After trial of a claim by a preferred source seeking payment for goods delivered pursuant to purchase orders, State found partially liable to claimant. Claim governed by Article 2 of the UCC. Claimant was in inexcusable breach of contract for seasonal goods when delivery of products did not commence in sufficient time to provide product for opening of the tourist season, and defendant was entitled to setoff cost of substitute product. However, defendant's right of setoff ceased on the date that it instructed claimant that it would accept delivery of product "regardless of the time it takes."
|Claimant(s):||INDUSTRIES FOR THE BLIND OF NEW YORK STATE, INC.|
|Claimant short name:||INDUSTRIES FOR THE BLIND OF NYS|
|Footnote (claimant name) :|
|Defendant(s):||THE STATE OF NEW YORK|
|Footnote (defendant name) :|
|Judge:||W. BROOKS DeBOW|
|Claimant's attorney:||GLEASON, DUNN, WALSH & O'SHEA
By: Lisa F. Joslin, Esq.
|Defendant's attorney:||ANDREW M. CUOMO, Attorney General of the State of
By: Michele M. Walls, Assistant Attorney General
|Third-party defendant's attorney:|
|Signature date:||December 21, 2010|
|See also (multicaptioned case)|
Claimant Industries for the Blind of New York State, Inc. ("IBNYS") brings this claim against the State of New York, in which it alleges breach of contract by the New York State Office of Parks, Recreation and Historic Preservation ("Parks"). The liability phase of the trial of this claim was conducted on September 15 and September 16, 2009 in Albany, New York. Claimant presented the testimony of: (1) Sharon Apholz, Director of Business Office Management for Parks; (2) Richard Healey, IBNYS President and Chief Executive Officer (CEO); and (3) James Bennett, IBNYS Director of Finance. Defendant presented the testimony of: (1) Amy Ortman, Assistant to the Park Manager for Niagara Falls State Park; (2) Larry Siegmann, Park Manager for the Niagara Falls State Park; and (3) recalled Sharon Apholz. Both parties presented portions of the examination before trial (EBT) testimony of Michael Scolnick, the former Vice President for Manufacturing for the Olmsted Center for the Visually Impaired. Numerous photographic, documentary and other exhibits were received into evidence.(1) After listening to the witnesses testify and observing their demeanor as they did so, and upon consideration of that evidence and all of the other evidence received at trial and the applicable law, the Court concludes that defendant is liable to claimant, as follows.
In the Fall of 2005, Parks issued two purchase orders to IBNYS for 400,000 hooded ponchos and 450,000 pairs of sandals. These items were to be distributed to patrons of the Cave of the Winds ("COTW"), an attraction at Niagara Falls, New York, to protect them from the spray from the Bridal Veil Falls, which patrons were able to view from as close as 10 feet. The ponchos and sandals, which were decorated with Parks and COTW logos, were required for the COTW's 2006 operating season, which ran from the beginning of May through mid-October of that year. While it is clear to the Court that the parties engaged one another with the best of intentions, IBNYS's delivery of the product became subject to extensive delays which left the COTW with a substantial shortfall of ponchos and sandals, the lack of which would have caused the attraction to close. To satisfy the operating needs of the COTW, Parks obtained substitute product from other vendors at increased prices, while continuing to accept delivery of product from IBNYS well into 2007 until virtually all of the sandals and ponchos from the 2005 purchase orders were delivered and accepted. Parks did not pay the vast majority of invoices submitted to it by IBNYS, which contends that payment of approximately $480,000.00 remains due on the fulfilled purchase orders. In this action, IBNYS seeks to recover full payment for all product that was delivered, while defendant defends its non-payment of IBNYS's invoices on the grounds that Parks was entitled to obtain cover product, and that it was entitled to setoff the higher costs of cover product against the amounts it owed to IBNYS.
IBNYS is a not-for-profit company whose mission is to provide opportunities for New Yorkers who are blind or visually impaired. IBNYS works with eight affiliated agencies throughout New York State that provide a range of rehabilitation services, including providing jobs to the blind and visually impaired. IBNYS enters into contracts with third parties in order to provide employment opportunities with consumers of its affiliated agencies and handles the marketing, contracting, billing, collection, administration and product and service development for its affiliated agencies. The Olmsted Center for the Visually Impaired ("Olmsted") is located in Buffalo and is one of IBNYS's affiliated agencies.
