permitted to test 10 of the cars for 30 days. In addition, the contract did not obligate the buyer "to take any steps until [the seller] conformed to the specifications by delivering cars which had completed the 30 day test . . . ." Id. Therefore, the court determined that "until that inspection occurred . . . there could be no tender of 'conforming goods' within the meaning of § 2-503(1)." Id. at 919.
Defendant would distinguish Pullman on two grounds. First, defendant notes that Pullman also contains language indicating that tender of delivery of nonconforming goods starts the statute of limitations running. See id. ("The statute of limitations for the breach of warranty begins to run when the seller tenders delivery of defective goods . . . ."). This argument, however, misconstrues Pullman's relevance to the case at hand. In Pullman, the goods were neither conforming nor non-conforming until the cars had been tested because the contract "specifically provided that any cars built before the 30 day test had been completed were constructed at the seller's risk." Id. Similarly, in the case at hand, the system was neither conforming nor non-conforming until it had been tested and, if necessary, defendant either had corrected it or repudiated its obligation to correct it. Until the system was non-conforming, there could be no breach of the performance warranty.
Second, defendant would distinguish Pullman by arguing that Pullman held only that, under a contract that provides for pre-delivery testing, testing does not constitute tender of delivery; whereas, under a contract that provides for post-delivery testing, physical delivery triggers the statute of limitations. (Def. Rep. Mem. at 5) However, as Cincinnati v. Dorr- Oliver, Inc., 659 F. Supp. 259 (D. Conn. 1986), illustrates, albeit in a holding I decline to follow, defendant's conclusion merely begs the question, which is when the parties intended delivery to occur. Dorr- Oliver addressed facts that are substantially similar to the ones at hand. The contract in question was for the sale of 16 centrifuges for the thickening of excess activated sludge at plaintiff's wastewater treatment plant. It provided for both pre-shipment and post-shipment testing. If the equipment failed the pre-shipment test three times, plaintiff (buyer) had the option of cancelling the contract, or accepting the equipment on the condition that the equipment pass the post-shipment test, "the acceptance test." The acceptance test was to be performed after all the equipment was installed and operating at plaintiff's plant for at least four weeks and after the parties mutually agreed the equipment was in suitable condition for continuous operation. If the equipment failed to conform to the contract specifications after three tries: (1) plaintiff could allow defendant additional time to replace or modify the equipment; (2) plaintiff could accept the equipment at a reduced price; (3) plaintiff could recover the contract price less the value of its use of the equipment; or (4) plaintiff could accept the equipment conditioned upon additional provisions negotiated by the parties. Id. at 260. The acceptance test was performed and "plaintiff declared that the defendant's contractual obligations had been fulfilled and released the defendant's performance bond." Id. at 261. Problems with the equipment arose and continued until the equipment ultimately was shut down. Plaintiff sued for breach of contract; defendant moved for summary judgment on the basis that the action was time-barred.
In response to plaintiff's argument that delivery did not occur until it had accepted the equipment, the court found that the contract contemplated a post-delivery inspection. Because the court determined that Pullman stands only for the narrow proposition that pre-delivery testing does not trigger the statute of limitations, it found that Pullman was inapposite. See id. at 263. In Pullman, "the inspection test was to be conducted not only before the vast balance of the goods were delivered but it was designed to determine whether the balance of the goods should in fact be delivered." Id. at 264. By contrast, the court found that "the relationship between installation and the acceptance testing here necessarily required the installation of the equipment." Id. 264. In addition, the court noted that "'Whether or not the buyer at that time "accepts" the goods, as that term is used in the Code, or, on the other hand, withholds acceptance until he or she has had an opportunity to fully inspect for defects, does not affect when the buyer must institute suit for breach of warranty.'" Id. at 262 (quoting Raymond-Dravo-Langenfelder v. Microdot, Inc., 425 F. Supp. 614, 617 (D. Del. 1977)).
Although delivery of nonconforming goods can constitute tender of delivery, see, e.g., H. Sand & Co. v. Airtemp Corp., 934 F.2d 450, 455 (2d Cir. 1991), and although the buyer need not accept the goods in order to start the statute of limitations running, and although the buyer need not be aware of the breach in order to start the statute of limitations running, see N.Y.U.C.C. § 2-725, Dorr- Oliver's result is still illogical. Under the Dorr- Oliver contract, the goods became non-conforming only at the time of the acceptance test. However, Dorr- Oliver found that the statute of limitations began to run before the goods became non-conforming because it placed undue emphasis on the date of physical delivery rather than on the terms of the specific contract before it. This caused the court to reach the perverse conclusion that the statute of limitations began to run before the breach occurred. Moreover, this conclusion is contrary to the express language of N.Y.U.C.C. § 2-725, which states that a cause of action accrues when the breach occurs. See N.Y.U.C.C. § 2-725; cf. Green v. Bock Laundry Mach. Co., 490 U.S. 504, 104 L. Ed. 2d 557, 109 S. Ct. 1981 (1989) (holding that when literal meaning of statute renders "unfathomable" result or "bizarre disposition," statute should not be read literally); Northpark Nat'l Bank v. Trust Co., 572 F. Supp. 524, 530 (S.D.N.Y. 1983) (noting that commercial practicality is virtue of UCC). Therefore, I decline to apply Dorr- Oliver.
