Marks & Associates, P.C. 
Newsletter
December 2014
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FIRM NEWS

 

 

The news at the firm is that we are all pretty busy with year-end work, but we want to take a moment to thank you for your kind attention to our newsletters and for the confidence many of you have placed in us by allowing us to represent you during the past year.   

 

We are excited about prospects for 2015 and we wish everyone a safe and happy holidays and a prosperous and sweet year to come. 

 

 Very truly yours,

 

Barry, Bill, Matt & Tammy

 

 

Whose Law Is It, Anyway?

 

First, let's get the terms straight:

Choice of Law refers to a contractual agreement that the laws of a specified state will be applied to any dispute or interpretation of the terms of the contract. In other words, regardless of where the lawsuit is brought, the judge will look to the laws of a certain state in ruling on the contract.

Forum Selection refers to an agreement in which the parties agree that all lawsuits will (or may) be brought in a specified state. It is important to specify whether the clause (1) merely provides that the parties consent to litigation being in a state's federal or state courts or (2) requires that all cases must be brought in those courts and that any case brought in another state may be removed to a court in the designated state.

So....what?

Choice of law is an important inclusion in an equipment lease or finance agreement because the laws of the states are not exactly the same. Some states have variations in the UCC, such as the definition of "finance lease" and rules governing the choice of law itself. This is particularly important where non-UCC laws are concerned, such as usury laws. Choice of law provides the lessor certainty and consistency.

Merely choosing to apply a state's laws is not dispositive of all issues, however. Courts can, as a matter of compelling public policy, refuse to honor other states' laws that are seriously at odds with laws protecting their citizens. This sometimes happens where a very high interest loan is made to a borrower in a state with strict usury laws and the court refuses to ignore those laws.

Another important point is that most courts will require some relationship between the transaction and/or parties and the designated state. Although recent revisions to the Uniform Commercial Code proposed to delete the requirement of "reasonable relationship" in authorizing choice of law, that language has been retained by many states.

Forum selection can be equally important. First, maintaining litigation in its home state saves the lessor money and trouble and makes the litigation more expensive for the lessee. Again, this can also provide consistency as the court's acceptance lessor's desired interpretation of lease language becomes precedent for future rulings. The site of litigation can also affect whether the judge will uphold a choice of law clause or apply the laws of his or her own state. This is particularly troubling where usury and other lessee/borrower protection laws are concerned.

What about when a lease is assigned? For many years, courts were split on whether to uphold a "floating" forum selection clause, one in which the location of litigation is not specified but is to be wherever the lessor or its assignee is located. The clear trend is to uphold these clauses.

We will have more on Forum selection in an upcoming issue.

 

 

 

Indemnities: Should There Be An Exception For Lessor (Simple) Negligence?

 

 

Indemnity language is often the source of irritation for lessees, particularly those who are new to equipment finance. The basic rules are fairly simple: the lessee, as the party who selected and is using the equipment, is responsible for any damage done by the equipment to persons or property. The lessor, who is basically in the position of being a lender, should have no responsibilities in that regard AND should be protected by the lessee (and its insurance).

 

Except for leases in which the lessor provides some additional services or is itself the manufacturer (leases that are not "finance leases" under UCC Article 2A), the only obligation that the lessor should undertake is to observe the lessee's right to quiet enjoyment.

 

Nevertheless, it is common for lessees to demand an exception to their indemnification obligation for the lessors "gross negligence or wilful misconduct." It is difficult to imagine an example of such behavior by the lessor. The hypothetical we have used in the past is a lessor who, during the course of an inspection, throws a lighted cigarette into a pool of flammable liquid or a lessor employee who loses his temper and throws a punch at one of the lessee's employees or customers.

 

We said hypothetical.

 

Trouble comes when the lessee raises what on its face would appear a reasonable question. "Does that we are indemnifying you against your own (simple) negligence." If the exception is only for a lessor's gross negligence, the lessee would still be required to indemnify the lessor against its own simple negligence.  

 

One definition of gross negligence is "a conscious and voluntary disregard of the need to use reasonable care causing a foreseeable injury to persons or property". Simple negligence, on the other hand, is simply the failure to use reasonable care, causing a foreseeable injury to persons or property.

 

Why should a lessor refuse to drop the standard to simple negligence?

 

In the first place, simple negligence includes imputed negligence, a form of vicarious liability. In many states, the ownership of an inherently dangerous piece of equipment (which can include motor vehicles, air craft and certain other machinery) requires the owner to be responsible for the machinery and for any negligent acts its lessee or another person with permission to use the equipment might cause. In other words, if a simple negligence standard is used, it is possible for the lessor to be sued for the lessee's negligence but not have the benefit of a lessee indemnification. Note that the Graves Amendment discussed on our website significantly reduces, if not eliminates, the potential for vicarious liability for the operation of motor vehicles.

 

There are other legal theories that can result in loss of indemnification without the lessor actually doing anything wrong. These include negligent entrustment under which the lessor's failure to guarantee that the lessee will safely use the equipment can result in liability.

 

Simple negligence might also be extended (we are not saying this is a correct interpretation) to an alleged failure to inspect the equipment or to enforce strictly the terms of the lease requiring proper maintenance and use. An aggressive lawyer might try a theory that the lessor was involved with the selection of the equipment or that its willingness to provide financing itself caused "dangerous" equipment to be placed in commerce. Again, these theories are somewhat foolish but hungry plaintiff's lawyers can be expected to look for any avenue to reach the lessor.

 

Another troubling issue exists: the lessee's indemnification obligation includes the obligation to provide legal counsel and defend the lessor. The lessee will almost undoubtedly be involved in the lawsuit anyway and it should not be unreasonable to expect the lessee counsel to defend the lessor. If a simple negligence standard is used, however, the lessor may find itself facing an argument by the lessee that the lessee should pay for legal counsel because the lessor will ultimately be found to be negligent.

 

Finally, and perhaps most ominously, bear in mind that most insurance certificates limit the liability coverage to coverage that is required by contract. In other words, if the insurance company providing lessor coverage as additional insured can show that the lessee has the right to avoid indemnification, it is possible that the insurance company will argue that liability coverage does not apply, either.

 

The negligence exception is not the only way we find indemnities to be deficient. Some poorly-drafted indemnities state that the lessee's only responsible for damage caused by its use of the equipment, failing to recognize that the ownership of the equipment, patent issues and other claims may result from the lease itself.

 

Indemnification is one of the few purely legal provisions in a well drafted equipment lease that should not be substantially altered. While compromise is possible (with a lengthy addition to the language) the general rule should be that the indemnification provision is non-negotiable at least in so far as any exception for gross negligence and wilful misconduct is concerned.

 

 

TRIVIA TEST

Of course, the first question as to be:  can you name Santa's reindeer? 

And the second question must be who wrote the "Night Before Christmas" and what is the poems original name? 

What are the twelve days of Christmas?

Who is Krampus?

Who first recorded Frost the Snowman and what other famous song did he record? 

As a hint to the answer to the last question, what was the name of the horse and the sports team that are associated with the singer?
 


Marks & Associates, P.C.
505 North 20th Street
Financial Center - Suite 1615
Birmingham, AL 35203
(205) 251-8301
_________
P.O. Box 11386
Birmingham, AL 35202



Nothing in this newsletter constitutes legal advice or is intended as a substitute for consultation with a qualified lawyer, accountant or other professional.