IBNYS is a "preferred source" of commodities under State Finance Law § 162, and is therefore exempt from the competitive procurement provisions of State Finance Law § 163 and other competitive procurement statutes (see State Finance Law § 162 ). This exemption is for the purpose of "advanc[ing] special social and economic goals" (id.). As a charitable non-profit agency for the blind, IBNYS is afforded the second highest priority in procurement by state agencies (see State Finance Law § 162 [a][ii]). The price of the commodities supplied by IBNYS "shall be as close to prevailing market price as practicable, but in no event greater than fifteen percent above" the prevailing market price for the same or equivalent commodities (State Finance Law § 162 [b]). As a preferred source, IBNYS has received a number of purchase orders from Parks.
During the COTW's 2005 operating season, IBNYS provided 458,290 pairs of sandals to the COTW attraction in two separate transactions. The first involved an order for 400,000 pairs of sandals, and the remainder were provided pursuant to an emergency order to address a shortfall toward the end of the 2005 operating season (see Defendant's Exhibit A; T:135).(2)
Richard Healey, President and CEO of IBNYS, had spent most of his adult life in business (T:89), most recently as the CEO of Rockefeller Group Telecommunications Services.
In the summer of 2005, Healey contacted Patricia Burns, a Parks purchasing agent, and Michael Fahey, the head of Parks' Purchasing Unit, about Parks' sandal and poncho procurement for the COTW attraction for the 2006 season. IBNYS was seeking the sandal and poncho procurement contract on behalf of Olmsted, whose consumers with multiple disabilities would perform post-manufacture quality control, unpacking boxes of goods to make sure they were fit for distribution, repacking them, and sending them on to the COTW attraction. IBNYS would negotiate and contract with Parks on behalf of Olmsted, and would receive a fee of 4.5 percent of the cost of the contract for negotiation and administration of any contract made on Olmsted's behalf. Olmsted's role in the negotiation process involved only contracting with a supplier for the manufacture of the sandals and ponchos, and setting a price for the sandals and ponchos.
Sharon Apholz, Director of Business Office Management for Parks, became involved in negotiations with IBNYS subsequent to Healey's contact with Fahey and Burns. On August 24, 2005, Healy initially proposed providing 450,000 pairs of sandals for the COTW "2006 season" at a cost of $1.28 per pair of sandals, which included "all duty, customs, and shipping costs" (see Defendant's Exhibit A).(3) Healey suggested "a delivery schedule of bimonthly shipments" to the COTW, and that he would "work out a mutually agreeable delivery schedule" with the COTW (see id.). Healey testified that with this bid, IBNYS/Olmsted would have used a New York-based manufacturer with whom they had a "track record" (T:195). Parks rejected the $1.28 price because Apholz determined that it exceeded the statutory preferred source limit of prevailing market price, plus 15%.
After further discussions with Parks and its suppliers, Healey revised the IBNYS bid on August 31, 2005 to $1.21 per pair of sandals for the 2006 season (Defendant's Exhibit B). IBNYS was able to lower its bid for the sandals to $1.21 per pair by finding a supplier - known as Procreative - that had a manufacturer in another country. This lower bid was possible, in part, because IBNYS was able to secure an agreement from the supplier to enter into a two-year agreement which included a price not to exceed $1.25 for 2007 (Defendant's Exhibit B). Healey indicated that it was IBNYS's "plan to give the [COTW] staff a phased delivery beginning in December which will give [Olmsted's] work activity people a steady stream of work from November through August" and that IBNYS and Parks "can work out a mutually agreeable delivery schedule . . . to accomplish this" (id.).
