NMSA 55-2A-407. Irrevocable promises; finance leases

55-2A-407. Irrevocable promises; finance leases. (1) In the case of a finance lease that is not a consumer lease the lessee's promises under the lease contract become irrevocable and independent upon the lessee's acceptance of the goods. (2) A promise that has become irrevocable and independent under Subsection (1): (a) is effective and enforceable between the parties, and by or against third parties including assignees of the parties; and (b) is not subject to cancellation, termination, modification, repudiation, excuse or substitution without the consent of the party to whom the promise runs. (3) This section does not affect the validity under any other law of a covenant in any lease contract making the lessee's promises irrevocable and independent upon the lessee's acceptance of the goods. History: 1978 Comp., § 55-2A-407, enacted by Laws 1992, ch. 114, § 55. OFFICIAL COMMENTS UCC Official Comments © by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved. Uniform Statutory Source: — None. 1. This section extends the benefits of the classic "hell or high water" clause to a finance lease that is not a consumer lease. This section is self-executing; no special provision need be added to the contract. This section makes covenants in a finance lease irrevocable and independent due to the function of the finance lessor in a three party relationship: the lessee is looking to the supplier to perform the essential covenants and warranties. Section 2A-209 [55-2A-209 NMSA 1978]. Thus, upon the lessee's acceptance of the goods the lessee's promises to the lessor under the lease contract become irrevocable and independent. The provisions of this section remain subject to the obligation of good faith (Sections 2A-103(4) and 1-203) [55-2A-103 and 55-1-203 NMSA 1978, respectively], and the lessee's revocation of acceptance (Section 2A-517) [55-2A-517 NMSA 1978]. 2. The section requires the lessee to perform even if the lessor's performance after the lessee's acceptance is not in accordance with the lease contract; the lessee may, however, have and pursue a cause of action against the lessor, e.g., breach of certain limited warranties (Sections 2A-210 and 2A-211(1)) [55-2A-210 and 55-2A-211 NMSA 1978, respectively]. This is appropriate because the benefit of the supplier's promises and warranties to the lessor under the supply contract and, in some cases, the warranty of a manufacturer who is not the supplier, is extended to the lessee under the finance lease. Section 2A-209 [55-2A-209 NMSA 1978]. Despite this balance, this section excludes a finance lease that is a consumer lease. That a consumer be obligated to pay notwithstanding defective goods or the like is a principle that is not tenable under case law (Unico v. Owen, 50 N.J. 101, 232 A.2d 405 (1967)), state statute (Unif. Consumer Credit Code §§ 3.403-.405, 7A U.L.A. 126-31 (1974), or federal statute (15 U.S.C. § 1666i (1982)). 3. The relationship of the three parties to a transaction that qualifies as a finance lease is best demonstrated by a hypothetical. A, the potential lessor, has been contracted by B, the potential lessee, to discuss the lease of an expensive line of equipment that B has recently placed an order for with C, the manufacturer of such goods. The negotiation is completed and A, as lessor, and B, as lessee, sign a lease of the line of equipment for a 60-month term. B, as buyer, assigns the purchase order with C to A. If this transaction creates a lease (Section 2A-103(1)(j)) [55-2A-103 NMSA 1978], this transaction should qualify as a finance lease. Section 2A-103(1)(g) [55-2A- 103 NMSA 1978]. 4. The line of equipment is delivered by C to B's place of business. After installation by C and testing by B, B accepts the goods by signing a certificate of delivery and acceptance, a copy of which is sent by B to A and C. One year later the line of equipment malfunctions and B falls behind in its manufacturing schedule. 5. Under this Article, because the lease is a finance lease, no warranty of fitness or merchantability is extended by A to B. Sections 2A-212(1) and 2A-213 [55-2A-212 and 55-2A-213 NMSA 1978, respectively]. Absent an express provision in the lease agreement, application of Section 2A-210 or Section 2A-211(1) [55-2A-210 or 55-2A- 211 NMSA 1978, respectively], or application of the principles of law and equity, including the law with respect to fraud, duress, or the like (Sections 2A-103(4) and 1- 103) [55-2A-103 and 55-1-103 NMSA 1978, respectively], B has no claim against A. B's obligation to pay rent to A continues as the obligation became irrevocable and independent when B accepted the line of equipment (Section 2A-407(1)) [55-2A-407 NMSA 1978]. B has no right to set-off with respect to any part of the rent still due under the lease. Section 2A-508(6) [55-2A-508 NMSA 1978]. However, B may have another remedy. Despite the lack of privity between B and C (the purchase order with C having been assigned by B to A), B may have a claim against C. Section 2A-209(1) [55-2A-209 NMSA 1978]. 6. This section does not address whether a "hell or high water" clause, i.e., a clause that is to the effect of this section, is enforceable if included in a finance lease that is a consumer lease or a lease that is not a finance lease. That issue will continue to be determined by the facts of each case and other law which this section does not affect. Sections 2A-104, 2A-103(4), 9-206 and 9-318 [55-2A-104, 55-2A-103, 55-9-206 and 55- 9-318 NMSA 1978, respectively]. However, with respect to finance leases that are not consumer leases courts have enforced "hell or high water" clauses. In re O.P.M. Leasing Servs., 21 Bankr. 993, 1006 (Bankr. S.D.N.Y. 1982). 7. Subsection (2) further provides that a promise that has become irrevocable and independent under subsection (1) is enforceable not only between the parties but also against third parties. Thus, the finance lease can be transferred or assigned without disturbing enforceability. Further, Subsection (2) also provides that the promise cannot, among other things, be cancelled or terminated without the consent of the lessor. Cross References: — Sections 1-103, 1-203, 2A-103(1)(g), 2A-103(1)(j), 2A-103(4), 2A-104, 2A-209, 2A-209(1), 2A-210, 2A-211(1), 2A-212(1), 2A-213, 2A-517(1)(b), 9-206 and 9-318 [55-1-103, 55-1-203, 55-2A-103, 55-2A-104, 55-2A-209, 55-2A-210, 55-2A- 211, 55-2A-212, 55-2A-213, 55-2A-517, 55-9-206 and 55-9-318 NMSA 1978, respectively]. "Cancellation". Section 2A-103(1)(b) [55-2A-103 NMSA 1978]. "Consumer lease". Section 2A-103(1)(e) [55-2A-103 NMSA 1978]. "Finance lease". Section 2A-103(1)(g) [55-2A-103 NMSA 1978]. "Goods". Section 2A-103(1)(h) [55-2A-103 NMSA 1978]. "Lease contract". Section 2A-103(1)(l) [55-2A-103 NMSA 1978]. "Lessee". Section 2A-103(1)(n) [55-2A-103 NMSA 1978]. "Party". Section 1-201(29) [55-1-201 NMSA 1978]. "Termination". Section 2A-103(1)(z) [55-2A-103 NMSA 1978]. PART 5 DEFAULT