Besco filed this complaint, Tecogen remained at the SFH work site and continued to address some of the punch list items. Despite Tecogen's efforts to complete the punch list items and to assist Besco with obtaining the necessary permits to operate the System, Besco began to insist upon immediate compliance with its various demands, including a request for consequential damages dating back over one year. In May 1990, primarily because Besco refused to make the final installment payment, and out of concern about the unsafe operation of the System by inexperienced Besco personnel, Tecogen "disabled" the System by turning it off. When Besco learned that the System had been shut down, it retaliated by barring Tecogen employees from SFH premises. Several days later, Besco was able to restart the System, making it capable of continuous commercial operation, and sold energy generated by the System to SFH for approximately the next 17 months, constituting over 4,000 hours of operation.
In October 1991, however, SFH ordered Besco to shut the System down, largely as a result of its concerns about alleged over-billing. SFH subsequently commissioned an outside agency to review the billing system and putatively to determine whether the System posed any safety risk to hospital personnel. An engineering report, referred to as the "Morris Report," was issued in late October 1991 and concluded that the System had been installed in violation of four provisions of the National Electrical Code ("NEC"). Two of the violations are serious and prevented safe operation of the System. The first of these two violations cited in the Morris Report was the inadequate clearance between the cogenerator and the Switchgear. Instead of the requisite distance of a four foot clearance, the distance between the Switchgear and the cogenerator was only about 36 to 38 inches. The second serious violation concerns the lack of an adequate means of secondary egress from the clearance space between the cogenerator and the Switchgear. At the time Besco locked Tecogen out of the SFH worksite, it was not aware of the NEC violations.
SFH notified Besco that it could not restart the System until the issue regarding the billing was resolved and the safety violations were remedied. In December 1991, a copy of the Morris Report was sent to the Jersey City Building Department, Office of the Construction Official, which, after reviewing the report, ordered the System at SFH shut down until the NEC violations were corrected. The System has not been operated since that date.
The parties submitted widely varying evidence as to the costs to repair or replace the System. The court primarily adopts the testimony of DiBella, who is the single most-knowledgeable person as to the System, and whose testimony was the most credible.
The cost to repair the NEC violations consists of two components. To repair the insufficient clearance in front of the Switchgear will cost about $ 32,000. The repair consists of moving the cogenerator away from the Switchgear to create the requisite clearance. The cost includes the replacement of various metal components with removable, non-conductive components.
The repair of the insufficient secondary egress ranges from about $ 2,000 to $ 3,000 to fashion the appropriate clearance between the cogenerator end of the System and the hospital wall. Another alternative is to replace the generator portion of the System with a smaller generator, ranging in cost from about $ 21,000 to $ 37,000. The latter solution appears to be the more appropriate. Lastly, the cost to remove the System is about $ 95,000.
II. Conclusions of Law
A. Choice of Law
The court's subject matter jurisdiction is based upon the parties' diversity of citizenship, pursuant to 28 U.S.C. § 1332. Because the parties agreed via the contract and by pre-trial stipulation to the application of Massachusetts law, the court must apply that state's substantive law. As to whether to apply state common law of contracts or the Uniform Commercial Code ("UCC"),
the court concludes, and the parties do not dispute, that the contract for the acquisition of a turnkey energy system is governed by Article 2 of the UCC. Although the contract involves a mixture of goods and services, the predominant purpose of the contract was for the sale of goods. USM Corp. v. Arthur D. Little Systems, Inc., 28 Mass. App. Ct. 108, 119, 546 N.E.2d 888, 894 (1989) (citations omitted) (contract for sale of turnkey computer in which nearly one-half of contract price was for services was governed by UCC); see Mass. Gen. Laws ch. 106, § 2-102 (West 1997); see also Cambridge Plating Co., Inc. v. Napco, Inc., 991 F.2d 21 (1st Cir. 1993) ("Massachusetts law is consistent with the general trend to view . . . mixed contracts as governed by the UCC.") (citing City of Twin Falls, 806 F.2d 862, 871); James J. White & Robert S. Summers, Uniform Commercial Code § 9-2 (4th ed. 1995) ("White & Summers").
