Question.
Owner issued a request for proposal (“RFP”) to various potential
suppliers for the design, manufacture and installation of a geothermal
heating system at Owner’s New York facility. In response to the RFP,
Contractor offered to design, manufacture, inspect, test and install a
solar system. Owner informed Contractor of the energy savings it
expected to realize at the facility. Contractor represented to Owner
that it could design, manufacture, inspect, test and install a solar
system that would perform in a superior manner compared to a geothermal
system. Contractor also represented several times in writing that it had
manufactured several solar systems of the size and type contained in
Owner’s RFP.
As a result of their negotiations, Contractor prepared a final quotation
for the design, manufacture, inspection, testing and installation of a
solar system. In reliance on the representations and warranties
contained in Contractor’ final quotation, Owner agreed to purchase a
solar system from Contractor. Owner and Contractor executed an equipment
purchase agreement (“Purchase Agreement”) for the solar system
(“Equipment”); the Purchase Agreement incorporated the final quotation
that Contractor had prepared and required that time was of the essence
for the delivery of the Equipment.
The Purchase Agreement contained implied warranties of merchantability,
fitness for a particular purpose and warranties arising from course of
dealing or usage of trade. The Purchase Agreement also contained several
express warranties, including a performance warranty that the Equipment
would perform in accordance with the performance requirements as set
forth in the specifications, that the Equipment would be designed and
manufactured to conform to the specifications, and that the Equipment
would be merchantable, of good material and workmanship, free from
defects and fit and sufficient for the intended purpose.
Due to Contractor’ fault, the delivery and installation of the system
fell behind the schedule set forth in the Purchase Agreement.
Since its installation, the solar system has never functioned according
to the terms of the Purchase Agreement and has been shut down on
numerous occasions for repair. The system failed within the first eleven
months of operation and had to be shut down for repairs. Contractor has
undertaken several repair attempts on a number of occasions. Since it
installed the system Contractor has replaced several parts of the
system. Defendant Contractor paid for the replacement parts and repairs,
acknowledging that the problems were due to its conduct and were its
responsibility.
On repeated occasions Contractor admitted that the system was
manufactured in a defective manner and that it could not function for
its intended and/or particular purpose. On several occasions Owner
requested that Contractor replace the system.
Contractor modified the Purchase Agreement and provided an additional
warranty of future performance for one year that, if the system failed
within one year, Contractor would replace the system. The system failed
shortly thereafter and Owner asked Contractor to manufacture and
deliver a new system.
Owner and Contractor had several meetings regarding the design,
manufacture, inspection, testing, installation and operation of a
replacement system to be supplied at Contractor’ cost. Owner and
Defendant Contractor came to an agreement relating to the replacement
system (“Replacement Agreement”). The Replacement Agreement provided
that Contractor would design, manufacture, inspect, test and install a
replacement solar system with what Contractor described as “better
technology” and continue to repair the existing system until the
replacement system could be installed.
The Replacement Agreement also provided that, in exchange for
Contractor’ agreement to provide a new solar system and for continuing
to repair the existing one, Owner would award Contractor and certain of
its affiliates preferred vendor status for identified projects.
Owner and Contractor had several meetings about the design, manufacture,
inspection, testing, installation and operation of the replacement
system under the terms of the Replacement Agreement; Contractor began
performance under the terms of the Replacement Agreement; and Owner
awarded certain projects to Contractor and/or certain of its affiliates
pursuant to the preferred vendor status arrangement. Sometime thereafter
Contractor requested an inspection of the existing system at the
facility. Contractor conducted an inspection of the existing system at
the Facility. Contractor’ repair crew arrived at the Facility to begin a
round of repairs, which Contractor had estimated would take four to
five weeks to complete.
At approximately the same time Owner met with Contractor. At that
meeting, Contractor took the position, for the first time, that Owner
was at fault for the performance failures because of misuse of the
system. These were the same performance failures that Contractor had
previously admitted were due solely to its defective manufacturing.
After the meeting, Contractor refused to design, manufacture, inspect
and test the replacement system and refused to continue to repair the
existing system as required under the terms of the Replacement
Agreement.
