LEASING LAW By Andrew J. Kalgreen The “As-Is, Where-Is” Disclaimer: How Strong Is It? BANK IS PLANNING TO SELL EQUIPMENT COLLATERAL —either repossessed equipment taken aft er a borrower’s default or leased equipment that has been returned by a lessee at the end of the lease term. [In this article, the term “bank” is used as short-hand for any equipment fi nance company.] Th e proposed sale agreement includes the standard disclaimer that the bank is selling the equipment “as-is, where-is” and the bank feels confi dent that it does not have to worry about any mechanical or other problems with the condition of the equipment once the buyer pays the purchase price. However, two cases dealing with aircraft may give the seller reason to question its confi dence. A determined that the parties had allocated the risk associated In the case of Luig v. North Bay Enterprises, Inc. , the with the condition of the aircraft to the buyer (a) by granting court considered a sale contract for a Bell helicopter that the buyer pre-purchase inspection rights (and if discrepancies included both an “as-is, where-is” disclaimer and a require-were discovered, the right to have the discrepancies repaired at ment that the seller deliver an “airworthy” aircraft . Aft er seller’s expense or to terminate the sale contract or to negotiate the buyer inspected the helicopter, the seller made repairs a reduction in the purchase price) and (b) by that the buyer requested and the buyer including explicit disclaimers of warranties. paid the sale price and accepted the heli-Essentially, the court ruled that the warran-copter. Sometime aft er delivery, the buyer ty disclaimers control. learned that the helicopter did not comply Although these cases came to diff erent with an FAA airworthiness directive and conclusions about the sale of an aircraft — the helicopter’s original engine had been one upholding the “as-is, where-is” dis-replaced with a non-compliant engine. Th e as-is, where -is claimer, the other negating it—they expose court ruled that: (a) the disclaimer terms of the very real diffi culties that a bank could the sale contract disclaimed only implied encounter when its sells any equipment (not just aircraft ) warranties; (b) the terms of the sale contract regarding air-and the buyer discovers previously unknown problems. If worthiness constituted an express warranty that the heli-this happens and the issues go to trial, the judge must rec-copter was to be delivered in an airworthy condition; and (c) oncile the broad disclaimer of any product warranties with the condition of the helicopter breached the seller’s express both any warranty-like provisions as well as the post-delivery warranties about its airworthiness. discovery of one or more material defects in the equipment. Th e case of McMahan Jets, LLC v. Roadlink Transportation, Most items of equipment today are complex machines Inc. , involved the sale of a Cessna Citation business jet. Th e sale (oft en including computerized components and related soft -contract included an “as-is, where-is” warranty disclaimer and ware) that are subject to signifi cant on-going maintenance, a provision that the seller “shall deliver Aircraft … with all service and inspection requirements, not only from the systems functioning normally … and in Airworthy Condition manufacturer, but also from government agencies (such as …” Almost two years aft er delivery, Cessna (the manufactur-OSHA for commercial equipment, the U.S. Department of er) inspected the aircraft and discovered that holes had been Transportation for trucks and trailers, the FAA for aircraft , drilled in a major structural component to accommodate a the U.S. Coast Guard for vessels, etc.). Also, maintenance speaker system in the passenger cabin. Cessna concluded that, records can be voluminous and incomplete depending on due to these holes, the aircraft was not airworthy. Th e court the age of the equipment, the number of prior owners and operators, and the diligence of the various repair and main-tenance teams in keeping records intact. In light of these practical issues, a bank’s equipment sale contract is usually documented with an “as-is, where-is” war-ranty disclaimer and the buyer may be invited to complete a pre-purchase inspection by its own expert. If material condi-tion discrepancies are found, the contract will typically give the 34 JULY/AUGUST/SEPTEMBER 2017 EQUIPMENT LEASING & FINANCE MAGAZINE