Industralease Automated & Scientific Equipment Corp. v. R.M.E. Enterprises, Inc.

• Decision Date: 11 July 1977
• Citation: 58 A.D.2d 482,396 N.Y.S.2d 427
• Parties: , 22 UCC Rep.Serv. 4 INDUSTRALEASE AUTOMATED & SCIENTIFIC EQUIPMENT CORPORATION, Appellant, v. R.M.E. ENTERPRISES, INC., et al., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 427

396 N.Y.S.2d 427

58 A.D.2d 482, 22 UCC Rep.Serv. 4

INDUSTRALEASE AUTOMATED & SCIENTIFIC EQUIPMENT CORPORATION, Appellant, v. R.M.E. ENTERPRISES, INC., et al., Respondents.

Supreme Court, Appellate Division, Second Department.

July 11, 1977.

Hays, St. John, Abramson & Heilbron, New York City (Edward J. Walsh, Jr. and R. Victor Bernstein, New York City, of counsel), for appellant.

Samuel W. Gilman, New York City, for respondents.

Before HOPKINS, J. P., and MARTUSCELLO, LATHAM, and DAMIANI, JJ.

HOPKINS, Justice Presiding.

The primary issue before us is whether disclaimers of express and implied warranties in a lease of industrial equipment are unconscionable under the circumstances where the equipment never operated (see Uniform Commercial Code (UCC), §§ 2-302, 2-316). A subsidiary issue is whether the UCC applies to leases of equipment.

The action is brought to recover unpaid rent under the lease. The defendants-respondents denied liability and counterclaimed for damages incurred in connection with the installation of the equipment. After a jury trial, in which the court charged that the disclaimer of warranties was not unconscionable as a matter of law, a verdict in favor of the defendants was returned on the complaint and granting them judgment on their counterclaim in the principal sum of $1,342.76. The plaintiff appeals. We affirm. We hold that the UCC applies to leases of equipment, and that the disclaimers of warranties were unconscionable under the circumstances.

I

The defendant R.M.E. Enterprises, Inc. (Enterprises) owned a 40-acre picnic grove in Warren, New Jersey. The operation of the grove necessarily generated considerable refuse during the season, which begins in May. Prior to the events involved in this litigation, the trash was piled in 40-foot open-top steel containers and disposed of by a rubbish collector. Enterprises was wholly owned by the defendant Max Evans who, with his wife, the defendant Irene Evans, managed the picnic grove.

Max Evans became interested in disposing of the rubbish through nonpollutant burning on the premises. He visited Farmingdale, New York, at the invitation of Clean Air Controls, Inc. (Clean Air) to inspect equipment in operation which, Clean Air informed him, would meet the requirements of Enterprises. Impressed with what he saw, he told Clean Air that he would take two units, one to be in reserve if the other broke down. Eventually, on February 24, 1971, a lease between Clean Air and Enterprises was executed, providing for 60 monthly payments of $322.58 in return for the use of the two units. The lease also contained a clause generally disclaiming any warranties, except that it preserved the warranties if the lessor were the manufacturer of the equipment. ¹ As Clean Air was the manufacturer of the leased equipment, under the language of the lease the usual warranties were thus in force for the benefit of Enterprises.

Thereafter, acting under instructions, Evans installed a concrete slab, underground wiring and a fuel tank. Evans testified that on May 13, 1971 (and this is not contested by the plaintiff) he was visited by a representative of Clean Air and a representative of the plaintiff who presented him with a set of new papers which "were like the other papers I signed but with a different company's name on the top", that he was told that the lease he had signed before was "no good", and that the new papers had to be signed "so we can get our money so you can get your incinerator." Evans testified that he signed the new papers, which were a lease between Enterprises and the plaintiff for the same equipment, providing for 60 monthly rental payments of $319.70, plus sales tax, and a guaranty by Max and Irene Evans of the lease. That lease contained an unqualified disclaimer of express and implied warranties. ² It also contained an option which granted the right to Enterprises to acquire the equipment at the end of the lease by a payment to the plaintiff in the sum of $1,390.

On May 14, 1971, the next day, the incinerators were delivered and installed. Evans testified (and his testimony was not contested by the plaintiff) that they did not then or thereafter work, although he complained to both Clean Air and to the plaintiff, which tried in vain to make the equipment operative. ³ Enterprises during this period made four rental payments to the plaintiff. By letters dated September 16, 1971 and December 30, 1971, Enterprises demanded the removal of the incinerators from its premises, but the plaintiff did not accede and required the continuance of the monthly payments.

This litigation then ensued.