Apholz testified that it was her understanding from negotiations on the sandal and poncho orders that IBNYS would make deliveries in time for the 2006 season, sometime in April, May and June 2006, although Parks would have begun to accept delivery as early as February or March 2006. Apholz further testified that Healey and IBNYS knew that the sandals and ponchos were for the upcoming 2006 season. According to Apholz, delivery dates were not set forth in the purchase orders because the parties anticipated deliveries after the start of the next fiscal year on April 1, 2006, and the purchase orders could not commit to expenditures in the next fiscal year. In contrast, Healey testified that there were no fixed delivery dates associated with the purchase orders, that there was no bargaining or negotiation concerning delivery dates, and that no one from Parks had ever demanded or requested before the purchase orders were issued that the sandals and ponchos be delivered by a certain date. Moreover, Healey testified that he did not promise or guarantee to deliver the sandals or ponchos by a certain date. Rather, Healey testified that the parties agreed to work out a mutually agreed-upon delivery schedule in the future, and that any delivery schedule that may have been discussed was a schedule that was desired by Parks that IBNYS hoped to meet. Healey did, however, acknowledge in his testimony his knowledge that the sandals and ponchos procurement was for the 2006 operating season.
On September 27, 2005, Christopher Pushkarsh, Executive Deputy Commissioner of Parks, executed a purchase order for the purchase of 400,000 yellow disposable adult plastic ponchos from IBNYS at a price of 20.5 cents per poncho for a total cost of $82,000 (Claimant's Exhibit 1). The purchase order specified the thickness of the ponchos, that the name "Cave of the Winds" and a logo would be printed in black on the back of each poncho, and that the delivered price includes all shipping and custom fees. On October 18, 2005, Pushkarsh executed another purchase order for the purchase of 450,000 pairs of sandals from IBNYS at a price of $1.21 per pair of sandals for a total cost of $544,500 (Claimant's Exhibit 2). The purchase order provided the specifications of the sandal, including that the Parks logo and the name "Cave of the Winds" would be printed on the sandals, as well as specifying the exact number of sandals ordered in each sandal size, and that the price included set-up, delivery and other fees. Neither purchase order included a term specifying any delivery dates.
On October 21, 2005, Apholz sent a letter to Healey confirming "several points of agreement" that were reached on October 12 and October 21, 2005 with regard to the sandal order (Claimant's Exhibit 5). The letter confirmed that the order of 450,000 pairs of sandals was for the 2006 operating season, and that the unit price of $1.21 per pair would apply to all orders placed until September 30, 2006 (id.). The letter also committed Parks to a unit price of not more than $1.246 for sandals purchased for the 2007 operating season. The letter asked Healey to accept the terms of the letter by executing his signature at the end of the letter, which Healey did on January 13, 2006, after receiving the final logos and artwork.
The purchase orders incorporated an Appendix A (Standard Clauses for New York State Contracts) and an Appendix B (General Specifications) (see Defendant's Exhibit X and Claimant's Exhibit 4). Appendix B provides that delivery must be made as ordered and in accordance with the terms of the contract, and that "[u]nless otherwise specified in the Bid Specifications, delivery shall be made within thirty calendar days after receipt of a purchase order by the Contractor" (id., at ¶ 45). Further, Appendix B provides that in all instances of potential or actual delay in delivery, the contractor is required to immediately notify the Commissioner, confirm in writing the explanation of the delay, and take appropriate action to avoid subsequent late deliveries (id.). Appendix B further provides that any extension of the time for delivery must be requested in writing to and approved in writing by the Commissioner (id.). Further, failure to meet the delivery schedule may be a grounds for the cancellation of the order or the contract (id.). Appendix B provides that a Purchase Order may be terminated by the Commissioner for a material breach that remains uncured for more than thirty days after written notice to the contractor, and that in such an event, the Commissioner may complete the contractual requirements in any manner deemed advisable and pursue legal and equitable remedies for breach (id., at ¶ 59 [a]). Under Appendix B, the State has a right to purchase cover product as a remedy for the contractor's breach, and the purchases of the cover product may be deducted from the contract quantity and the payments due the contractor (id., at ¶ 64 [a]). Further, under Appendix A, the State reserves its common law, equitable and statutory rights of setoff (Defendant's Exhibit X, at ¶ 9).
