Contract Hire Agreements
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PLANNING
FOR PROFIT
L_ AST week in this series a start was made in considering the provisions and safeguards that should be included in any contract hire agreement to the mutual benefit of both the supplier and user. A written agreement is advisable, and virtually essential, for this type of transport arrangement because of the long-term aspect of the contract.
Moreover, in many instances the supplier will be obtaining a particular type of vehicle for the exclusive use of one customer and must, therefore, be assured of a minimum amount of work. As mentioned last week, the opening paragraph of such an agreement would designate the two parties to the agreement, as is normal legal practice. Thus, the haulier or supplier of the vehicle would probably be termed "the contractor" and the customer or user of the vehicle "the hirer". It is repeated that, .whilst comment is being made on the points that need to be considered when drawing up a hire agreement, it is nevertheless recommended that the parties concerned should consult a solicitor for his professional advice in the actual drawing up of the agreement.
Continuing with the points dealt with last week, when defining the number, size and type of vehicle to be supplied, the maximum load-carrying capacity should also be stated. Associated with this statement would be a clause prohibiting the hirer to overload a vehicle to the obvious detriment of the' contractor's operating costs. Moreover, if a particular breakdown could be shown to be the direct result of such overloading, an appropriate clause should place the responsibility for the repair of that vehicle and the possible provision of a replacement on the hirer. As with instructions involving the contravention of the law, the contractor should be at liberty to terminate the agreement if the hirer persistently overloads a vehicle above the maximum stated in the agreement, irrespective of whether this weight happens to be less than the legal maximum gross weight of the vehicle concerned.
Several of the items of the contractor's expenditure which go to make up the total operating costs of the vehicle are beyond his control, at least so far as the basic cost is involved. Two obvious -examples are wages (when applicable) and fuel, the rate or prices of which are fixed largely on a national level. Any substantial change in either of these items could substantially affect the contractor's overall costs and provision should, therefore, be made to allow for an adjustment of charges in the event of any such changes during the period of the agreement.
Regarding the actual payment of the hire charges, this again should be mutually agreed beforehand and set out in the agreement. Thereafter, should the hirer fail to comply with this clause, it should be stated that the contractor would then be at liberty to discontinue providing vehicles and take steps for the recovery of the arrears of charges.
Liability for the goods carried will clearly be the responsibility of the hirer when vehicles were operating under C licence and the driver was then the .employee of the hirer. But it would be also advisable for the contractor supplying vehicles to operate under contract A licence to disclaim liability for loss of goods or cash which the driver may handle on behalf of the hirer. As stated earlier, in the majority of -cases a contract hire agreement would be concerned with a more specific set of conditions as to the goods carried and the journeys made than would apply in general haulage work. Even so, it would be advisable, in the interest of the contractor, that a clause should stipulate that no dangerous goods should be loaded on the contractor's vehicle without prior mutual agreement. Here, again, as with compliance with legal requirements and restriction on overloading, both contractor and hirer should satisfy themselves that they fully understand and agree as to the extent and obligation of the driver to carry out instructions from the hirer.
MOST IMPORTANT CLAUSES Probably the two most important clauses in a hire agreement specify the vehicles to be supplied and the charge to be made. But although the charge may be clearly stated and the manner in which it is to be calculated—whether it be on a mileage, tonnage, time or other basis—occasion for disagreement could still arise if both parties were not mutually agreed as to the extent of the service covered by such a charge. To avoid such a possibility it would be an advantage to state clearly in the agreement or, alternatively, in a schedule attached to the agreement, just what is being provided.
One of the advantages of contract hire, particularly for the customer, is that the service provided can be virtually "tailor made" to his particular requirements. This advantage, however, must have the effect of varying the cost of supplying vehicles on hire substantially. There is consequently no practical purpose in making a comparison of hire charges until the respective extent ot the service provided is known.
One such variation has already been mentioned last week, namely, whether or not the contractor provides the driver as well as the vehicle. If he does, then a contract A licence will be necessary , with a guarantee of a minimum period of 12 months' work. Whilst no such guarantee is legally required when the customer or hirer provides .the driver, it would obviously be commercially prudent for the contractor to ensure that the outlay he proposes making on the purchase of a particular vehicle for a customer is justified. The inclusion or, alternatively, exclusion of a driver's wages in the hire charges must make an appreciable difference. This is particularly so if such a charge is based on mileage and, moreover, if-the average weekly mileage is comparatively low, as is frequently the case with collection and delivery vans.
Another factor which can affect hire agreement and charges made is the respective location of the premises of the contractor and the hirer. If these are relatively near (and assuming the vehicles are operating on C licence), it might be convenient, and in the mutual interest of both parties, for the hirer's drivers to report to the premises of the contractor each morning to collect their vehicles and correspondingly returning them at night. In that event the contractor, in addition to being responsible for garaging the vehicles, will probably arrange for the fuelling of the vehicles each night and, possibly, whatever washing was required, in addition to servicing and more major repairs_
In other circumstances different arrangements might have to be made. The two premises could be so far distant as to make such an arrangement impracticable because the accumulative dead mileage from one premises to the other would make it a totally uneconomic proposition. Alternatively, the hirer might be a large organization having vehicles based at several depots and again necessitating some other arrangement.
