The motor carrier industry is one of the most competitive in the nation, and we recognize the need for equipment leasing services.  Equipment leasing gives carriers the ability to accept shipments they otherwise might not be able to because of the resource capital needed to purchase equipment. Leasing also avoids the long term costs and liabilities that naturally come with purchasing the equipment itself.  That being said, equipment lease agreements are still contracts with provisions enforceable against the lessee.  This blog discusses some of the common clauses in these lease agreements of which potential lessees should be aware. These common pitfalls include: venue selection/choice of law clauses; clauses regarding damaged equipment, including wear and tear; indemnification clauses; and hidden charges.

Venue Selection/Choice of Law Clauses:

It is a regular practice for equipment leasing companies to include venue selection and choice of law clauses in their agreements. These clauses typically read in the following manner:

“The Lease and its Conditions shall be governed by the laws of the State of Colorado, notwithstanding any conflicts of laws provisions.”

These clauses are usually paired hand-in-hand with venue selection clauses, which commonly say:

“Any dispute or action which arises from this Agreement between Lessee and Lessor shall be within the exclusive jurisdiction of the appropriate District Court of the City of Denver, Colorado.”

According to these clauses, the agreement itself would be interpreted and enforced under the laws of Colorado, and any dispute related to the agreement would have to be adjudicated in Denver.  When dealing with larger leasing companies, these clauses can be especially inconvenient and burdensome for the equipment renter, such as a situation where the equipment was rented by a company located in Alabama from a local branch of a national company with its headquarters in Colorado which uses the above clauses.  If the Alabama company had any issues with the lease agreement and intended to file suit, or if the lessor filed suit against the Alabama company, then the only court where such claims could be filed would be in Denver, Colorado, and the contract and any other issues would be adjudicated according to the laws of Colorado.

Beware as well of certain venues being well known as plaintiff or defendant friendly.  The American Tort Reform Foundation puts out an annual “Judicial Hellholes” report.  The ATR describes their methodology of inclusion as “focusing primarily on jurisdictions where courts have been radically out of balance.” Most of the venues are considered plaintiff friendly, however, it doesn’t hurt to check to see if the venue selection in a contract is listed in the “Judicial Hellholes” report and understand why they were included.

The problems posed by these clauses range from the substantive, such as specific state law issues on damages, contract interpretation, etc., to logistical nightmares posed by a necessity to find an attorney in a foreign jurisdiction and the potential for having to travel across the country just to assert or defend your rights under the contract.

Damaged Equipment/Wear and Tear:

Typically, equipment lease agreements provide something like:

“Lessee shall maintain at its own expense and in accordance with Lessor’s Equipment Standards the equipment in good condition and free from defects. Lessee shall return all equipment in the same condition as when received, normal wear and tear excepted. Determinations as to wear and tear shall remain in the sole discretion of Lessor.”

It is not uncommon for there to be disputes between lessors and lessees as to what damages are due to wear and tear and what damages are attributable to the lessee. These clauses are typically part of the standard contractual provisions, and it is unlikely any one lessee could negotiate it out of the contract. However, the lessee can try to press the lessor to use a more precise definition of wear and tear in the contract. If the lessor will not budge on the language, the lessee would simply have to be careful in the use of this equipment in an attempt to avoid extra charges.

Indemnification Clauses:

These clauses typically read in the following manner, and are standard as part of any lease agreement:

“Lessee hereby agrees to indemnify, defend, and hold harmless Lessor from and against any and all claims, losses, liabilities,  obligations and expenses, including reasonable attorneys’ fees, which in any way arise out of or are incident to the lease, use,  possession, maintenance, control, or condition of the equipment during the lease.”

These clauses impose contractual obligations on one party, the lessee, to pay or compensate the other party, the lessor, for its own legal liabilities or losses, which usually include attorneys’ fees. The laws of the states, though, vary as to their interpretation of indemnification clauses and what is subject to indemnification. For example, some states do not permit attorneys’ fees to be part of the indemnity where it is not explicitly stated, whereas in other states the right to indemnity automatically includes the rights to attorneys’ fees.

Hidden Charges:

You may think that you’re getting a bargain at the rental rate you’ve been provided by the leasing company. Beware, though, of potential charges hidden in the terms and conditions of the lease agreement which could greatly reduce the advantage of leasing the equipment in the first place. For example, it is not unheard of for leasing companies to charge, in addition to the rental charges, mileage charges, tire wear charges, and break wear charges. These charges are enforceable contract provisions and potential lessees should be extremely wary of them.  Again, if a more precise definition can be negotiated by the lessee as to what constitutes these charges, this can help avoid additional, unplanned for cost to the lessee down the road.

As one can see, there are a number of potential pitfalls to be aware of when leasing equipment. These issues can be compounded by the fact some attorneys who represent trucking companies also represent equipment leasing companies.  If you have an attorney you use and he represents leasing companies, you might want to consider a different attorney to offer legal advice and counsel when it comes to equipment lease agreements. You can ask your attorney if he represents any leasing companies.  This is not to say every attorney who represents leasing companies would not give appropriate and sound legal advice if they also represent trucking companies.

It is always recommended to seek the advice of counsel before entering into any binding, and potentially questionable, agreement. If you have a lease agreement for equipment, or are thinking about entering into one, and have questions or concerns, contact your attorney.  Additionally, any of our attorneys at Roberts Perryman would be more than happy to answer any questions you might have.

Check out the latest Transport Topics for Andrew’s contribution to the article “States Passing Legislation to Clear Way for Platooning Tests”.

This article was written by Andrew Laquet associate attorney at Roberts Perryman PC. Andrew’s focuses his practice on transportation, insurance defense and complex litigation.

Roberts Perryman has been a leader in transportation defense for over 50 years with offices in St. Louis and Springfield, MO and Belleville, IL. http://www.robertsperryman.com