Question: I sell new and used equipment. I usually don’t have buyers sign a separate contract or bill of sale because I have a provision in my rental contract that I believe covers sales. Is that enough or is there some reason I need to use a separate document?
Answer: Technically, you could rely on a brief provision in your rental contract, but I wouldn’t recommend doing that for anything other than small incidental items, like belts, hats, boots, gloves, etc. Attempting to sell equipment using that type of provision is a little like trying to build a skyscraper using a ladder — you can try it, but it’s probably not going to be enough. A recent ruling by a federal judge in Indiana underscores the point.
What happened. General Motors was sued by two plaintiffs, Ron Shea and Robert Kelly, in a proposed class action — a claim that can include hundreds or even thousands of plaintiffs, typically combining small individual claims into one, potentially colossal, lawsuit — accusing General Motors of selling vehicles which included defective engines that consume excessive amounts of oil in Shea et al. v. General Motors LLC; Case No. 3:21-cv-00086, U.S. District Court, N. Dist. of IN. GM responded, in part, saying it was never given the opportunity to repair the engines in question because Shea and Kelly never actually sought repairs, rendering the claim itself theoretical.
The federal court agreed, and dismissed the case, saying:
“The vehicle owners really offer but a hypothetical — that if they had sought repairs during the warranty period, GM wouldn’t have repaired the defect,” Judge Damon Leichty wrote in his decision. “The court decides only actual controversies, not hypotheticals.”
The judge also added, “These owners never presented their vehicles to GM for repair; by definition, they cannot claim a remedy failed when they never sought the remedy.”
Why this is important. Class actions are a major threat. By combining multitudes of claims, class actions tend to make small cases — which by themselves often wouldn’t merit pursuing — into enormous combined claims that attract swarms of plaintiffs’ class-action lawyers seeking to recover massive verdicts against businesses, many of which simply weren’t aware that they were doing anything wrong. In recent years, a number of well-known class-action and consumer protection lawsuits accusing equipment dealers and lessors of improper and/or illegal practices with respect to damage waivers, fuel charges, environmental fees, taxes and other issues already have cost them tens of millions of dollars. Consequently, eliminating or even just limiting these types of claims to the extent possible has become a major focus for us as
well as for our clients.
Why rental contract provisions are not enough. Most sale provisions included in rental contracts simply extend the protections of the rental contract to sales, to the extent legally possible. That’s a good start, but consider Judge Leichty’s ruling in this context:
“They (the class-action plaintiffs) cannot claim a remedy failed when they never sought the remedy.”
Few rental contract sale provisions would go so far as to mention a specific remedy for a defective part — for example, the extension of a manufacturer’s warranty. Why? First, there simply isn’t room in most rental contracts because of the need to include so many critical rental-specific legal provisions. Secondly, the primary purpose of a rental contract is, obviously, to address a rental transaction. Product defect remedies are, by their nature, creatures of sales transactions — lessees have little need for them other than to make certain the equipment they rent works during their rental. This makes including issues like warranty passthrough provisions, which extend original equipment manufacturer (OEM) warranties to buyers, largely irrelevant — the reason you almost never see that language in a rental contract.
A properly written bill of sale, on the other hand, would expressly extend OEM warranties to the buyer whenever possible, offer to facilitate pursuit of claims on such warranties, and possibly even offer a supplemental limited warranty made by the direct seller. For example, “This equipment is covered by a limited warranty calling for the seller’s replacement of parts which prove defective within 90 days immediately following your purchase …”
Subject, of course, to applicable laws — state laws vary with respect to limited warranties and warranty limitations — these types of provisions generally not only limit the seller’s liability for repairs and replacements, but also their potential liability for class-action claims.
In other words, though it may seem counterintuitive, offering a limited warranty, or at least an extension of the OEM’s warranties, if they can be extended under applicable provisioning agreements with the OEMs, effectively creates a safety mechanism for addressing customer complaints. It sets up a legal hurdle by first requiring them to pursue the remedies available under their contract — the bill of sale — before filing a potentially devastating class-action lawsuit against the seller (you).
That is not all that is needed, not by a long shot. A proper bill of sale also should include a number of other provisions, including:
- Price, deposits and payment terms.
- Acknowledgement of receipt, examination, inspection, testing and acceptance by the buyer.
- “As-Is” language and warranty waiver.
- Security interest/lien grant and the right to file a UCC-1 financing statement — particularly if the seller will be financing any portion of the purchase for even a short period of time.
- Shipping and delivery provision identifying which party is liable for insurance and damage during transportation.
- Act(s) of God/force majeure provision, which excuses the seller from timely performance in the event of a delay associated with transportation, customs clearance, taxes, supplier delays, strikes, epidemics or pandemics, government-mandated shutdowns, and the usual list of additional uncontrollable events, such as fire, flood, storm, earthquake, tsunami and more.
- Upper limit of the seller’s liability — typically to the purchase price.
- Default provision, which includes seller’s right to recover the entire purchase price or the seller’s anticipated profit and any other damages the seller might suffer as a consequence of the buyer’s breach, as well as interest, attorneys’ fees and costs of court.
- Arbitration clause.
- Class-action waiver.
- Integration provision incorporating all of the parties’ agreements into the bill of sale and eliminating reliance on outside representations, warranties, advertisements, etc.
Somewhat surprisingly, Judge Leichty’s ruling in Shea v. GM also highlights the importance of the often-overlooked integration provision. In addition to their defect claims, the plaintiffs had alleged that GM misrepresented the vehicles in question in its advertising materials. In response, Judge Leichty pointed out that:
“[The plaintiffs] never sufficiently alleged they relied on these materials in making their purchases.”
The takeaway here for equipment sellers is that if non-reliance on advertising materials can be used to fend off additional claims, such as those involving consumer protection act violations, such as false-advertising claims, as proved to be the case in Shea v. GM, then a bill of sale should always include an integration provision which acknowledges non-reliance on advertising and other outside materials — and thereby waives such claims to the extent possible from the outset.
Selling new and used equipment can be an immensely profitable business, but even a single defect can generate catastrophic legal liability if not handled carefully and properly from the start. As is true with respect to any job, starting with the proper tools can save you time, money and headaches, literally and legally. With respect to sales of new and used equipment, that tool is a properly written bill of sale.
James Waite is a business lawyer with more than 25 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. He can be reached at 866-582-2586 or james@jameswaitelaw.com.
