Commercial Equipment Leases - The "One Contract" Rule
Today's post discusses commercial equipment lease law in Iowa, specifically the One Contract Rule. Our guest writer is Iowa lawyer, Ed McConnell.
The “One Contract” Rule – What It Is and How to Use It
Edward N. McConnell
ISSUE: What is the “One Contract” Rule and why does it matter if it is cited in contract transaction disputes involving multiple documents/contracts?
ANSWER: Under the Restatement (Second) of Contracts, § 202(2) and Iowa law, multiple documents (separate contracts/documents) executed at the same time; as part of the same transaction; by the same parties are construed together placing the documents under the “One Contract” rule. Thus, in circumstance where there are multiple contracts/documents pertaining to the same transaction, the most likely result will be that the separate contracts/documents will be construed together to resolve any ambiguous or conflicting terms.
Introduction – The Rule
Restatement (Second) of Contracts - The “One Contract” Rule
The “one contract” rule is found in the Restatement (Second) of Contracts, § 202(2) (American Law Institute, 1981), under “Rules in Aid of Interpretation”. It states, “A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together”. Thus, in matters where conflicting or ambiguous terms are present in multiple contracts or there are consistent terms which show a pattern of intent or conduct, the “One Contract” Rule comes into play.
Policy Supporting the “One Contract” Rule
As a general matter, commercial, and many consumer contracts, consist of multiple documents. In some circumstances, the multiple documents/contracts may contain conflicting or ambiguous provisions or have terms which are consistent and demonstrate a pattern of conduct or intent of the parties. This rule of interpretation can be used when either conflicting terms have to be reconciled and/or consistent terms have to be deciphered as to intent or pattern of conduct. For purposes of discussion, a commercial equipment lease and separate equipment supplier promotional contract will be used an as an example.
First, let’s review the commercial equipment lease. A master commercial equipment lease contract may only consist of one or two pages, but often times there are ancillary but essential documents to the transaction that are required by the funding source to allow for enhanced enforceability and negotiability of the lease. Standard examples in the leasing industry of essential ancillary documents, in addition to a master lease document, are as follows; personal guaranties of the lessees; schedule/description of equipment; franchise fee acknowledgment and/or working capital acknowledgement (if relevant to the particular transaction); purchase option, if not stated on the face of the master lease; estoppel certificate; continuing cross-collateralization agreement; insurance binder; corporate authorization resolution and acknowledgment and acceptance of delivery of equipment. Some lessors put these provisions in the master lease. Others have the above provisions placed in separate documents to be signed by the lessee(s) at the time the master lease is executed. In doing so lessors believe the chance of a lessee making a successful claim they did not read or understand the documents and their provisions is reduced because they have been required to individually review and sign the required documents. The above mentioned documents represent only some of the ancillary, but essential forms, in leasing transactions. In a standard leasing situation (without a separate equipment supplier promotional program) these documents pose no real threat to the enforceability of the master lease. In fact, such ancillary documents enhance enforceability and negotiability of the lease itself.
A practical reality of commercial equipment leasing is that lessors deal with independent equipment suppliers. Many equipment suppliers use promotional agreements to encourage or enhance sales. These agreements often promise an offsetting payment to the monthly lease rental obligation as an inducement to sale of equipment. Sometimes these programs are well known, understood and agreed to by the lessor; other times they are not. The equipment supplier’s sales staff is the vehicle by which the promotional agreement, the lease and any ancillary documents are presented to the potential lessee; in some instances, the lessor uses the supplier’s contract forms, which contain the supplier’ logo. Such a situation often creates the impression on the part of the lessees that there is an agency relationship between the equipment supplier and lessor. Should the advertising payments promised to the lessee by the equipment supplier stop, the lessees assume that the obligations to pay the lease rent also end. Depending on the documentation and surrounding circumstances, the “one contract” rule can be problematic for the lessor when the equipment supplier reneges on payments promised to the lessee which offset lease rental payments. This is especially true if the lessor is unaware of the use of the promotional agreements or approves, actually or tacitly, of the use of the promotional agreements without ironclad conditions agreed to by all parties that the promotional agreements are not part of the master lease. Equipment suppliers’ promotional agreements are rarely a good idea in an equipment lease or secured transaction because they introduce uncertainty into a lease transaction that should otherwise be an unconditional obligation. Over the course of the last decade, there have been two large lease portfolios entered into by Iowa based leasing companies which involved equipment supplier payment programs designed to offset most or all of the lease payments. Both were the subject of considerable litigation in Polk County. These cases involved the Royal Links Beverage Caddy Express Carts and the Credit Card Center ATM lease portfolios. The “one contract” rule could have been argued in both cases but no one clearly raised the issue. This paper will use the Royal Links portfolio and a particular lease from that portfolio as an example of how the “one contract” rule might have been applied.
