Attorney and compliance expert offers a primer on dealership documentation for P&A executives. 
 - Photo by vadimguzhva via iStock

Attorney and compliance expert offers a primer on dealership documentation for P&A executives. 

Photo by vadimguzhva via iStock

A typical car dealer enters into hundreds, if not thousands, of contracts on a monthly basis. But from my conversations with many F&I managers over the years, certain arcane issues — and the very nature of contracts — may not always be well understood. This article will attempt to explain several of these relevant issues.

The Signing Ceremony, a.k.a. ‘The Paperwork’

After a customer has completed the test drive, selected the vehicle and options, and agreed to the financing, the F&I manager and the customer undertake the review and affixing of the signatures to all the relevant documents. This execution of all the documents is, essentially, the closing or the signing ceremony. 

The contract or contracts are the pivotal documents which are signed. In most states, two contracts are signed: the buyer’s order or lease order and the retail installment sale contract or lease contract. How these documents relate to one another will be addressed. 

Contract Defined

“Contract” is not a synonym for “agreement.” A contract is a legally recognized understanding between two parties which can be enforced in court, as there are duties and rights created when two parties contract. An agreement is a broader term. All contracts can be classified as an agreement. But not all agreements are necessarily contracts. An analogy would be the term “corporation” versus “company.” “Company” is a much broader term and includes the term “corporation.” 

One can certainly use the term “agreement” to mean contract when selling or leasing a car. Moreover, an agreement may be used to describe a mandated disclosure document. And, finally, agreements may be “incorporated by reference” into the contract. This term will be discussed infra (a fancy Latin term for “below”). Buyer’s orders, leases, and retail installment sale contracts are all contracts. 

A contract is comprised of an offer coupled with an acceptance and it must include “consideration,” a legally defined term. Consideration is an act or forbearance or a promise, done or given by one party, in return for the act or promise of another. The Latin phrase quid pro quo, which means “something for something,” means consideration. In retailing cars, paying money in exchange for a car is the consideration.

Generally, the offer must be definite. If a dealer is selling a Ford Fusion to a consumer, for example, the particular Fusion must be clearly described. Characteristics of the particular vehicle such as the year, make, model, type, trim, color, mileage, stock number, and most significantly, the vehicle identification number, define which Fusion is being sold. All these terms are included on the documents to be certain that there is no error as to which Fusion is being offered for sale.In return, the acceptance must be unequivocal. This acceptance would be manifested by the customer signing all the relevant documents in the signing ceremony. 

Contractual Obligations and Provisions

A valid contract creates mutual obligations. This means that each of the parties is obligated, or required, to perform a duty under the contract. The contract conditions determine the order of the parties’ obligations. A condition is an act or event that affects a party’s contractual duty. The duty of the dealer to deliver the vehicle on a particular date, with the itemized provisions on the buyer’s order, would be a condition. 

A contractual term is a provision, which forms part of the contract. These terms create obligations on the part of the customer and dealer. Failure to discharge these terms may engender breach, whether a material or minor breach. Material breach may void the contract, freeing the non-breaching party from honoring his contractual obligations. Failure to maintain insurance on the vehicle would be a breach in a retail installment sale contract. 

Verbal Contracts and Written Contracts

Verbal contracts can be binding. But certain contracts must be in writing to be enforced. The statute of frauds requires that the sale of goods totaling $500 or more must be in writing. Hence, a contract to sell a car must be in writing. 

Spot Deliveries, Condition Precedent, and Condition Subsequent

Many vehicles are tentatively sold to customers before the retail installment sale contract is assigned (a legal term) or the “paper is hung.” If the retail installment sale contract can’t be assigned on terms acceptable to the dealer, the dealer will demand the return of the vehicle in most states. 

Enter the terms “condition precedent” and “condition subsequent,” two important legalities. One of these two conditions is usually mentioned in the buyer’s order and/or a spot delivery agreement. If the vehicle is spotted with a condition precedent, it means that there is no final contract until the retail installment sale contract is assigned. 

Conversely, if the vehicle is spotted with a condition subsequent the transaction is complete unless the dealer cannot assign the retail installment sale contract. 

How These Documents Work Together

There are three legal concerns in responding to this question: incorporation by reference, single document rule, and the integration clause.

“Incorporation by reference” refers to the act of merging other documents into a primary document so that the named incorporated documents are all read together as one document. It should be mentioned that some documents are disclosure documents required by law. They are effective unto themselves and may not need to be incorporated. 

The single document rule, which is a state law, exists in about one-third of all states. A single document rule requires that all documents, or certain documents, evidencing the sale and financing transaction between the dealer and the buyer, must be contained in one document. 

In California, for example, for many years, all the terms had to be on one piece of paper. Some versions of the rule seem to require the nonsensical combining of all documents, even arguably service contracts, credit and GAP coverage, and the like, into a single document. Other states’ rules limit themselves to the sale and credit documents only.

An integration clause, or a merger clause, states that the contract is the complete and final agreement between the parties. In other words, it could mean that all other agreements, documents, or verbal representations, have been superseded by the contract with the integration clause. In many states all the signed documents in the signing ceremony are understood to be effective and binding in the contracting process. 

These three legal concepts have been used by plaintiffs’ lawyers against dealers, with the lawyers seeking to have some or all of the contractual language — such as an arbitration clause — tossed out by the court. Or, the rules are used to argue that because the dealer violated the single document rule, the documents used in the deal are unenforceable. Care should be taken in the application of these terms and observing the single document rule. 

Finally, a relevant explanation of an “assignment,” in the car world, is when the dealer owns the right to receive payments and sells this right to a financing source. Dealers are the initial creditors. When they enter into a retail installment sale contract with customers, they have the right to receive the monthly payments. State retail installment sales acts help create this dealer status. 

When dealers sell the retail installment sale contracts, they are defined as assignors and the financing source, which buys these contracts, becomes the assignee. Some retail installment sale contracts have extensive assignment clauses whereas others do not. Generally, retail installment sale contracts do not have to have an assignment clause, as the right to receive a stream of payments is freely permitted pursuant to contract law.

The law is long, but life is short. However, taking time to better understand these central issues and documents, which are mandatory in order to sell cars — and F&I products — is time well spent. 

Govern yourselves accordingly.

Terrence J. O’Loughlin JD MBA is the director of compliance at the Reynolds and Reynolds Co.

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