B. The Contract Terms
Plaintiff Besco contends that Tecogen breached the contract by failing to fulfill certain obligations pertaining to the turnkey sale. In particular, Besco alleges that Tecogen failed to provide several components that were essential to the operation of the System, failed to obtain final operating permits, and installed the System in violation of safety requirements. By way of three counterclaims, Tecogen seeks payment of the outstanding debt on the contract, a declaration that it is released from all obligations under the contract, and costs associated with the instant action. To resolve these issues, the court must first ascertain the parties' respective rights and obligations under the Agreement.
To ascertain the parties' obligations under the Agreement, the court must "construe the contract as a whole, in a reasonable and practical way, consistent with its language, background, and purpose." USM Corp., 28 Mass. App. Ct. at 116, 546 N.E.2d at 893 (citations omitted). The court may consider extrinsic evidence relating to the background and intention of the parties and to the parties' understanding of the meaning of the language used in the contract when that language is ambiguous. See id. (citations omitted).
The court first discusses the warranties made by Tecogen. Relevant to the case at bar, an express warranty can be made either by affirmation or description. An affirmation of promise is one "made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain. . . ." UCC § 2-313(1)(a). An express warranty also can be made by description. Uniform Commercial Code § 2-313(1)(b) provides that "any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description." As can be seen from the court's discussion below, express warranties by affirmation and description often arise from the same set of facts.
The Agreement contains at least one express warranty by affirmation that is relevant to the issues presently before the court. As Besco points out, the Warranty Clause contained in the Agreement expressly guarantees that the "equipment is . . . to be free from defects in material and workmanship." Accord USM Corp., 28 Mass. App. Ct. at 119, 546 N.E.2d at 894. In its ordinary sense, the word "material" refers to the physical components of the System. See Webster's Ninth New Collegiate Dictionary 733 (1991). The court finds that defendant expressly warranted that the physical components of the module would be free from defects. Likewise, the court finds that the word "workmanship" as it is used in the Agreement warrants that the System would be free from defects in the quality of the manner in which it was designed, manufactured and installed. Accord USM Corp., 28 Mass. App. Ct. at 119, 546 N.E.2d at 894.
The court next finds that the Agreement expressly warrants by description that Tecogen was obligated to provide a "turnkey" installation. In reaching this result, the court first looks to the four corners of the contract. The Agreement expressly provided for a turnkey sale and then described that type of sale as constituting engineering and installation services, all associated equipment required for the installation, as well as the cogeneration module itself. The Agreement does not contain any other reference to the turnkey sale.
Other courts have had occasion to define what constitutes a turnkey sale. In USM Corp., the court discussed the general meaning of the term and how it is used in relation to describing contracts for the sale of goods, such as computers, oil and gas, and construction contracts. USM Corp., 28 Mass. App. Ct. at 117-118, 546 N.E.2d at 893-94. The general use of the word "turnkey" means that a seller must complete all the work, and assume all the risk, that is necessary to turn the finished product over to the buyer. See id. at 117 n. 9, 546 N.E.2d at 893 n. 9. In Chapman & Cole and CCP, Ltd. v. Itel Container Int'l B.V., 865 F.2d 676 (5th Cir, 1989), the court provided the following definition:
A 'turn-key' job is defined as a job or contract in which the contractor agrees to complete the work of the building and installation to the point of readiness for operation or occupancy. The developer assumes all risks incident to the creation of a fully completed facility and must bear the risk for all loss and damage to the work until its completion and acceptance.
Chapman & Cole, 865 F.2d at 681 (citations and internal quotation marks omitted).