A day or two after receiving the Purchase Orders from Parks, Olmsted issued purchase orders with their supplier, Procreative, for the sandals and ponchos. Shortly after receiving Olmsted's purchase orders, Procreative requested graphic arts for the logos so that the manufacturer, which was located in Pakistan, could commence production. Michael Scolnick, Vice President of Manufacturing for Olmsted, testified at an EBT that production of the sandals would take four months before deliveries could begin, so it was imperative that Parks send the logos so that production could commence (T:441-442). On November 8, 2005, Pamela Sinko, a Parks employee, sent the Parks logo to Healey in a computerized jpeg format (see Claimant's Exhibit 7). On November 14, 2005, Scolnick sent an email to Larry Siegmann, Park Manager for the Niagara Falls State Park, and Amy Ortman, Siegmann's assistant, requesting the Parks logo and the COTW logo (see Claimant's Exhibit 6). On November 18, 2005, Healey requested the COTW logo in "JPEG or some [other] electronic image" from Sinko, who replied that she did not have the artwork, but that Fahey may be able to locate the artwork (see Claimant's Exhibit 7). Ortman testified that Scolnick again asked for the logos in late December 2005 in a computer format other than jpeg, and that she sent the logo and the artwork to Scolnick by email on January 3, 2006 (see Claimant's Exhibit 8). Healey testified that he advised Parks that the delay in getting the logo and the artwork would delay production of the sandals and ponchos.
Pre-production samples of the sandal and poncho were manufactured and presented to Apholz on or about January 17, 2006, but the logos were not on the samples because they were not received in time to be incorporated. Healey's letter accompanying the pre-production samples stated that IBNYS "will be able to meet the desired delivery schedule" (Defendant's Exhibit F), which Healey testified meant a delivery schedule to be mutually agreed upon in the future (T:176). Apholz recommended some changes in the products to address issues of quality and conformity with the purchase order specifications, and Healey agreed to the requested modifications.
By April 2006, the COTW had not yet received any shipment of sandals or ponchos under the two IBNYS purchase orders, and the staff at the COTW was becoming concerned as they were low on sandals and ponchos, and the attraction was scheduled to open around May 1. Scolnick was aware as of April 14, 2006 that the COTW was low on product, as he stated in an email to Procreative that "[a]s you can see from the customer [COTW] demand we are getting dangerously close to shutting the customer down" (Defendant's Exhibit O). Further, Healey testified that he was informed in April 2006 by Parks that the COTW was running low on sandals. As for a reason that deliveries had not yet been made, Healey testified that he learned in April 2006 that one of the factories in Pakistan had been diverted to make other product after the logo and artwork was not forthcoming from Parks in the latter months of 2005, and that it was not producing sandals. IBNYS and Olmsted were forced to find another manufacturer in China, and Healey testified that it took IBNYS and Olmsted weeks to negotiate a letter of credit that would satisfy the Chinese manufacturer's requirement of a 100 percent down payment up front, at which point the Chinese manufacturer started production. Healey testified that IBNYS did not believe that the negotiations with the Chinese manufacturer in April 2006 would interrupt the delivery of the sandals to Parks.
On April 27, 2006, Healey, Scolnick, Apholz and Fahey participated in the first of several conference calls and meetings between IBNYS and Parks that occurred from that date through late June 2006, during each of which Parks' concerns about the delivery of the sandals and ponchos and when shipments would be received by the COTW were discussed. During the April 27 conference call, Scolnick and Healey advised that they had secured a Chinese manufacturer because they were not confident that their Pakistani manufacturer could handle the order in a "timely manner" (Defendant's Exhibit G). Healey and Scolnick indicated that a shipment of 24,000 pairs of sandals was scheduled to arrive in the United States from Pakistan by May 24, 2006, and that they understood that this shipment needed to arrive at the COTW prior to the Memorial Day weekend. Healey and Scolnick also advised that another 14,000 pairs of sandals were scheduled to arrive by June 26, 2006 from Pakistan, and a "rush order" of 17,000 pairs of sandals was scheduled to arrive in the United States by May 16, 2006 from China. Moreover, Healey and Scolnick offered a schedule for the remaining sandals to be shipped from China in eight shipments, scheduled to arrive in staggered dates, approximately every ten days, from June 5 through August 15, 2006. In addition, Healey and Scolnick offered a delivery schedule for the ponchos of 30,000 ponchos to be delivered in mid-May 2006 and the remaining 370,000 ponchos to arrive in the United States by June 15, 2006.
