The Finnish Supreme Court has recently ruled on limitations of liability and termination rights in financial leasing. By way of background, financial leasing is characterised as a three-party relationship where the lessee chooses the goods provided by the seller, the seller sells the goods to the lessor which in turn leases them to the lessee. The lessor usually acts as a financing company only, and the general idea is that the position of the lessor is similar to that of a bank, i.e. without any liability for defects in the leased goods. In a standardised lease agreement, all claims by the lessee are usually directed towards the seller and, consequently, provisions limiting the liability and of the lessor and the termination rights of the lessee are more or less standard.
In this recent case, the leased goods eventually turned out to be defected and unusable, and the lessee wished to terminate the lease agreement. However, the lease agreement between the lessor and the lessee limited the lessor’s liability for any defects in the leased goods and provided that all claims of the lessee were to be presented to the seller. The lessor argued that this limitation also entailed that the lessee did not have the right to terminate the lease agreement due to the goods being defective and that the lessee should, thus, continue making payments to the lessor under the lease agreement. The Supreme Court however took the view that while the lessor had contractually limited its liability for any defects in the goods, the lessee’s right to terminate the agreement had not been clearly and expressly excluded under the lease agreement. Further, the Supreme Court considered that since the right to terminate a lease agreement as a result of a material defect is an important legal remedy for the lessee, such right cannot be completely excluded with an unclearly worded limitation of liability clause.
While this Supreme Court ruling is in line with previous case law regarding unclearly worded contractual provisions in leasing agreements, it differs from previous case law on an important issue. The Supreme Court recognised the fact that financial leasing agreements have certain special characteristics, such as the financier role of the lessor with its generally limited liability for the quality and properties of the goods. In its reasoning, the Supreme Court also referred to international law on financial leasing (inter alia, the UNIDROIT Convention on Financial Leasing), where the liability of the lessor is generally limited.
Although the lessee was in this specific case deemed to have the right to terminate the lease agreement due to a material defect in the goods notwithstanding the limitation of liability clause protecting the lessor, the ruling should not be interpreted to mean that the lessee’s termination right could not be contractually excluded. Instead, the ruling does highlight the fact that any such contractual provisions will need to be clearly drafted to expressly address all relevant points.
For further information, please contact
Timo Lehtimäki
Partner