Renting construction equipment is something contractors do on most projects, but few realize the exposure that comes along with signing such agreements.
Too often, contractors execute a rental contract without giving much thought to anything other than the type of equipment, its availability and the amounts to be paid. Too quick a review coupled with a likely unfamiliarity with stated terms often create risks many times greater than the cost of the rental. This is because indemnification and hold harmless provisions have become standard issue in such agreements. Understanding the “legalese” within such fine print is absolutely critical to avoid subjecting oneself to these costly risk-shifting clauses.
In its most basic sense, contractual indemnity has someone agreeing to hold another harmless for certain claims, losses or damages. While governed by the terms of the applicable contract, such indemnification provisions may be further defined through judicial interpretation. All in the construction industry quickly realize that indemnity and hold harmless clauses are applied at all responsibility levels.
The contractor is generally required to indemnify the owner and the subcontractor is then expected to indemnify the contractor as well as the owner. It’s no different with rental agreements. The lessor (the company renting out its equipment) looks to have the renter (the contractor borrowing the equipment) indemnify and hold it harmless in case something goes wrong while operating the rented equipment. Although it may not seem like it, in reality, parties are free to include and negotiate indemnity provisions as they please. So, when entering into a contract with such clauses, several issues should be kept in mind, namely:
- Who is indemnifying whom?
- Does the contract clearly express an intent to indemnify a party against its own negligence?
- Do the terms of the agreement determine whether the indemnitor (the one doing the indemnifying) is obligated to reimburse the indemnitee (the one being indemnified) for a particular claim?
- What is being indemnified (i.e., personal injury, property damage, attorneys’ fees and costs of defense, economic loss)?
- Is there a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is such monetary limitation part of the project specifications or bid documents, if any?
- Is there a provision requiring that the risk be covered by insurance such that the indemnity is limited to the amount of the insurance coverage?
Here are clauses taken from the indemnification sections of two different rental agreements. One clearly works best for the lessor while the other might be better for the lessee.
- Lessee shall indemnify and hold Lessor harmless from any claims of third parties for loss, injury and damage to their persons and property arising out of Lessee’s possession, use, maintenance or return of the equipment, including legal costs incurred in defense of such claims.
- Lessee shall indemnify and hold Lessor harmless and its agents from and against all claims, damages, losses and expenses, including legal fees, arising out of or resulting from the rental of the equipment, even if such claims, damages, losses or expenses are caused in whole or in part by any negligent act or omission of a party indemnified here under.
A rental company whose 20-foot scissor lift malfunctioned found out the hard way which of these clauses was better when it was sued by an injured employee of the contractor that had rented its equipment. The rental company hoped to escape liability because the language in its agreement, similar to excerpt A, stated that the lessee (the contractor) would indemnify it. The rental company expected to simply pass over the employee claim to the contractor. Not so said the court, which determined that when it comes to being indemnified and held harmless for one’s own negligence, as was the case here because the injury was the result of a problem with the rental equipment, say exactly that in the agreement, as is done in excerpt B.
With such clauses becoming so common in construction contracts, it is especially important to understand how much or how little can be negotiated in or out in this regard. A poorly written provision could lead to the erroneous presumption of protection when none actually exists. Worse, it could result in a litigation nightmare or a very costly claim. Because indemnification can be both a sword and a shield, one needs to truly understand what sort of indemnity is in the rental agreement they’re signing.