II

The plaintiff's complaint sought $17,936.76, representing the balance of the payments due under the lease, together with the sum of $2,500 for legal expenses. The defendants denied liability, claiming that the plaintiff had breached its warranty that the equipment was properly constructed, free of operational defects, and capable of meeting the need of disposing of the rubbish accumulated as the result of its business; and the defendants counterclaimed in addition for the sum of $5,000, alleged to have been incurred as expenses by them in installing the equipment and attempting to make it function properly.

At the trial the court held that the disclaimer of warranties contained in the lease was not unconscionable as a matter of law. The court left to the jury the determination of the issue whether the plaintiff had made express warranties concerning the capacity of the incinerators to function properly, instructing the jury that if in fact the warranties had been made, and the incinerators had not worked properly, the plaintiff had breached its contract.

The jury returned a verdict on the complaint in favor of the defendants and awarded the defendants $1,342.76 on their counterclaim.

III

The first issue which must be decided is whether the UCC and the express and implied warranties which it provides apply to a lease of equipment. We think that they do.

In Hoisting Engine Sales Co. v. Hart, 237 N.Y. 30, 37, 142 N.E. 342, 344, the defendant leased from the plaintiff a hoist and traveler, which failed to operate. The Court of Appeals refused to consider whether the hiring of a chattel should be assimilated to the sale of goods under the Personal Property Law then in effect (Personal Property Law, former § 96), but held that at common law the owner of a chattel for hire was under an obligation to ascertain that the chattel was reasonably fit for the purpose expressly stated, or for the intended use of which he should have been aware (see, also, Matter of Casualty Co. of Amer. (Bliss Co.), 250 N.Y. 410, 417, 165 N.E. 829, 832). Later cases confirm the existence of such an implied warranty based on the common law, without reliance on the UCC (Vander Veer v. Tyrrell, 29 A.D.2d 255, 259, 287 N.Y.S.2d 228, 232; Atlantic Tug & Equip. Co. v. S & L Paving Corp., 40 A.D.2d 589, 590, 334 N.Y.S.2d 532, 533; cf. Farnsworth, Implied Warranties of Quality in Non-Sales Cases, 57 Col.L.Rev. 653, 655-660; Murray, Under the Spreading Analogy of Article 2 of the Uniform Commercial Code, 39 Fordham L.Rev. 447, 453).

Several cases have suggested the application of the UCC to the leasing of chattels (Hertz Commercial Leasing Corp. v. Transportation Credit Clearing House, 59 Misc.2d 226, 298 N.Y.S.2d 392, revd. on other grounds, 64 Misc.2d 910, 316 N.Y.S.2d 585; Owens v. Patent Scaffolding Co., 77 Misc.2d 992, 354 N.Y.S.2d 778, revd. 50 A.D.2d 866, 376 N.Y.S.2d 948; United States Leasing Corp. v. Franklin Plaza Apts., 65 Misc.2d 1082, 319 N.Y.S.2d 531). Our decision in Owens v. Patent Scaffolding Co. (supra) is not dispositive of the question. There we simply held that the broadening application of warranties in the rental of equipment was irrelevant to the issue whether the transaction was subject to the six-year Statute of Limitations prescribed by CPLR 213 (subd. 2) or, rather, the four-year Statute of Limitations prescribed by section 2-725 of the UCC.

Section 2-102 of the UCC provides that "(u)nless the context otherwise requires, this Article applies to transactions in goods", thereafter making it clear that it does not apply to a contract intended as a security transaction. The nature of the contract between the plaintiff and Enterprises precludes its characterization as a security transaction. In our view the transaction, though cast in form as a lease, assumed the true model of a sale. The testimony of Evans established that Enterprises was not financially able to purchase the equipment outright. Though the plaintiff and Clean Air, for their own reasons, chose to put the transaction in the form of a lease, quite clearly their intent, and Enterprises' intent as well, was the sale of the equipment for a price payable over a period of five years in monthly installments, with a small balance due at the end of the period, upon the payment of which, at the option of Enterprises, the equipment would be owned by Enterprises. The lease was one in name only (see 1 Williston on Sales (4th ed., Squillante & Fonseca), §§ 11-12, pp. 511-515; cf. Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W.2d 46; Redfern Meats v. Hertz Corp., 134 Ga.App. 381, 215 S.E.2d 10; All-States Leasing Co. v. Bass, 96 Idaho 873, 538 P.2d 1177; Jones v. Keetch, 388 Mich. 164, 200 N.W.2d 227).

Because of the nature of the transaction, therefore, the rights of the parties are governed by the provisions of the UCC.

IV

The UCC plainly recognizes the validity of disclaimers of warranties in sales agreements under certain circumstances (UCC, § 2-316). Here, pursuant to the statute, the exclusion of warranties was accomplished by conspicuous and bold print and thus complied with the statute in that respect. The question whether in this case the disclaimer is unconscionable remains.

The defendants had raised the issue of unconscionability at the trial. Trial Term held that the disclaimer...