This post gives a brief overview of the legal and commercial issues affecting funders and brokers when assets supplied to customers by finance houses or lessors following broker introductions, are alleged not to perform properly.

Fit for purpose

There is a legal requirement in all sale and supply contracts that the goods sold or supplied are of satisfactory quality and fit for the purpose for which they acquired. These requirements are automatically inserted by statute into all sale or supply contracts as conditions. A breach of a condition provides the aggrieved party rights  to either, reject the goods and claim damages or, if the right to reject has been lost (for example, because of use), to claim damages only.

Therefore, it is vital for sellers and suppliers of goods that the assets are of satisfactory quality and fit for their purpose, as they face potentially large claims for the return the any instalments or rentals paid and other damages, which may include loss of profits.

The chain

Typically in finance or leasing transactions, the  broker will introduce the deal to the funder and the dealer will invoice the funder which will then enter into a supply contract with the customer. The invoice performs various functions in law. It is an offer to sell the goods to the funder by the dealer and is evidence of a concluded sale contract, into which the implied conditions referred above are inserted. If the goods are alleged not to be of satisfactory quality or fit for the purpose then the contractual framework works in reverse, to flow liability back along the supply chain from the customer to the funder to the dealer. If the broker is in the invoice chain then it will be within the liability chain. Therefore, brokers should not themselves raise sale invoices for the goods so as to protect themselves from being exposed to quality issues and associated liability.

Diagram KYM

However, most funders require any brokers which introduce potential business to them to be pre approved and enter into broker trading agreements into which the funder will place warranties in relation to the quality and fitness of the goods so that in the event that the customer alleges the goods are defective and seeks to unwind the agreement, the funder can seek recompense from the broker under the trading agreement, even if the broker is not in the invoice chain.

Additionally the funder often enters into buy back or recourse agreements with their dealers so that in the event of quality issues being raised the dealer will have to buy back the goods at a pre agreed price on an “as is where is” basis.

Restricting Liability 

Most funders have limitation or exclusions clauses in their agreements with customers which seek to restrict or remove any liability on the funder in the event of defective equipment. Whether such clauses are effective is always a tricky point to determine in law, as the courts will only uphold them if they are reasonable in the circumstances. A hint recently given by the Court of Appeal in Albury Asset Rentals Ltd v Ash Manor Cheese Co Ltd and Manton Hire and Sales Ltd suggested that such clauses will be upheld. If so, then even if the goods are defective, the funder can look to exclude or restrict liability which then would prevent the liability flowing any further back along the chain as to the broker or dealer.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.