Risk Management: The Importance of Signed Contracts

The American Rental Association (ARA) and ARA Insurance have updated the rental contracts guide “Business Management: Contracts and Legal Guidelines.”  The update expands the discussions of numerous issues — such as purchase options, mechanics’ liens, bankruptcy issues and privacy legislation — only touched on in the original, explains attorney James Waite, Esq., author of the previous guide as well as the new version, and a partner with Winters & Waite, a firm specializing in equipment leasing and related transactions, corporate law, and mergers and acquisitions.  The company has offices in Dallas, Denver and Miami.

In addition, says Waite, several new sections are included to address topics suggested by ARA members, such as repair and maintenance contracts, master leases, re-rentals and portable storage container rentals.  In total, there are 16 new subsections to the book.

The purpose of a rental contract is to clearly establish the terms of the transaction, including the responsibilities of each party, in order to avoid misunderstandings that could occur in the absence of specified terms and to provide legal protection in the event either party doesn’t perform. These contracts offer essential protections to rental businesses, which is why it was decided to update the guide.

“A signed rental contract creates an agreement between a rental operator and a customer that provides the legal basis for the rental relationship and alters — in favor of the rental company — many of the standard legal presumptions that would otherwise apply under the law,” Waite says, adding that rental contracts also serve other purposes, such as:

  1. Specifying that the equipment is being rented, not purchased, and that ownership remains with the rental company at all times;
  2. Setting forth basic terms, including persons entitled to use the equipment while out on rent; where the equipment may be used; the basic rental rate and any other charges, such as delivery, setup, damage waiver, late fees, excess usage, interest and deposits; and the time in/time out;
  3. Establishing rights and remedies in the event of a default, such as failure to pay charges or return the equipment;
  4. Creating the presumption that a customer has thoroughly inspected the equipment; was completely satisfied with its condition; that the equipment wasn’t defective when the customer received it; and that the customer has received all necessary instructions and warnings;
  5. Increasing the customer’s duty of care from the “ordinary care” standard implied under common (case) law to something approaching full responsibility for damage or destruction to the equipment during the rental term;
  6. Creating a framework for settling other legal issues, such as where to file lawsuits, which state’s laws apply and restrictions on oral modifications to the written contract; and
  7. Identifying which party is liable for injuries and/or damages sustained during the rental term.

Does your contract accomplish all of the above? At the start of a new year also is a good time to review your company’s contract to ensure it offers optimal protection.  At the same time, an airtight contract is meaningless if it goes unsigned by the customer.

Are your employees doing their jobs and getting those contracts signed without fail?  If employees are expected to get rental customers to sign contracts, it’s a good idea to train them on the purposes of the contract and the negative consequences — including those as basic as nonpayment of the rental fee — if contracts aren’t signed.

“Civil lawsuits, particularly those based on negligence and product liability, are probably the most compelling reasons for training employees to make sure rental contracts are signed,” says Waite.

Insurance can cover many claims, but there are limits to this protection, for instance where the claim exceeds the rental company’s liability insurance coverage or when claims are excluded from coverage, says Waite.  Unless the rental contract limits or eliminates such claims — and was signed by the customer — the rental operator is on the hook.

In the February issue of Rental Management, this column will discuss at what point during the rental process the contract should be signed; if a new contract is required when the rental order is changed or expanded; and the potential liabilities rental operators face and how a contract can be used to limit claims.  You also can get a jump start on this latter topic by participating in a Jan. 18, 2012, webinar presented by Waite.  Visit ARArental.org to register for the webinar.

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