Attempting to apply or avoid the “one contract” rule presents factual and legal challenges for both parties to the contracts. The “one contract” rule can only be used in multiple contract/document situations. This paper will cite to the law in Iowa and other states relative to the “one contract” rule; review the “one contract” rule as an exception to the “parol evidence rule” and discuss how this rule could affect mistake and agency/fraud defenses as well as present ideas on how, even if lessors are bound by the “one contract” rule, the “hell and high water” and “integration” clauses in the leases may still make the leases fully enforceable under the “one contract” rule.
The “One Contract” Rule – Analysis Paradigm
- General Rule
Iowa law states, “[I]nstruments relating to the same transaction which are contemporaneously executed should be construed together.” Taylor Enterprise, Inc. v. Clarinda Production Credit Ass'n, 447 N.W.2d 113, 115 (Iowa 1989) (this tracks with the definition previously cited from the Restatement) A more precise description appears in Florida case law. “When two or more documents are executed by the same parties, at or near the same time, in the course of the same transaction, and concern the same subject matter, these documents will be read and construed together.” Hopfenspirger v. West, 949 So.2d 1050, 1053 (5th Dist. Fla. 2006)(citations omitted) Further, it is a generally accepted rule of contract law that, where a writing expressly refers to and sufficiently describes another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing. Courtesy Auto Group, Inc. v. Garcia, 778 So.2d 1000, 1002 (5th Dist. Fla. 2000) The key point is that documents, “essential” to the overall transaction, fall under the “one contract” rule. See, Personal Security & Safety Systems, Inc. v. Motorola, Inc., 297 F. 3rd 388(5th Cir. 2002)
This legal standard must be broken down into its component parts to fully understand its application and ramifications in situations where multiple contracts/documents are present.
- “Number of Documents/Multiple Writings”
In order to invoke the “one contract” rule there must first be “two or more documents” which are “essential” to the overall transaction. As a general rule, this simply means that all “essential” documents involved in single transaction are construed together to resolve any disputes over meaning. The “essential” documents can also be analyzed to determine if consistencies in terminology affect the intent or conduct of the parties. Repeating the footnote at the bottom of this page, this does not mean that terms from one contract are imported wholesale into the other contract(s). The court will look at any conflicting or ambiguous terms in the contracts to see if such terms can be reconciled. It will also look at consistent terms to discern any intent or pattern of conduct which affects the parties intended relationship.
- “Documents Executed at or Near the Same Time
The “two or more” “essential” documents to the overall transaction must have been “executed at or near the same time, in the course of the same transaction and concern the same subject matter.” Modern transactions which require signatures from parties’ located great distances from one another may not be “executed at the same time”. Generally, to meet this requirement, it should be sufficient for the time of execution to be near the original date of execution. This could be thirty days or more depending on the location of the parties. The greater amount of time that passes may be an indicator that contracts are truly “separate” and should be construed as such. Circumstances will dictate if this factor of the “one contract” rule plays a significant role in the analysis.
- “In The Course of the Same Transaction”
The key to this element is the ability to recognize exactly what kind of transaction has occurred. In a situation, like a finance lease or secured transaction, there are more than two parties, each contributes a certain benefit to the transaction, and there are certainly more than two contracts/documents which are essential to the transaction. For example, in an equipment lease, the equipment is supplied by a vendor or manufacturer and financing is obtained from a separate source, usually a party called a lessor. Each party to the lease/secured transaction has a similar goal. The equipment supplier wants to sell equipment; the financing source wants to obtain interest on money loaned and the purchaser (known as a lessee) wants to get and use equipment in their respective business. Thus, under this scenario, although different contracts/documents may be between different parties, they are all part of the “same transaction”.
- “And Concerning The Same Subject Matter”
Again using the equipment lease example, in this circumstance, the “subject matter” is the sale and financing of the equipment. The supplier wants to sell the equipment (the subject matter); the lessor wants to finance and receive interest payments off of the money loaned for the sale of the equipment (the subject matter) and the lessee wants to obtain and use the equipment (the subject matter). Thus, even if separate contracts/documents exist related to various aspects of the transaction, it all relates to the same subject matter.
