending depositions, hearings and pre-trial conferences, paying lawyers or worrying about losing a lawsuit he never should have had to file and, perhaps, paying the other side’s attorneys’ fees as well.

Given the foregoing, what is the “real” point of preparing and signing a rental contract? Although some might still say it’s to simply memorialize the transaction — and it is true that a written agreement must do that in order to meet the definition of a “contract” — what about all of the issues discussed above? What about the multitude of other issues that can arise in connection with a rental? How would the parties deal with defect claims, overuse, late returns, theft, third-party damage, training and licensing shortfalls, and the vast array of other legal and operational issues that should be dealt with depending on the type of equipment and when, where and by whom it will be used?

In most cases, the answer to that question would be litigation.

If we assume for a moment that no sane person, other than a lawyer, really enjoys litigation, what’s to be done? Although touchy-feely theories about “reasonableness,” “mutual cooperation” and “global conflict resolution” abound, I find that few of my clients are very interested in “can’t we all just get along” conversations by the time they get to my office. As the client mentioned above knows only too well, the reality is that you have two options:

  • Give in and surrender.
  • Make sure your contract places you in a strong enough position to enable you to win without giving in, and, if it’s really good, avoid the need to litigate at all because the other side surrenders without a fight.

This reminds me of a famous muffler commercial from my youth, in which a mechanic turns to a reluctant customer and says. “You can pay me now or pay me later.” I hated that commercial and wanted badly to learn how to fix my own muffler and let that mechanic know about it, but he had a point — if you don’t spend a little time and money now, you’re likely to spend a lot more later.

The client recovered everything he was owed and he didn’t have to sue anyone. That means he won’t spend the next three to five years or more arguing, responding to discovery requests, attending depositions, hearings and pre-trial conferences, paying lawyers or worrying about losing a lawsuit he never should have had to file and, perhaps, paying the other side’s attorneys’ fees as well.

That’s the point — prepare. Do the things up front that ultimately will save you time, headaches and, most importantly, money, by enabling yourself to win and get the other side to surrender without a fight. How can you do that?

Make sure your contracts are written at least as much for your customer’s lawyer as they are for your customer. Why?

  • Even if your customer reads each contract 10 times before signing it, he or she isn’t any more likely to care about what it says than you are when you sign a car rental contract.
  • The person who is going to read it, care about what it says and fully understand its impact on the lawsuit he or she and your customer want to file against you is your customer’s lawyer. You want that lawyer to read your contracts and say to your customer, “I recommend that you surrender immediately because you don’t have a prayer of winning this lawsuit.” You also want that lawyer to say to him or herself, “There’s no way I’m taking this case because I’m a contingency fee lawyer and I don’t have the time or the resources to spend on losing cases.

In short, my answer to the question of whether a contract can be simplified always is, “Yes.” However, at the risk of sounding a little too much like an annoying muffler mechanic, my answer to the question regarding whether a contract should be simplified usually is either, “No” or “How much do you like litigation?”