Case #1.  Implied Warranties for Leased Goods

Titan Machinery, Inc. v. Patterson Enterprises, Inc.

Supreme Court of North Dakota

2016 ND 19 (January 21, 2016)

Background

Titan Machinery, Inc. (“Titan”) leased certain heavy construction equipment to Patterson Enterprises, Inc. (“Patterson”) pursuant to certain oral equipment leases.  Titan sued Patterson for delinquent lease payments and equipment damage, among other claims, and Patterson counterclaimed that Titan failed to provide the equipment in the condition required by the oral leases.  The lower court, among other findings, held that Titan did not breach an express warranty, an implied warranty of fitness for a particular purpose, or an implied warranty of merchantability.

Holding

The Court reversed and remanded to the lower court for further findings concerning the implied warranty of merchantability.  North Dakota has enacted UCC Article 2A relating to leases of goods, which includes UCC § 2A-213 stating that the lessor impliedly warrants that leased goods will be fit for a particular purpose if at the time the goods are leased the lessor knows of the purpose for which the goods are required and the lessee is relying on the lessor’s skill to furnish suitable goods.  UCC § 2A-212 implies a warranty of merchantability, that is the goods must pass without objection in the trade under the description in the lease agreement and be fit for the ordinary purpose for which the goods are used.

Accordingly, UCC § 2A-212 establishes a minimum standard of merchantability and the lessee may establish a breach of the implied warranty by showing that the goods are not fit for the ordinary purpose for which goods of that type are used.

A merchant impliedly warrants that goods are merchantable unless specifically excluded or modified.  UCC § 2A-214.  Exclusions of warranties must be in writing, be conspicuous, and in the case of modification or exclusion of the implied warranty of merchantability, mention the word “merchantability.”

The lower court’s findings implied that Patterson needed to provide evidence separate from the statutory requirements of merchantability for the implied warranty to exist or be breached.  Since the lower court did not address the statutory standards for finding a breach of the warranty of merchantability, the Court reversed and remanded back to the lower court for further findings about the warranty of merchantability.

Observations

  • Oral leases, while generally enforceable subject to a particular state’s requirements for contracts that need to be set forth in writing (the statute of frauds) can easily lead to disagreements later since there is no written lease agreement clearly reflecting the terms. Therefore it is always advisable to have a written lease agreement.  Furthermore, since implied warranties should be disclaimed in writing, an oral lease cannot properly disclaim implied warranties.
  • The case reminds us that the warranties of fitness for a particular purpose and merchantability are implied in lease agreements unless specifically excluded, and a breach of the implied warranties is established if the goods do not meet the requirements specified in the statute.  There is no independent obligation for the lessee to produce additional evidence that is not set forth in the statutes to establish a breach of the implied warranties of merchantability and fitness for a particular purpose.
  • It is common for leases to exclude express and implied warranties. The disclaimers must be specific (in the case of the implied warranty of merchantability), conspicuous, and in writing.  While the UCC generally permits “as-is” language to disclaim implied warranties, well-drafted leases use both “as-is” language and specific disclaimers of express and implied warranties.  While there is no particular guidance on what constitutes a conspicuous disclaimer, at least one California court found a provision conspicuous when it was printed in bold face twice as large as the other terms.

Case #2. Recent Changes to the California Finance Lenders Law

The California Finance Lenders Law (“CFLL”), which requires all entities making or brokering loans connected to California to be licensed in California, was recently amended to permit payment of compensation to unlicensed persons for referrals.  The purpose of the amendment, according to the legislative history, is to create a level playing field with competitors of CFLL licensees who were already permitted to receive referrals, such as factors, or partners of banks.

Among other requirements, the interest rate on the loan may not exceed 36 percent per annum, the licensee is required to perform suitability due diligence on the borrower, there are disclosure requirements to the borrower, and there are restrictions on the activities that may be performed by the unlicensed person, including participating in loan negotiations, counseling the borrower about the loan, and participating in preparation of loan documentation.  Cal. Financial Code §§ 22602-22604.

Observations:

  • Entities engaging in lending and brokering activities in California should closely analyze the CFLL’s requirements, including:
    • Do current activities fall within the scope of lending and brokering activities covered by the CFLL
    • Is an exemption from CFLL available
    • Strategy for completing the application process for a CFLL license
    • Development of CFLL compliance policies and procedures
  • While the amendment of the CFLL permits lenders and brokers to pay for referrals in accordance with the new statutory requirements, it does not permit unlicensed brokering and lending activities in California.

Case #3.  Of Note – On January 12, 2016, the International Accounting Standards Board (“IASB”) issued International Financial Reporting Standards (“IFRS”) 16 Leases relating to lease accounting standards.