On May 4, 2006, Healey, Scolnick, Burns, Fahey and Apholz participated in a second conference call in which Healey advised Parks of a "slippage" in the delivery schedule of the sandals and ponchos (Defendant's Exhibit H). In particular, the rush order was pushed back and scheduled to arrive on May 21, 2006. Moreover, the first shipment of 30,000 ponchos was now scheduled to be shipped three days later, and Scolnick would try to have approximately 10,000 of the 30,000 ponchos shipped earlier. Parks was informed that the remaining 370,000 ponchos would be manufactured by May 30, 2006, and if there was not an adequate supply at the COTW attraction by June 15, a sufficient supply would be air shipped.
On May 17, 2006, Healey, Scolnick, Fahey, Burns and Apholz participated in a meeting during which Scolnick advised that the rush order had been shipped from China, as scheduled, and he was working with Ortman to arrange delivery by May 20, 2006. Apholz advised that if the sandals did not arrive in time to meet the needs of park patrons, the COTW staff would have to resort to reclaiming discarded sandals and sanitizing them for redistribution, the cost of which would reduce the payment to IBNYS for the sandal order. Moreover, Parks was advised that the delivery of the first shipment of 30,000 ponchos was further delayed another three days and that the "advance" order of 10,000 ponchos "did not materialize due to logistical difficulties in China" (Defendant's Exhibit I). The next day, on May 18, 2006, Scolnick telephoned Apholz to inform her that the rush order did not leave from China as previously thought, and that they would instead be shipped on May 23. Further Scolnick advised that beginning May 30, 2006, shipments of 38,000 pairs of sandals would "depart from China by sea every eight to ten days, until [the Parks] order has been filled" (Defendant's Exhibit J), and he approximated that the first shipment would arrive in New York City on June 25, 2006. Scolnick also advised that the first shipment of 30,000 ponchos would be shipped from China on May 30, 2006. Siegmann testified that he contacted Scolnick several times during the month of May to check on the status of the deliveries and to get firm delivery dates, only to be told repeatedly that the deliveries were on their way.
As Memorial Day approached, the COTW started running out of ponchos and sandals to distribute to patrons, and was distributing only size 5 and 15 sandals, which proved to be a safety concern as a size 15 sandal was too large for most patrons' feet. The COTW staff started recycling used sandals, washing and bleaching them and redistributing them to new patrons.
On May 26 and May 30, 2006, Apholz, Healey and Scolnick participated in conference calls during which Healey informed that the rush order of sandals would actually depart China on May 30, 2006 and was scheduled to arrive in Buffalo "within three to four days" (Defendant's Exhibit K). Healey and Apholz had two telephone conversations in early June 2006, during which Healey confirmed that the rush order of approximately 15,000 pairs of sandals - not 17,000 pairs - arrived in Buffalo on June 6, 2006. Indeed, the first shipment of 15,120 pairs of sandals was received by the COTW on June 7, 2006, six weeks into the 2006 season, at which point 47,395 visitors had visited the attraction. Healey indicated that it was his intent to immediately air ship 52,000 pairs of sandals in various sizes to meet anticipated requirements for the July Fourth weekend. Moreover, Healey provided an updated schedule for the shipment of sandals, with 240,000 pairs of sandals to be sent in four shipments from the end of June through the third week of July 2006, and the rest of the sandals would be delivered according to a schedule provided on July 12, 2006. Finally, Healey advised Apholz that production had been stopped on the ponchos due to a disagreement between the Pakistani and Chinese manufacturers, but that production had resumed and an air shipment of 30,000 ponchos was scheduled to leave China on June 15, 2006.
