Negotiating Rental Contracts With Large Customers

Question: Some of our large customers insist on modifying our rental contract or using their own. What are the most important issues to consider and how can I avoid making a critical mistake?

Answer: This is fairly commonplace when dealing with larger customers, particularly schools, governmental entities and some contractors. Importantly, there is no “established” set of rules for dealing with these issues, making it difficult for rental operators to know whether they’re accepting merely “industry standard” modifications or instead, assuming potentially catastrophic liabilities.

This can vary dramatically, depending on the type(s) of equipment being rented, the project, the location, weather and soil conditions, the familiarity of the proposed user(s) with the machine(s), the length of the proposed rental term and who will provide servicing and maintenance if the term extends for several months or more, insurance limits, lien rights, and, of course, local laws, rules, regulations and permitting requirements.

This can be a daunting process, motivating some rental operators, at their peril, to simply sign whatever contract or modifications the customer demands. Doing so, however, can be hazardous and usually is unnecessary. Most customers start with a “Christmas List” of demands and then negotiate back to something reasonable. I’ve seen customers include provisions waiving all lien rights, requiring their “approval” for damage claims, limiting recoveries to claims made “within 24 hours” and many more.

Although each rental is different, the following is a short list of common issues to look for. The phrase “don’t try this at home” is fairly apt here, but if you don’t have time to address all of your customer’s proposed changes in detail or if you can’t send them an attorney, you can at least check for these issues and if you see them, try to negotiate something reasonable:

  • Insist on retaining (do not delete) and include, whenever possible, the following provisions:

Warranty waiver:  The customer’s waiver of all express and implied warranties by the equipment rental company particularly “merchantability” and “fitness.”

Customer’s acknowledgment of receipt of instructions and warnings:  This is especially important for limiting “products liability” claims based on “failure to warn” of  potential hazards.

Customer’s assumption of rental-related risks: Particularly, risks of personal injuries and  property damage, whether to the rented equipment or to someone else’s  property.

Customer’s waiver of incidental and consequential damages:  Such damages may include  costs arising as a “proximate result” of an equipment malfunction, such as lost  profits, delay damages and suits by other  contractors on a job site who claim to have been affected  by the malfunction.

Legal and proper use requirement:  Restricting use of rented equipment solely to those  lawful use(s) for which the equipment was intended by its manufacturer.

Prohibition on subleasing or assigning equipment without the rental operator’s approval:  Among other things, unauthorized subleasing can result in use and injuries  suffered by  untrained individuals,  waivers of  lien rights, equipment disappearances and/or theft.

Hold harmless provision:  The customer’s agreement not to sue the rental operator for a variety of issues,  including equipment malfunctions.

Indemnity provision:  The customer’s agreement to “indemnify” or “pay you” for, among other things,  claims arising in connection with the customer’s failure to  properly  use and   maintain the rented  equipment.

  • Do not add the following provisions, even if the customer requests you do so:

Waiver of your mechanic’s lien rights: Mechanic’s lien rights, where available, can create  substantial negotiating leverage for rental operators, particularly when rental  payments    are overdue.

Waiver of your right to repossess rented equipment: A provision granting the rental  operator the right to repossess rented equipment without first having to obtain a court  order can be invaluable,  particularly because the law generally only permits such “extra-  judicial” repossession for failure to pay rent; and not for other breaches, such as  misuse,  abuse, overuse and/or unauthorized subleasing.

Warranties by the seller/rental company: Facially benign warranties, such as “the  equipment is in good condition and free of defects” can expose rental operators to  enormous liability if the equipment  malfunctions, even if the malfunction was not the  fault of the rental operator.

Indemnity obligations of seller/rental company: Agreeing to indemnify a customer for  anything beyond the rent received can be an expensive mistake. Consider, for  example,  other potential losses arising  from a malfunction, such as lost profits on a large project,  delay damages and claims by other contractors.

Obligation of the rental company to repair equipment: These obligations often are written  in a way that ignores the cause of the damage, such as the customer’s misuse.

Dollar amount limitations on your claims: Rental operators should be entitled to recover  all of the damages they sustain as a result of the customer’s breach of the rental  contract,  as well as attorneys’  fees, interest and costs of collection.

Time deadlines for submission of claims: Rental operators often don’t immediately discover damage caused by a customer’s negligence, making the insertion of time  deadlines for submissions of  equipment damage claims a significant problem.

– A requirement that the customer “approve” your claims before being required to pay  them: It may be a bit hard to imagine many customers devoting a great deal of time   or  energy to “approving” claims  that cost them money.

  • Additional recommendations: Never do any of the following if you can avoid it:

Use a contract form provided by a printer or by a software company:  This is a dangerous  mistake and can leave you in a serious bind when you get to court with no  attorney to turn  to for help. I recently  reviewed a rental contract provided by a well-known printer that  included a damage waiver provision despite the fact that the rental  company did not sell  damage waivers. This issue actually resulted in  the total loss of a skid-steer, without  compensation, in a case from Minnesota last year. Worse, the  damage waiver provision  was written so poorly, it actually required the rental operator, not the  customers, to pay  the damage waiver fee, arguably resulting in the rental  operator’s waiver of all claims  against all of its prior customers for damage to its equipment.

Replace your rental contract with the customer’s contract:  Agreeing to modify the terms of  your own rental contract is one thing; it is entirely another to replace it with  your  customer’s contract.

Sign a customer’s purchase order that says “Additional terms on reverse side”:  The terms  on the reverse side will replace the terms of your rental contract.

Permit a customer to “rubber stamp” your rental contract. Some such stamps say “Terms  and Conditions as provided in Customer’s P.O.”:  This also will entirely replace  your rental  contract.

Permit the customer to make notations on your rental contract, particularly notations  such as “for receiving purposes only”:  This can nullify your contract entirely and  convert it  to a “packing list.”

Permit a customer to attach the customer’s own “Terms and Conditions” to your rental  contract:  This creates a potential “battle of forms” between your rental contract and  your  customer’s and if your  customer’s contract was the last one provided, it arguably wins.

Writing a rental contract used to be a matter of obtaining a “standard form.” Those days are over. The industry has grown dramatically in the last several years, which is a very good thing, but lawsuits against rental operators for everything from equipment failures to damage waivers are proliferating, meaning you must either take steps to protect yourself or risk losing your entire business as a result of a single accident.

Once identified, however, most of the risks can be limited or eliminated, but doing so requires a very clear understanding of your equipment, your customers, your surroundings and your legal exposure. Your rental contract can be a tremendous source of protection, not to mention, negotiating leverage, if carefully thought through, but it can cost you dearly if it isn’t. 

James Waite, Esq., is a rental industry attorney with more than 20 years of experience in renting and leasing equipment. He authored the American Rental Association (ARA) book on rental contracts and represents equipment lessors throughout North America on a wide range of issues, including negotiating and drafting leases and rental contracts, as well as buying, selling and financing rental companies and their equipment. He can be reached at 866-582-2586 or email j.waite@wwlegal.net or info@jameswaitelaw.com. His downloadable rental contract forms and addenda can be purchased online at equipmentrentalcontacts.com.

You can also read this article in Rental Management Magazine.

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