U-Haul and AMERCO: Business Law Contract Analysis

Introduction to AMERCO and U-Haul

U-Haul is a brand under the parentage of AMERCO Holdings Company. AMERCO has five operating segments: Moving and Storage, Property and Casualty Insurance, Life Insurance, and SAC Holdings. The U-Haul division consists of several product offerings, including self-storage rentals, self-storage-related products, and moving services. This research limits itself to Moving and Storage operations, which comprised 89% of net revenue in fiscal year 2005.

AMERCO is the parent company of several subsidiaries and divisions. U-Haul is the largest, comprising the greatest share of revenue by far. AMERCO has over 14,000 independent dealers and 1,450 company-owned rental centers throughout the U.S. and Canada. It also maintains 1,000 storage locations with 378,000 rooms of storage space. AMERCO's top competitors are Budget, Penske Truck Leasing, and Public Storage.

A major portion of AMERCO's revenue is generated through its truck and moving equipment rentals. Although the company owns 1,000 of its own rental centers, a majority of its revenue is generated through independent dealers. Independent dealers must sign a contract that sets forth the manner in which they will operate their rental centers. Often, a small business owner will supplement their income by adding U-Haul to their market mix. Independent contractors earn a commission on their sales.

Each division of AMERCO has its own president, and all must report to a Board of Directors. The Chairman of the Board and overall President is Edward Shoen, a descendant of the original founders of the company. Many members of the Shoen family still control much of the company. Although AMERCO has a Board of Directors, the company continues to operate as a family-style business, with family members occupying many positions in upper management.

Contract Validity Analysis

Every contract must contain certain elements to be considered valid: mutual assent, lawful objective, capacity of the parties to perform, consideration, and appropriate form. The omission of any of these elements can render a contract invalid. AMERCO engages in numerous types of contracts with a variety of entities, including realtors, suppliers, vendors, and repair persons. The nature and exact structure of each type of contract will differ to reflect the nature of the agreement. Actual contracts between parties are not public information, and the specifics are not often available.

Most of the contracts that U-Haul uses are standardized forms. Examining U-Haul's standard Purchase Contract, mutual assent is met by the "Recitals" section. This contract is a blanket purchase contract specifically for the purchase of parts or components used by U-Haul. One key criticism of this section is that it is too general. It refers to previous drawings, specifications, and terms without naming those documents specifically. It refers to "Exhibit A," which sets forth the parts to be supplied, but does not reference the documents containing previously agreed terms. This section could render the contract invalid if more specific terms are not set forth elsewhere; supporting documents referred to in this section should be properly referenced and attached as exhibits.

The contract does have a lawful objective and therefore meets that requirement. According to the referenced documents, the vendor and U-Haul have met to discuss the specifics of the contract, so it is reasonable to assume that both parties have the capacity to perform; otherwise, a formal contract would not have been offered. An analysis of this particular contract presents difficulty due to the absence of specific terms.

There are many assumptions that must be accepted in analyzing the consideration portion of the contract. The terms are general, and the difficulty again arises from failure to provide supporting documentation. Under the "Description of Work" section, the fact that this will be an ongoing contract is alluded to through the use of purchase orders to specify future parts orders. However, the exact terms of the contract are never set forth, and this section would have been stronger with a specific time period laid out.

The Indemnity Agreement appears to resolve the time issue by declaring that the duration of the agreement shall be five years from the date of execution. However, this provision appears in the Indemnity Agreement, not the Purchasing Contract itself — a potentially significant sticking point in the administration of the contract. If the supporting documents mentioned throughout are not more specific, this contract could become a source of litigation between the parties.

It is also difficult to determine whether the terms of the contract are fair due to the lack of specific information. It mentions items such as "non-conforming" parts without defining what "non-conforming" means. For instance, if a part has a minor defect such as a paint bubble that does not affect functionality, would that part be considered non-conforming, or acceptable under the terms of the contract? Several such terms need to be more clearly defined to avoid future conflict.

This contract lacks appropriate form in several respects. Section 6.1 states, in part: "(ii) all work under this Contract shall be free from faults and defects, (iii) the Parts shall conform with the Specifications, (iv) timely performance of its obligations hereunder, and (v) the Parts shall be fit for the particular purpose for which they are intended." (Purchase Contract, Section 6.1). The level of performance required is not clearly defined. The first clause requires that parts be "free from faults and defects" — but does this include blemishes or scratches? The last clause requires that parts be suitable for the purpose intended, yet it is possible for a technically defective part to still be usable. This is only one example of the ambiguity found throughout the contract.

Another example of ambiguity appears in section 5.1: "Vendor shall immediately notify UHI of any problems that may arise from the Specifications." The term "immediately" is problematic. Does it mean within 24 hours? Within 48 hours? As soon as is reasonable? The drafter of the contract likely knew what was intended, but more concrete language would make the contract far more enforceable.

It is apparent that this contract was intended to cover a number of circumstances and products. While that is possible, the document as written lacks the strength to render it easily enforceable. The first major flaw is that it references specifications that apparently lay out the terms of the transaction without referencing them specifically or attaching them as exhibits. When documents are referenced, the language should be specific — for example, "the parts referenced in section A-1 of Exhibit B." While potentially wordy, such precision eliminates ambiguities that could become sources of conflict.