On June 13, 2006, Healey and Apholz had a phone conversation during which Healey reported that 40,000 pairs of sandals were shipped from China on June 12, 2006 and that they would arrive at the COTW by July 5 or July 6, 2006. Healey also reported that a container of 25,000 pairs of sandals from Pakistan was located in South Africa and that they were attempting to have the shipment re-routed. Moreover, Healey reported that they would be able to air ship only 17,000 of the 52,000 pairs of sandals that they had intended to air ship for the July Fourth weekend on June 15, 2006, and that he was not able to commit to air shipping the remaining 35,000 sandals. Healey indicated that he was notified that 30,000 ponchos would be leaving China by air on June 15, 2006 and should be delivered to the COTW by June 21, 2006, and that an additional 180,000 ponchos would be leaving China by June 28, 2006 and should be delivered to the COTW by July 21, 2006.
On June 21, 2006, Healey advised Apholz that the date on the air shipment of the ponchos had "slipped again" and that the ponchos would arrive in Buffalo on June 24 or June 25, 2006 (Defendant's Exhibit P). Further, Healey advised that a shipment of 17,000 pairs of sandals "should make it into Buffalo" by June 29 or June 30, 2006 so that the sandals would be there in time for the July Fourth weekend (id.). Healey also indicated that they ordered an additional 15,000 pairs of sandals that they had hoped to deliver before the July Fourth weekend, but they did not believe that the sandals would be delivered in time. On June 26, 2006, the first shipment of 30,000 ponchos from IBNYS was received by the COTW attraction, which at that point had 86,623 visitors to date for the 2006 season.
By mid- to late-June, the supply of ponchos and sandals had become critically low. As delivery schedules continued to slip and little product was delivered by Olmsted, it became evident to Apholz and other Parks officials that IBNYS and Olmsted would not deliver enough sandals and ponchos in time for the busy July Fourth weekend. After consulting with Parks staff in Albany, Apholz made the decision to secure an "alternative short supply" of sandals and ponchos from other vendors to sustain the COTW through the July Fourth weekend and "until deliveries were forthcoming" (T:473). Ortman researched potential vendors on the Internet and contacted former vendors to find a supply of sandals and ponchos at the lowest price possible in the quickest time frame. On or about June 23, 2006, Parks placed an order through the Shoe Corporation of Birmingham ("Shoe Corp") for 49,498 pairs of water shoes, at a cost of $2.70 per pair, which were received by the COTW on June 30, 2006. Parks also placed an order through Dollar Days for 29,000 plain ponchos with no logo or lettering. After it ordered additional product, Parks began to withhold payment to IBNYS for the deliveries that had already been made, although Parks did not initially communicate this fact to IBNYS.
Parks' decision to seek an alternative short supply of sandals and ponchos in advance of July Fourth proved prescient, as Healey reported to Apholz on June 28, 2006 that the 17,000 pairs of sandals that they intended to ship to the COTW in time for the July Fourth weekend was delayed and that it was "highly doubtful" that the sandals would be received in time for the holiday (Defendant's Exhibit N). Moreover, Healey indicated that the 25,000 pairs of sandals manufactured in Pakistan was en route to New York City from South Africa and should arrive by July 8, 2006, with an estimated arrival date in Buffalo of July 15, 2006. Healey further advised that a shipment of 21,000 pairs of sandals was scheduled to arrive in the United States approximately on July 8, 2006, and an additional 17,000 pairs by air ship July 5, 2006, and another 38,000 by July 12, 2006. Apholz noted that it was "evident from [their June 28, 2006] discussion that NO sandal deliveries will be made by [the July Fourth weekend]" (id.). By the weekend of July Fourth, IBNYS/Olmsted had delivered only 15,120 pairs of sandals and only 30,000 ponchos. The COTW had 16,528 visitors the July Fourth weekend, which depleted the initial supply of Shoe Corp water shoes, so Parks ordered another 49,498 pairs of water shoes from Shoe Corp.
The COTW subsequently received four shipments totaling more than 100,000 pairs of sandals from IBNYS/Olmsted on four dates between July 11, 2006 and August 4, 2006. Thus, by August 4, 2006, IBNYS/Olmsted had delivered 115,272 sandals to the COTW, which had had 210,585 visitors to date for the 2006 season. To provide enough sandals for the remainder of the 2006 season, Parks bought another 38,968 pairs of water shoes from Shoe Corp, which were delivered on August 14, 2006, and another approximately 70,000 pairs of sandals from Knots Limited, which were delivered in six shipments from August 26, 2006 through September 11, 2006. In total, Parks paid $706,143.75 to alternative suppliers for footwear for the COTW's 2006 season.