- “Same Parties”
Here it gets to be a little trickier. In transactions that have one party on each side and, with two or more documents related to the same transaction, it is relatively simple to invoke the rule should a dispute arise as to conflicting and/or consistent contract terms. However, some transactions have three or more parties. A non-lease example of this could be a real estate deal in which the seller of land contracts with a buyer who, in turn, contracts separately with a builder but for which the transfer of title is contingent on some action by the builder related to the completion of the building. The contract with the builder contains an arbitration clause. The real estate contract has a provision for attorney fees to the successful party in litigation. A dispute arises between the buyer and the builder which implicates the final transfer of title. The buyer and builder go into arbitration and the buyer prevails. He seeks to invoke the fee shifting provisions of the real estate contract since the completion of the building affects final transfer of title. In this circumstance the “one contract” rule could come into play even though there are multiple parties and contracts/documents that play different roles in the transaction.
Other times, the multiple, essential documents involve different parties who are part of the same transaction but, because of their relationship to the overall transaction, can be considered “same parties” for purposes of this analysis of this rule. In the case of an equipment finance lease or secured transaction, the law recognizes that a three way transaction has taken place between the parties. In a transaction with multiple documents it is important to establish the relationship of all parties to the transaction to insure a proper analysis of this element. Nevertheless, do not be dissuaded from use of this rule just because, at first blush, it appears the parties are “different”.
- “Essential” Documents and “Express References”
Are ‘essential” documents always contracts or can they be some other type of document? How “express” do “express references” have to be? A guide to answering these questions is found in a ruling by the Tennessee Supreme Court. In McCall v. Towne Square, Inc., 503 S.W. 2d 180, 182-83 (Tenn. 1973), the Court held:
“Other writings, or matters contained therein, which are referred to in a written contract may be regarded as incorporated by reference as a part of the contract. Where a written contract refers to another instrument and makes the terms and conditions of such other instrument a part of it the two will be construed together as the agreement of the parties.” Id.
Certainly, an “essential” document can be a formal contract. However, an “essential” document can be something other than a contract; such as a purchase order; or an invoice or exhibit to one of the contracts in the transaction. An “express reference” can be something as seemingly innocuous as a description of or type of equipment, a serial number of equipment or item; or a detailed description of goods involved in the transaction for which a serial number is not available. The circumstances of each case will vary. The most important factor regarding this element is, can a court determine from the language of the contracts/documents and the references contained therein that the parties intended the terms used to be “essential” and thus the instruments should be construed together? All of the above factors are for the court to determine as a matter of law.
- Case Study – The Royal Links Beverage Caddy Express Cart Program
An Example of How to Perform a “One Contract” Rule Analysis Using the Outlook Farm Golf Example
Background of the Royal Links Program
In late 2002, C and J Leasing and C & J Vantage Leasing (collectively referred to as C and J) began the process of funding 409 equipment leases involving 544 non-motorized beverage caddy express carts sold by Royal Links USA, an Ohio corporation (hereinafter Royal Links), who was the equipment supplier. The lessees (equipment purchasers) were various golf courses and pro shops located across the United States. The key feature of each transaction was that golf courses would be provided non-motorized golf cart(s) which held food and beverage items intended for sale to golfers on the various courses. By agreement between Royal Links and the golf courses, advertising would be displayed on the golf carts for which the course would be paid a monthly fee which equaled the monthly payment on the lease. (See, Exhibit 1-Royal Links USA Program Agreement) C and J, along with fourteen other leasing companies, agreed to finance the purchase price of the beverage caddy carts for which it was to receive monthly rental payments under a noncancelable finance lease. C and J knew of the Royal Links advertising program but claimed it was not aware of the specific details of the program. C and J believed the payments by Royal Links to the golf courses were based on amount of product sales from the golf carts. Nevertheless, C and J provided Royal Links with its lease factor rate which allowed the Royal Links salespersons to calculate the exact amount of the lease rental payments. Royal Links then exactly matched the advertising payments to the monthly lease rental payments and made this part of the sales presentation. In this fashion Royal Links matched up the advertising payments to the specific leases. C and J denied that it approved such a practice; regardless, the monthly advertising payment exactly equaled the monthly lease payment. 