Defendant also seeks to rely on Triangle Underwriters, supra, to establish that physical delivery constitutes tender of delivery even when post-delivery testing is done and corrections are made. However, in Triangle Underwriters, the contract contemplated a turn-key computer system. See 604 F.2d at 741. "But the 'delivery' gave immediate cause for concern," id. at 740, and it was apparent upon installation that the system did not work as expected. Defendant attempted for over a year to fix the computer system, and perhaps even for as long as two years. See id. Therefore, in Triangle Underwriters, the performance warranty was breached the moment the computer was plugged in. See id. at 742 ("the breach occurred when the system was installed and immediately proved itself incapable"). In the case at hand, however, neither party expected the system to work upon mechanical completion. As plaintiff states:
The parties never contemplated that the Teller system would be a "turn-key" project that would be ready to operate properly upon its initial installation. The System required a lengthy implementation period before it was expected achieve its guaranteed performance. Indeed, the Contract provides that before the System was even to be tested there would be an extended running period.
(Pl. R. 3(g) Statement P10) Therefore, Triangle Underwriters is inapposite.
Under the terms of the Contract, TESI did not tender delivery when it mechanically completed, nor when it installed, the system. This conclusion is compelled by one essential fact: plaintiff could not have sued for breach of contract while TESI, and later defendant, was still performing under the Contract. TESI/defendant could not have breached the Contract while it was still fulfilling the performance warranty, which does not place a time limit on defendant's obligation to correct the system. So long as TESI/defendant had not yet breached, plaintiff could not have sued. Therefore, it would be irrational to conclude that the statute of limitations began to run while TESI was still performing.
Moreover, the parties contemplated that there would be an extended installation period during which the system was being worked on by defendant. Therefore, tender of delivery did not occur until TESI/defendant either had satisfied the performance warranty or repudiated its obligation to satisfy the performance warranty. Before then, the system could not even have been termed nonconforming because it was not yet expected to conform to the Contract specifications.
From the affidavits and exhibits, it appears that, if defendant breached the performance warranty, it breached it sometime between October 10, 1986 -- the date of Teller's internal memo -- and July 14, 1987 -- the date of defendant's letter to plaintiff stating that it believed the Contract should be closed out "from a guarantee aspect." Certainly, defendant's July 14, 1987 letter made it clear that defendant would not satisfy the performance warranty as a contractual obligation. However, even applying the estimate most favorable to defendant, which would start the statute of limitations running on October 10, 1986, plaintiff had until October 10, 1990 to commence this suit. Because plaintiff initially filed suit on October 24, 1989, its action appears not to be time barred.
However, defendant now contends that the reason it strove "for over seven years to make the Scrubber work to St. Anne's satisfaction is [its] belief that is simply good business to keep a customer happy." (Teller Rep. Aff. P59; see also Def. Rep. Mem. at 6 (stating that "defendant never admitted that the Scrubber did not operate properly or that defendant was responsible for any deficiencies in its performance")). To support this contention, defendant claims that "whenever we asked for payment (of the holdback), we were told we would not get it until the performance tests were met." (Teller Rep. Aff. P61) In addition, defendant maintains that the Contract was listed as an open contract on the Asset Purchase Agreement because the Agreement defined "the term 'Open Contract' to include 'each agreement pursuant to which Seller [TESI] . . . has not received full payment . . . .'" (Def. Rep. Mem. at 6) And, according to Schedule 5.9.1, plaintiff owed $ 64,815 on the Contract as of February 1986. (Teller Rep. Aff. P4)
Although Teller's internal memorandum of October 10, 1986, and defendant's July 14, 1987 letter weaken defendant's contention that it was attempting to correct the system in order to maintain good client relations, this contention nonetheless raises a material issue of fact as to the date of the alleged breach.
For the above reasons, defendant's motion for summary judgment is denied.
Dated: New York, New York
March 9, 1992
Michael B. Mukasey,
U.S. District Judge