Question. With respect to the Replacement Agreement, there are three issues that the parties dispute:
(1) whether the Replacement Agreement was a new agreement or was a modification of the Purchase Agreement;
(2) whether a written Replacement Agreement exists and; if not,
(3) whether there is an enforceable oral Replacement Agreement based on the doctrine of partial performance.
1. New agreement or modification of the Purchase Agreement?
Owner contends that the Replacement Agreement is a
new agreement, not a modification of the Purchase Agreement.
Contractor, on the other hand, contends that the Replacement Agreement
is a modification of the Purchase Agreement. The characterization of the
Replacement Agreement is only important if the Replacement Agreement is
an oral agreement.
If the Replacement Agreement was an oral agreement and that the
Replacement Agreement was a modification of the Purchase Agreement, then
Owner’s claim would fail. Pursuant to the Purchase Agreement, “[n]o
amendment to this Agreement shall be effective unless it is in writing
and signed by duly authorized representatives of both parties.”
Therefore, under this paragraph, no oral modification of the Purchase
Agreement would be enforceable. For purposes of discussion let’s accept
Owner’s assertion that the Replacement Agreement is a new agreement and
not merely a modification of the Purchase Agreement.
2. Written or oral agreement?
Assuming that the
Replacement Agreement is a new agreement, separate and distinct from the
Purchase Agreement, there is a question whether the e-mail exchange
between the parties is sufficient to create a written agreement. Under §
2-201(1) of New York’s Uniform Commercial Code, “a contract for the
sale of goods for the price of $500.00 or more is not enforceable an
authorized agent of the defendant has signed a writing indicating the
existence of the contract.” Owner asserts that the Contractor’s e-mail
of to Owner constitutes the Replacement Agreement. That e-mail states as
follows:
John,
This is to confirm that we have reached an agreement combining
Contractor’s commitment to replace the solar system with Owner’s
commitment to award business to Contractor.
1. Contractor to repair the existing system,-allowing Owner to operate
the system. Owner will bear 50% of the repair cost including testing.
2. Contractor will fabricate a new system. Contractor will bear the cost
of the new system- Owner will bear the cost of removing the existing
system [f]rom its location and installing the new system in that
location.
Owner will commit to award the following business to Contractor:
{LISTING OF FUTURE PROJECTS OMITTED}
For this business Contractor would have a ‚ÄòPreferred Vendor Status’ = Rights of first refusal.
Precondition:
Contractor must be technically qualified and competitive.
You and I will have to work out the contract and submit it to the respective management for approval and signature.
Agreements to agree are not
recognized as binding obligations under New York law. There is a strong
presumption against finding binding obligation in agreements which
include open terms, call for future approvals and expressly anticipate
future preparation and execution of contract documents. There is an
established a framework for analyzing whether a written instrument
constitutes a binding preliminary agreement or an unenforceable
agreement to agree.
Ordinarily, where the parties contemplate further negotiations and the
execution of a formal instrument, a preliminary agreement does not
create a binding contract. Under some circumstances, however,
preliminary agreements can generate contractual obligations. One example
of such an agreement is where the parties have agreed on all points
that require negotiation including whether to be bound, but agree to
memorialize their agreement in a more formal document. Such an
agreement is fully binding; it is preliminary only in form-only in the
sense that the parties desire a more elaborate formalization of the
agreement.
Furthermore, there is a four-part test for determining whether the
parties intended their written statements to constitute a binding
contract. These factors are: (1) whether there has been an express
reservation of the right not to be bound in the absence of a writing;
(2) whether there has been partial performance of the contract; (3)
whether all of the terms of the alleged contract have been agreed upon;
and (4) whether the agreement at issue is the type of contract that is
usually committed to writing.
The first factor, the language of the agreement, is the most important.
In this case, the language of Contractor’s e-mail to Owner demonstrates
that his e-mail was not a fully binding preliminary agreement. Although
Contractor used the word “Agreement” in the subject line of his e-mail
and noted that this e-mail “confirm[s] that we have reached an
agreement,” it is clear that, when read in its entirety, this e-mail
does not constitute an agreement under New York law. Most particularly,
the last line of the e-mail, in which Contractor stated that he and
Owner would have to “work out the contract and submit it to the
respective management for approval and signature[,]”makes clear that
this e-mail is not a formal memorialization of an intent to be bound. To
the contrary, this email indicates that the parties still have to “work
out the contract” and that, before the parties are bound, they have to
submit the contract to management for approval.
