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This article has been written by Prateek Giri Goswami, by pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho

Introduction

Development is burgeoning with every coming decade and along with it the need for construction and construction projects has become a quotidian thing from constructing in a highly populated city to carrying on projects in remote areas. In current times builders undertake construction projects from different cities and countries also. In order to execute such projects in different places, the builder is required to procure wherewithal for effective execution, however, the builder cannot transport his/her equipment to different places, and it can be extremely cost consuming and to remedy that the builders simply enter into an equipment rental agreement with the person or company present at the local area of the assigned project work. This article will discuss important general terms and conditions that are essential (except Boilerplate Clauses) while drafting an equipment rental agreement. The aim of the article is to explain what are the special conditions of an equipment rental agreement and its advantages and how it safeguards the interest of both parties.

What is an equipment rental agreement (ERA)?

It is an agreement where an individual or company (usually from a construction business) rents construction equipment to another contractor on the basis of terms and conditions. The two types of ERA are:

1. Standard rent agreement

In such agreement, the equipment is rented for a fixed period of time for a certain cost and upon the completion of that time period the equipment is returned to the original owner. For example, the lessor will rent the equipment for 1 year to the lessee and the lessee will deliver monthly payment towards the same, upon, competition of the 1 year, the lessee will have to return the equipment. The parties can add a clause for the renewal of the agreement.

2. Rent-to-own agreement

In such an agreement, the party to whom the equipment is leased has the option to fully purchase the rented equipment at any time during the term of the agreement. For example, if the agreement term is of 5 years, then an additional clause stating that the lessee shall have an option to purchase the rented equipment any time during the term of the agreement and the amount of already paid rent to the lessor will be adjusted (set-off)  in the purchase price. 

Important terms and conditions of an ERA

1. Details of equipment

This is the first thing that is required to be incorporated in the agreement, to explicitly provide the details of all the equipment that are to be rented by the virtue of the agreement. The detailed explanation of the equipment can be quite complex depending upon the quantum, therefore it would be more appropriate to annex a schedule with the agreement, containing all the details of equipment. The benefit of creating a detailed schedule of the equipment is that it helps in quantifying the amount and it will help in seeking an effective remedy in the event of any dispute in the future. For example, the schedule may contain the listed equipment along with their quality rating such as 3 JCB machines (quality tested certificate issued by engineer), 10 crushers ( within the warranty period and quality tested), etc.

2. Logistics 

It is necessary to clearly determine on whom the liability befalls towards transportation, installation, and returning of equipment upon competition of Agreement, it is generally incumbent upon the lessee to ensure the abovesaid. However, it is also the responsibility of the Lessor to assist and provide technical expertise to the lessee on how to install and use the equipment if the equipment requires any special technical knowledge. For example, 

(1) the lessee will be liable to receive the equipment from the XYZ storage unit of the lessor and the cost of the same shall be solely borne by the lessee and the same cannot be adjusted in the rental amount.

(2). Upon the completion of the term of the agreement, the lessee is liable to safely deliver equipment within 5 days at the XYZ storage unit of the lessor, and the lessee shall deem to be responsible for the equipment until the equipment are safely delivered to the lessor and receiving certificate has been issued by the lessor to the lessee.

(3) The equipment A & B as mentioned in the schedule-1, requires technical knowledge and assistance to use it properly, the lessor shall provide the user manual and the safety protocol along with personnel to train the workers of the lessee for 7 days, the lessee shall be liable to duly compensate the personnel for the services. 

3. Prior inspection 

The parties may agree that before taking possession of the rented equipment, the lessor will be required to conduct a quality inspection done by any third party and provide a certificate of the good condition of the equipment to the lessee, this will benefit both the parties as it will invoke a sense of trust in the mind of the lessee and it will help the lessor in keeping a check-in future of the equipment and assert claim/indemnification from the lessee if there has been drastic damage or depreciation in the quality of the equipment rented. For example, the lessor shall provide a safety and quality certificate from any of the X, Y, Z inspection firms, the said certificates shall be older than the preceding 2 months from the date execution of this agreement.

4. Payment schedule

Since it is a rental agreement, a mechanism of periodic payment needs to be incorporated as to which date of every month or every quarter, or every six months the lessee will be required to furnish payment.

5. Security deposit 

Another pivotal clause of ERA, a rental agreement of any kind shall not be made without the necessary concomitant of a security deposit clause, in this clause, a fixed amount is required to be deposited by the lessee to the lessor before taking possession of the equipment and the said amount will be refundable at the end of the agreement unless any contingency takes place, it is pertinent to mention that it is better to define the contingency/events in which the lessor will be entitled to keep the security deposit amount. This clause mitigates prospective risk and provides a safety net for the lessor, furthermore, it also creates a sense of duty to care for the lessee towards the equipment rented as any negligence or laxity will have adverse consequences for the lessee.