Where an ancillary user of commercial vehicles has already decided that, whilst he must retain control of the distribution of his products to the extent of employing his own driver but does not wish to be involved in the engineering problems of running vehicles, he may nevertheless still provide on his premises some accommodation for the vehicles on hire. This might arise due to a policy of loading vehicles the previous night, so that some protection and security was necessary. Additionally. it might be considered more convenient for the hirer, as a saving both in time and mileage, to install bulk fuel facilities on his own premises, even though the vehicles were hired. This arrangement. incidentally, would give him the benefit of lower-priced fuel. Similarly, it might be both more convenient and cheaper for the hirer to wash the vehicles and even, in some cases, do a minimum of servicing, such as greasing.
TWO MAIN COST GROUPS-
All such variations in the extent of the service provided will • obviously be dependent upon individual circumstances. But whilst there is no objection to the extent of such variations, it is important for both parties to be agreed as to what is provided. To this end it would be useful to check over all items of operating costs to ensure that each has been accounted for as the responsibility of one party or the other. At the same time, it would serve to emphasize the importance of both contractor and hirer appreciating the distinction between standing and running costs, as otherwise differences could
• subsequentlYarise between the parties should a hire vehicle be found to be underor over-employed.
The total cost of operating a commercial vehicle can be conveniently segregated into these two groups—standing costs and running costs—thereby reflecting the two elements of time and mileage inherent in transport operation. Standing costs are incurred, and continue to be incurred, whether a vehicle is in use or not whilst, as their name implies, running costs vary directly, or almost directly, in relation to the mileage run.
Even when an operator is both the owner and user of a vehicle it is important thathe should be aware of this division, so realizing the added overall costs per mile oi per ton resulting from under-utilization of a vehicle. Should such conditions apply, an operator who is both owner and user is at least in a position to remedy uneconomic operation of this type.
Not so the contractor who, having committed himself to supplying and probably maintaining a vehicle at a fixed charge, has then no control as to the extent to which the hirer cares to use it, with the exception of such excessive use as would contravene legal requirements as to maximum driver's hours. It would be necessary for him, when formulating charges, to submit to a potential customer, to ascertain and make provision to meet his total oulgoings whether the vehicle to be supplied is adequately and gainfully employed or not.
In this context a revue of the 10 items which go to make up the operating costs is useful. Assuming a vehicle is to be provided for a period of a year or more, agreement will have to be reached between the two parties regarding payment of the annual licence duty. This, of course, varies in relation to commercial vehicles according to the unladen weight of goods vehicles or carrying capacity of passenger vehicles. Thus, whilst a 30-cwt. van with an unladen weight of 1 ton 18 cwt. will incur an annual licence duty of £33, the corresponding amount for a 7-tonner (unladen weight 3 tons 4 cwt.) would be £46 10s. Hackney carriage rate of duty on a 41-seater is £22 10s.
Variation in the payment of wages has already been dealt with, but where the contractor supplies the driver and is responsible for his wages, then some arrangement must be reached and noted in the agreement as to when, and to what extent, the hirer is responsible for the payment of overtime working. Rent and rates in respect of garaging the vehicle will again vary according to which party provides this service.
Insurance of the vehicle would normally be undertaken by the contractor. In addition to establishing the financial responsibility for this item, the extent of the insurance cover provided by the contractor should be discussed by both parties to ensure that no aspect of operation is left unprovided for or, alternatively, duplicated. This latter' event could arise if the hirer has already in existence some form of comprehensive goods-in-transit insurance policy, to cover his products from the moment of manufacture until handed to the customer, irrespective of whether he operates his own vehicles or not.
The fifth and firial item of standing costs—interest on the capital outlay of providing the vehicle—is obviously the responsibility of the contractor. The amount will, of course, be dependent upon the total price of the vehicle and the rate of interest which the contractor's financial standing necessitates.
This, incidentally, is an item of operating cost where, in many cases, the large contract hire specialist can show a saving compared with a small ancillary user, due to the fact that the contractor has access to financial sources at more favourable terms. Conversely, the large trader or industrialist, although because of the size of his organization can borrow money equally favourably, is more disposed to put it to use in his own business, where he is often assured of a better return.
The allocation of the five items of running costs as between contractor and hirer would normally be more straightforward. Thus, fuel, lubricants and tyres, once responsibility had been agreed, should present no problems. Similarly, depreciation will be the responsibility of the contractor and, in the case of specialized vehicles, due allowance for obsolescence must be made should the hirer no longer require them after the initial agreed period.
,Whilst in many cases the whole of the cost of maintenance, inclusive of waihing, .servicing, minor and major repairs, will• all be the responsibility of the contractor, there may be• occasions when,' as mentioned earlier, it might be more convenient for practical purposes to arrange for the hirer to do washing and possibly greasing on his own premises. In that event due allowance will have to be made in the charges submitted to the hirer.
The agreement should also specify the occasions and extent to which the contractor will be responsible for providing the hirer with replacement vehicles as and when the occasions arise.