Under its agreement with Royal Links, C and J purchased golf carts for use by the courses in the Royal Links program and paid Royal Links $12,500 for each cart. (See, Exhibit 2-Royal Links Invoice to C and J Leasing for golf carts) In return, C and J Leasing entered into an equipment lease agreement with the golf courses under which the courses would make a monthly lease payment which equaled the amount the courses were to receive under the Royal Links Advertising Program. (See, Exhibit 3-Royal Links USA Equipment Lease Agreement identifying C and J Leasing Corp. as the lessor) The lease contained a “hell and high water” clause making the lease obligations unconditional and noncancelable. By late 2004, Royal Links began to default on its monthly advertising payments to the golf courses. In turn, the golf courses, claiming that the golf carts were worthless without the advertising payments, stopped paying on the leases. Since there was a direct setoff of the advertising and lease payments the golf courses claimed the default on the advertising payments released them from the obligations of the leases. C and J disagreed, citing the “hell and high water” language of the leases, and sued to enforce the leases. Royal Links took bankruptcy in 2005.
Attached to this outline are representative “essential” documents which set forth the various agreements between Royal Links and the golf courses and C and J and the golf courses. A review and analysis of these contracts and documents should serve as an example of how to breakdown “one contract” rule cases.
- A Comparative Analysis of the Documents in the Royal Links Transaction
There are three (3) “essential” documents in the Royal Links transactions. The Program Agreement (Exhibit 1) specifically refers to and incorporates the Purchase Order/Invoice (Exhibit 2) by “Reservation Number” into the Program Agreement. The Equipment Lease (Exhibit 3) sets forth the terms of the repayment obligations of the lessees to the lessor. This documentation procedure was generally followed in each and every case. Thus, the Purchase Order/Invoice and the Program Agreement are two separate documents that refer to one another as part of the same transaction. To further illustrate matters using our specific examples, the Program Agreement states the “Monthly Sponsorship Revenue Sharing” amount for the particular lease, in this case is $628.00. (Exhibit 1) A review of the lease shows the monthly lease payment amount as $628.00. (Exhibit 3) Additionally, the lease lists the “Lease Rate Factor” which allowed Royal Links salespersons to be able to exactly calculate the monthly lease payment and thus match it exactly to the “Monthly Sponsorship Revenue Sharing”. (See Exhibit 1 and 3) This information was obtained from C and J by Royal Links. Normally, this information is not shared by leasing companies with equipment suppliers.
While it is true the Equipment Lease Agreement does not make any reference to the “Monthly Sponsorship Revenue Sharing” or the Concession Cart Unit numbers, the Invoice/Purchase Order between Royal Links and C and J (Exhibit 2) specifically identifies Concession Carts Unit # 2080/2081 which corresponds to the cart numbers on the Program Agreement (Exhibit 1) The Lease clearly provided for financing two beverage caddy express carts. Additionally, Paragraph 5 of the Program Agreement mentions that Royal Links had the option to “exercise its purchase option under any lease.” (Exhibit 1, paragraph 5, Purchase Option) Another interesting feature is that the Program Agreement contained a “purchase option” for the carts. (Exhibit 1, para. 5) Meanwhile, the Lease transferred title of the carts on delivery and claimed a security interest which could be released at the end of the Lease term. (Exhibit 3, para. 6 and 12) Thus, Royal Links knew some, if not all the carts sold, would be subject to lease agreements.
Both the Program Agreement and the Equipment Lease Agreement contained a “Miscellaneous” paragraph which contains language indicating that each contract was the “entire agreement between the parties”. This provision in the Program Agreement indicated that this paragraph “superseded any prior agreements, or representations, written or oral.” (Exhibit 1-para 7) The Lease simply stated, “This Lease is the entire agreement between us and cannot be modified except by another document signed by us.” (Exhibit 3-para. 14)
All the documents, in this particular transaction, are on Royal Links forms. The Program Agreement is clearly between Royal Links and the golf course. It provided that in the event of a dispute jurisdiction and venue would be in Ohio. C and J had no involvement or obligation under the Program Agreement for payment of the advertising revenues. While C and J is the named lessor on the Equipment Lease Agreement, the document itself is clearly a Royal Links produced form. It provided that jurisdiction and venue of any disputes would be in Iowa. Royal Links had no obligations to the golf course under the lease for financing. The Purchase Order was between C and J and Royal Links and documented the purchase, by C and J, of the specifically numbered carts identified on the Program Agreement. C and J knew that these uniquely numbered carts were for this particular lease and program agreement transaction based on the printed information on the Invoice/Purchase Order. (See, Exhibit 3)
Finally, Royal Links signed the Program Agreement on March 16, 2004. It then presented both the Program Agreement and Lease to the golf course which executed the documents on March 29, 2004. On April 17, 2004 the golf course accepted delivery of the carts from Royal Links and confirmed the same to C and J. (See, Exhibit 4-Delivery and Acceptance Certificate) The Lease was accepted by C and J on A
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