6. Maintenance

It is imperative to succinctly decide which party will be liable to maintain the equipment rented, generally, the liability befalls on the lessee to maintain the equipment if the equipment is of sensitive nature or requires any special care, the parties shall incorporate a schedule wherein it can be defied by the lessor on how to maintain the equipment, or the parties can also come up with an arrangement as to distribute liability, for example for regular standard maintenance the lessee will incur the cost whereas for any sudden and irreparable malfunction or damage to the equipment not caused by the lessee then it will be incumbent upon the lessor to either repair or replace it. However, it is pertinent to mention that incorporating any such kind of clause to distribute liabilities needs to be drafted with extra care because any ambiguity or multiple interpretations can lead to multiple disputes.

7. Enjoyment of equipment 

By the virtue of the agreement, it is implied that the lessee will be entitled to use and enjoy the leased equipment during the period of the agreement without any trouble or hindrance, however this right to utilize and enjoy may be subjected to certain restrictions one of the primary restriction is that the lessee will only use the equipment for the purpose towards which it was rented/leased the lessee can use it for some wholly different work or project or once the equipment is installed, the lessee cannot transport the equipment to some other location without the prior consent of the lessor,  the lessor can also impose conditions and instructions on how the use the equipment if the equipment is of delicate nature the lessor via the agreement restrict certain type of usage which can be dangerous or detrimental to the equipment, furthermore, it should be explicitly mentioned that the lessee cannot under any circumstances sub-lease the equipment to some third party.

8. Indemnification

The lessee shall be liable to indemnify the lessor from any claim, demand, cause of action, loss or liability, property damage arising from the usage of equipment by the Lessee.

9. Inspection

As explained above that as per the agreement the lessee is required to maintain the equipment during the term of the agreement, this liability needs to be checked by the lessor as to whether the maintenance by the lessee is in propriety and for the purpose of this it is agreed between the parties that lessor shall have the right at all reasonable times during regular business hours to enter into and upon the property of lessee for the purpose of inspecting the equipment this clause helps in ensuring that the assurance given by the lessee are actually be implemented in reality.

10. Insurance 

It is a prerequisite that the lessee has casualty insurance before entering into the agreement, further, a clause related to insurance must be added in the agreement stating that the following:

  1. The lessee shall add the lessor as the beneficiary of such casualty insurance to the extent the lessor gets compensated for damage to the equipment in the event of any casualty such as fire.
  2. The lessee shall extend liability insurance in favor of the lessor that protects the lessor from liability in all events in form and amount satisfactory to the lessor.
  3. The lessee shall have a worker’s compensation coverage as required by the laws of the State.
  4. To have rental interruption insurance in an amount which shall cover rental payments for no less than 24 months

11.   Events of defaults

It is pivotal to expressly state what kind of instances will tantamount to default, this will provide more certainty to the agreement and the parties will be aware as to things that they must refrain from doing or omitting, the common events of defaults that can be added are:-

  1.  Failure or any undue or unjustified delay in payment.
  2. Upon the revelation that any representation and warranties were false.
  3. If the lessee becomes insolvent or unable to pay his debts which indicates an inability to pay to the lessor. For example, if the insolvency proceedings have been initiated against the lessee under the Insolvency and Bankruptcy Code 2016 or a bank has initiated proceedings under Section 13 of SARFAESI Act 2002 and Security Enforcement Rules 2002.

12. Remedy on defaults

Expressly defining the scope of default is futile if it is not supported with the necessary concomitant of remedies against such defaults, these remedies empower the aggrieved party to try for self-help instead of seeking help from courts to obtain interim injunctions and also this clause along with the event of defaults clause create deterrence for the negligent party. Some common remedies that can be incorporated in this clause are:

  1. Termination by giving prior notice.
  2. Ask for the return or equipment or prohibit the lessee from using the equipment.
  3. Any other reasonable and equitable action. 

Conclusion

The above-explained terms and conditions are generally accepted norms of an ERA, the terms and conditions of an ERA may vary depending upon the type of equipment, project/purpose, location, or payment arrangement may be different. It is pertinent to mention that the clauses discussed are in the context of an ERA, the boilerplate clauses such as a waiver, severability, dispute resolution, assignment, heading, counterparts, entire agreement, etc are implied along with the clauses discussed above, however, the dispute resolution must be clear as to the venue and jurisdiction in case the parties are from different states.

References


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