Furthermore, it is clear from subsequent e-mails in this exchange
between Contractor and Owner that the parties had not agreed to all of
the terms of the alleged contract. In a subsequent e-mail Owner wrote to
Contractor that, although Owner is “in agreement to move forward” as
Contractor proposed, there were “two clarifications” that he “planned to
include on the proposal,” and he indicated that he would begin to work
with Owner’s legal counsel to formalize Contractor’s proposals and that
he would call later “to confirm that Owner was “ready to move forward as
[he had] outlined.”
One month later, in an e-mail Owner wrote to Contractor that he was
forwarding “the current draft of the formal agreement” and informed him
that “[t]his draft is still being reviewed internally at Owner, so
[Owner] may make some changes as well….” He also asked Contractor to
“review [the draft] and send [him] any comments that [he might] have.”
In addition, he stated that he would set up a call with Contractor and
others “to go through a detailed review of any questions, additions or
changes that [Contractor might] have.” Finally, Owner stated that he
thought the parties were “moving forward to a successful closure of this
issue, but want[ed] to make sure [the parties] close on the formal
contract as soon as possible.”
Given the strong presumption against finding binding obligation in
agreements which include open terms, call for future approvals and
expressly anticipate future preparation and execution of contract
documents, it is clear that the e-mail exchange between Contractor and
Owner does not constitute a written contract.
3. Applicability of partial performance exception to § 2-201(1)
Since we have concluded that the e-mail exchange does
not constitute a written Replacement Agreement, we must next determine
whether the “partial performance” exception to ¬ß 2-201(1)’s writing
requirement applies to this case.
Section 2-201(3), which allows for this exception, provides that
[a] contract which does not satisfy the requirements of subsection (1)
but which is valid in other respects is enforceable
(a) if the goods are to be specially manufactured for the buyer and are
not suitable for sale to others in the ordinary course of the seller’s
business and the seller, before notice of repudiation is received and
under circumstances which reasonably indicate that the goods are for the
buyer, has made either a substantial beginning of their manufacture or
commitments for their procurement; or
(b) if the party against whom enforcement is sought admits in his
pleading, testimony or otherwise in court that a contract for sale was
made, but the contract is not enforceable under this provision beyond
the quantity of goods admitted; or
(c) with respect to goods for which payment has been made and accepted
or which have been received and accepted (Section 2-606).
Owner contends that, under the terms of the Replacement Agreement,
Contractor agreed to “design, manufacture, inspect, test and install a
replacement solar system at the Facility … [and] agreed to repair the
existing solar system at the Facility until the replacement solar system
was delivered.” Owner also claims that “[t]he Replacement Agreement …
provided that, in exchange for Contractor’s agreement to provide a new
solar system and for continuing to repair the existing Equipment,
Contractor would be awarded preferred vendor status for identified Owner
projects.” Finally, Owner asserts that Contractor began performance
under the terms of the Replacement Agreement, and in reliance thereon,
Owner awarded certain projects to Contractor to their preferred vendor
status arrangement.
Partial performance’ as a substitute for the required writing can
validate the contract only for the goods which have been accepted or for
which payment has been made and accepted. The reasoning is that if the
subject of a contract is an indivisible unit, even part performance
under the contract tends to prove the existence of the entire contract.
In this case, there is no doubt that the replacement solar system is a
single indivisible unit. What is at issue, however, is whether both
parties partially performed under the Replacement Agreement. Owner
alleges that Contractor began performance under the terms of the
Replacement Agreement and that, “in reliance [on Contractor performance,
Owner awarded certain projects to Contractor pursuant to their
preferred vendor status arrangement.
These allegations when accepted as true support a claim for breach of
the Replacement Agreement and defeat the argument that the Replacement
Agreement is unenforceable under the Statute of Frauds