Terms such as "timely" or "immediately" can easily be given concrete definitions in a general contract, particularly when they reflect corporate policies and procedures. A phrase such as "within 24 hours" is more concrete and measurable. From a court's perspective, it is difficult to determine whether an obligation was met in a "timely" manner, but straightforward to determine whether it was met "within 24 hours." Concrete terminology is the key to writing a contract that is both binding and enforceable.

UCC Compliance and the Purchasing Contract

It is possible to write an effective blanket contract that is enforceable; however, the key lies in setting terms that are concrete and unambiguous. Specific terms can be spelled out in supporting documents that are properly referenced. As currently written, it would be difficult for U-Haul to support a breach-of-contract claim against a vendor over a defective product. In several places, the contract refers to purchase orders and other articles "incorporated by reference" into the contract's terms, but documents can only be incorporated by reference when they are specifically named — for example, "Purchase Order #65849." Without such specificity, a vendor with multiple contracts could argue that an entirely different document is being referenced. Ambiguities such as these could result in a breach-of-contract case being dismissed for lack of evidence.

Blanket contracts are a typical form of agreement, especially when a merchant purchases services from multiple vendors. It is possible to write an effective and enforceable blanket contract; however, the terms must be concrete and properly referenced. As written, this contract is too general to be reliably enforceable.

The Uniform Commercial Code (UCC) regulates business transactions in all fifty states. Every state has adopted the UCC or one of its revisions. Article 2 of the UCC regulates sales. U-Haul uses a blanket contract to govern all of its purchases from outside vendors, with the specifics of each transaction found in separately drafted and approved specifications. One of the keys to good contract management is understanding how the UCC applies to a specific contract, since some contracts may not be enforceable under the UCC depending on the goods sold or whether the contract's terms meet UCC guidelines.

UCC Article 2-204 provides information on the general formation of a contract of sale. The U-Haul contract lacks specific terms of sale and a specific start date, indicating these items are located in other documents that are never properly referenced or attached. However, this does not preclude the contract from falling under the UCC. Article 2 states, "An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined" (UCC Article 2-204). Furthermore, section 2-204 recognizes "conduct by both parties which recognizes the existence of such a contract." Although specific terms are not spelled out in the general contract, the contract does appear to qualify for jurisdiction under UCC Article 2.

The most important factor under the UCC is the intent by both parties to form a contract, even if the contract might otherwise fail for indefiniteness. Section 2-205 of the UCC states that "an offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable." This provision opens almost any written document to consideration as a sales contract if a merchant makes a firm offer in writing. However, this offer is not considered valid beyond a period of three months (UCC 2-205). Companies are permitted to use their own forms for sales contracts, but if an offer is not accepted within three months, it is no longer valid. As applied to the U-Haul contract, this means that even its vague terms could still constitute a valid offer for sale under the UCC.

Section 2-206 extends the acceptance of an offer for sale to other forms of media. The U-Haul contract examined here lacks many of the formal elements required under general contract law, and many of its terms are ambiguous enough that they would not withstand scrutiny under strict contract law. However, the UCC's standards are more lenient and accommodate many variations that are still recognized as contracts for sale. Therefore, although the U-Haul contract is weak under general contract law, it still appears to be a valid instrument of sale under the UCC.

There are several legal remedies available to both buyers and sellers under the UCC. The main difference between formal contract law and UCC-governed sales is the amount and types of damages that can be awarded. In general, a breach of a contract governed by the UCC — but not constituting a formal contract — is limited to damages amounting to actual costs incurred (UCC, Section 2-275). This may include any price differences that have occurred from the time of purchase to the present, but damages typically cannot exceed actual monetary values. There is a four-year statute of limitations to file for a breach of a sales contract governed by the UCC (UCC, Section 2-275).

Under formal contract law, remedies can often extend beyond the actual value of goods or services tendered. For instance, where the actions of one party caused another party to breach a contract with a third party, the first party may be liable for damages incurred from both contracts. Damage awards for breaches of formal contracts are often higher than those falling under the UCC alone. Understanding the distinction between formal contracts and UCC-governed sales agreements is an important component of contract law literacy.

Conclusion

The AMERCO case is an excellent example of a well-suited Chapter 11 filing. AMERCO had sufficient resources to repay its creditors but simply needed time to devise a plan. U-Haul was unharmed by the filing and continued to operate as usual. Filing for bankruptcy protection is never an easy decision, and there are often many steps that must occur — and many other options that must be exhausted — before a company reaches that point. Chapter 7 remains the ultimate last resort, used only when there is no other logical way out.

In conclusion, AMERCO was accused of antitrust violations, which proved to be unfounded allegations. The company emerged from Chapter 11 reorganization no worse for the wear. AMERCO's diverse product offering represents an effective risk management strategy, and this attention to risk management was key to weathering the legal and financial challenges it faced over the years.

One of the more ingenious aspects of AMERCO's business model is that it generates revenue without absorbing the full overhead costs of expansion. By convincing other businesses to sell its product, U-Haul created a network of independent dealers who earn a modest commission on sales. While these commissions represent an operating expense, U-Haul does not incur the overhead costs associated with operating additional branch locations. The commissions paid are substantially less than the potential overhead costs of running additional store locations, allowing U-Haul to enjoy the benefits of broad distribution without the corresponding fixed costs.