By: Thomas S. Tripodianos Published: December 2006

Lessee has no obligation to lessor for defective equipment.

Question. I have a finance-lease contract for equipment which I have personally guaranteed. The deal I negotiated provides that I can return the equipment if I am not satisfied and that I will either be refunded any payment made for the equipment or it will be replaced with equipment that is satisfactory. Either way, I had an unrestricted right of return on the equipment for 60 days after delivery. I was also assured that the warranty would be honored under all circumstances. The equipment has malfunctioned one month after delivery and the leasing company has refused to service same. Accordingly, I have stopped making payments (I’ve made one so far.) The leasing company has declared me in default and demanded all the money due under our agreement and the guaranty as immediately payable. Am I obligated to make payment? What are the leasing companies’ obligations with regards to the defective equipment?

This case illustrates a rule of thumb I have offered countless times but unfortunately few have grasped: “If it ain’t in writing it didn’t happen”. Origination credit for that phrase goes to my partner Thomas H. Welby. As it turns out the agreement the contractor (“Contractor”) posing this question thought he was entering into was not the one he signed.

A third-party finance agreement is an agreement whereby a third party agrees to provide the financing between a supplier and a consumer. In a finance lease, the lessee negotiates directly with the supplier or manufacturer and then arranges for the lessor to buy the goods to lease them to the lessee. In order for a lease to qualify as a third-party finance agreement, the lessor must not select, manufacture, or supply the goods. The transaction between the lessor and the lessee is therefore first and last a financial transaction. Thus, in such a situation it makes no sense to treat the lessor as a seller with warranty liability to the lessee, nor to free the supplier or manufacturer from the promises it would have made in an outright sale to the lessee. It is well-settled that third-party finance agreements are given full force and effect

The Contractor selected the subject equipment from the manufacturer, paid the manufacturer a down payment, and entered into the Lease with the financing company to finance the equipment. By submitting the subject Lease and proof that Contractor defaulted thereon after making only one payment, the financing company has met its initial burden of establishing its entitlement to judgment as a matter of law. Although Contractor indicates that the equipment was defective, under the terms of the Lease, the financing company made no representations or warranties to Contractor regarding the equipment. In this regard, paragraph 2 of the Lease provides, in pertinent part, that “[t]here are no warranties by or on behalf of the Lessor;” that “Lessor acknowledges and agrees ··· [that] Lessor makes no warranties, either express or implied ··· with respect to the equipment or as to the condition of the equipment, its merchantability, its fitness or suitability for any particular purpose, its design, its capacity, its quality ···”; that “Lessee leases the equipment as is' and with all faults ···”; that “if the equipment ··· is unsatisfactory for any reason ··· Lessee's only remedy, if any, shall be against the supplier or manufacturer of the equipment and not against the Lessor.” The Lease further provides that “[n]o defect, damage, or unfitness of the equipment for any purpose shall relieve the Lessee of the obligation to pay rent or relieve Lessee of any other obligation under this Lease.” Such provisions are typical of a finance lease, designed to comply with UCC 2-A-103(1)(g). The Lease expressly states that “Lessee agrees ··· that it is the intent of both parties to this Lease that the Lease qualify as a statutory finance lease under Article 2A of the [UCC].” Moreover, pursuant to paragraph 3 of the Lease, Contractor expressly agreed that they selected the equipment and vendor, that the financing company did not participate in that selection, and that Contractor is requesting the financing company to acquire the equipment on their behalf by purchasing the equipment from the vendor.

The liability of the third-party manufacturer to the Contractor is independent of the financing company’s claims against the Contractor. Thus, the financing company, as lessor, has the right to enforce the Lease regardless of Contractor' disputes with the supplier of the equipment.

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