Despite the common meaning of "turnkey," however, the parties are free to expressly limit the seller's obligations and to allocate the risks as they see fit. See id. at 682. In the case at bar, Tecogen argues that the Agreement expressly limits the obligation to provide a turnkey sale. Paragraph three of the Terms and Conditions Clause, which is entitled "Installation Clause," lists certain obligations of Tecogen with regard to the installation of the System. Tecogen points out that the obligation to provide a turnkey sale is limited by the provision stating that Tecogen must "assist" plaintiff in obtaining licenses and permits. Tecogen concludes from that language that the obligation to obtain the permits remained with Besco because Tecogen's obligation merely was to assist in obtaining the permits; it was not Tecogen's obligation to obtain the permits, as that responsibility remained with Besco throughout the course of the dealings between the parties. The court agrees with Tecogen that the language in the Agreement is unambiguous with respect to the parties' respective obligations in obtaining the necessary permits; the ultimate responsibility to obtain the permits remained with Besco.
Reading the Agreement as a whole, and in light of the meaning of the term "turnkey" as it is used in the Agreement and in the course of trade, the court concludes that Tecogen was required to provide a turnkey installation of the System, which included every aspect of the design, manufacture and installation of the System, subject only to Tecogen's limited duty to assist Besco in obtaining operating permits.
Lastly, the court must address whether the warranties, either by affirmation or description, were limited by the terms of the Agreement. The final sentence of the Warranty Clause purports to negate any express or implied warranties not contained in the Agreement. For example, the NEC violations implicate at least the implied warranty of fitness for a particular purpose in that they render the System unusable as intended. The Agreement expressly disclaims implied warranties, and such disclaimers are generally valid if conspicuously made. UCC § 2-316(2). However, whenever possible, express warranties and the language disclaiming such warranties must be "construed . . . as consistent with each other." UCC § 2-316(1). This means, that "to the extent that the express warranties are inconsistent with the disclaimer . . . § 2-316(1) requires that the express warranties be given effect." USM Corp., 28 Mass. App. Ct. at 121-22, 546 N.E.2d at 895-96 (citations omitted); Hart Eng'g Co. v. FMC Corp., 593 F. Supp. 1471, 1479 (D.R.I. 1984). In the case at bar, the court concludes that the express warranties in the Agreement must be given effect despite any overlap with the disclaimer of any implied warranties.
(2) P & A Warranty/Specification No. 315
The court turns to a discussion of the P & A Warranty and Specification No. 315, on which the parties place a great deal of importance. The central issue is whether those documents are part of the Agreement, and if so, what effect, if any, the terms of those documents have on the parties' respective obligations. Besco's principal reason for seeking inclusion of these documents in the Agreement is that the documents purportedly show that Tecogen was obligated to provide several components, based upon Besco's argument, that were not otherwise required under the Agreement.
Tecogen argues as if the issue involves a "battle of the forms" under UCC § 2-207 and insists that the attempted additions to the Agreement constitute material alterations to which Tecogen allegedly never agreed. However, § 2-207 is inapplicable because that section only applies to the formation of a contract and is irrelevant once the parties have reached an agreement. Magliozzi v. P & T Container Serv. Co., Inc., 34 Mass. App. Ct. 591, 594, 614 N.E.2d 690, 692 (1993) ("Once agreement has been reached and performance has commenced, § 2-207 does not operate to make additional terms that are proposed unilaterally in a later writing part of the agreement." (citations omitted)). See also 2 Anderson, Uniform Commercial Code § 2-209:17, at 323-24 ("When a sales contract has been made, the seller cannot unilaterally modify the contract by adding in the invoice a term.")
The court finds that an enforceable agreement was reached at the time that Besco and Tecogen signed the contract. Once the agreement was reached, Besco's only hope for including the P & A Warranty and Specification No. 315 is to show that those documents were incorporated into the contract by modification.
Uniform Commercial Code § 2-209, which governs modification of contracts, states in relevant part:
(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.
(3) The requirements of the Statute of Frauds section of this Article (section 2-201) must be satisfied if the contract as modified is within its provision.