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Lessee of Computer Equipment Is Entitled to Benefit of Warranties in Lease-Finance Situation

July 1989

A large number of computer systems are financed through lease-financing mechanisms. Although the parties typically focus on the financial aspects of the deal, the structure is still technically a two part transaction: The leasing company purchases the computer system from the manufacturer or retailer and then leases the system to the user.

As a result, the lessee-user has no direct contractual relationship, or “privity,” with the manufacturer. In the recent case of Hersel Corporation v. Peter Canney , lack of privity was raised by the manufacturer and retailer as a defense to a suit by the lessee for damages caused by a defective system.

The case turned on a provision of the Uniform Commercial Code (the “UCC”), a body of law governing commercial transactions which, with some variations, is in effect in all states. Section 2- 318 of the UCC states that lack of privity between a “plaintiff” and “defendant” is not a defense in any action brought against a manufacturer, seller, lessor or supplier of goods to recover damages for breach of warranty. The court succinctly noted that, contrary to the manufacturer’s and retailer’s argument, the section did not exclude a lessee-user from the protection it offers to a “plaintiff.” Therefore, the court reasoned that the lessee-user could sue the manufacturer and retailer, both on the basis of warranties expressly made by the manufacturer, and for the implied warranties that the UCC reads into all transactions for the purchase and sale of goods.

TLB Comment : Depending on their relative negotiating power, both the seller and lessee-user can improve their positions by careful drafting of the agreements to which they are parties. The manufacturer can, within limits, restrict or disclaim its warranties and require that these limitations and disclaimers be passed through to the lessee-user by written agreement. Conversely, the lessee- user should press for the sales agreement between the manufacturer and the lessor to contain appropriate warranties and for the warranties to be assigned to the lessee-user in writing.