As for ponchos, the COTW received one more shipment of 30,000 ponchos from IBNYS/Olmsted on July 14, 2006. At that point, IBNYS/Olmsted had delivered 60,000 ponchos while the COTW had 144,686 visitors to date for the 2006 season. Healey offered to Apholz on July 21, 2006 that IBNYS would provide to Parks 60,000 plain clear ponchos in two shipments to be delivered at the end of July and the beginning of August 2006 at no additional cost to tide the COTW over until the shipment of 340,000 ponchos was delivered towards the end of August. Healey's proposal, however, was not accepted because, as Apholz testified, Parks was not confident in the ability of IBNYS to deliver considering its track record in failing to deliver product, and Parks could not afford to take the risk. Instead, Parks bought almost 190,000 ponchos from Plastex, which were received in two deliveries in late July and late August 2006. Parks paid $84,197.08 to alternative suppliers for ponchos for the 2006 COTW season.
In September 2006, Parks was past due on invoices for approximately $168,000 worth of sandals and ponchos that had been delivered to the COTW. James Bennett, Director of Finance for IBNYS, and Ellen Nantista, an IBNYS employee, contacted Apholz to inquire when payment could be expected. Bennett testified that Apholz responded by telling them that Parks was "waiting for fulfillment of the deliverance, [or] something to that effect" (T:271).
Shipments of sandals from IBNYS/Olmsted resumed in October 2006, and the COTW received 187,712 pairs of sandals in six shipments on the following dates: (1) 37,152 pairs of sandals on October 6, 2006; (2) 36,792 pairs on October 19, 2006; (3) 34,416 pairs on October 25, 2006; (4) 39,600 pairs on October 25, 2006; (5) 30,672 pairs on October 31, 2006; and (6) 19,080 pairs on November 1, 2006. From October 6, 2006 through the end of the season, the COTW had 9,613 visitors. In an October 11, 2006 email to Healey, Apholz wrote: "[f]or the record we [Parks] anticipate shipment of the complete order regardless of the time it takes" (Claimant's Exhibit 12). Healey testified that he spoke to Apholz following receipt of the email and confirmed that the order should be completed regardless of the time it would take to complete. At some point in October 2006, after no payment from Parks had been received, Bennett and Nantista again contacted Apholz about the past due amounts, to which Apholz replied that "[d]ue to an administrative change, [Apholz] cannot authorize payments on [the IBNYS] account" (T:274).
On October 31, 2006, Healey emailed Apholz to inform her that another 47,000 sandals were en route with "no exact delivery date," and that delivery of the remaining 90,000 sandals and 340,000 ponchos might not occur if they were unable to resolve a dispute they were having with their supplier (Claimant's Exhibit 13). Healey indicated that they wanted to "fulfill [their] end of the arrangement with Parks, but the financial losses continue to grow for [IBNYS]" and that the "best solution" for Parks, Olmsted and IBNYS may be to forego the remaining shipments (id.). In an email about Healey's email to other officials at Parks dated November 2, 2006, Apholz stated that:
Healey "is looking for us [Parks] to say we do not need/want the remaining 90,000 [pairs of] sandals and 340,000 ponchos. I [Apholz] will not do that. I fell short of telling him (although I am sure he knows what our intention is since we've not paid him a dime) that if I agreed to cancel the remaining balances, it would be that much more difficult to be made whole for our out of pocket expenses. It is going to be difficult enough to recovery [sic] our costs over and above the value of the shipments made"
(id.). There was no evidence in the record of any reply to Healey's email from Apholz or anyone else at Parks.
On November 6, 2006, Bennett sent Pushkarsh a collection letter, in which he informed Parks of past due and current invoices totaling $364,269.53. Bennett received no response from Pushkarsh or any other Parks employee. In December 2006, Bennett and Nantista again contacted Apholz about the status of the Parks account, and Apholz then indicated to them that Parks intended to assert a setoff against IBNYS outstanding invoices.
On February 5, 2007, Bennett sent Apholz a letter with attachments indicating that Parks owed IBNYS $491,648.80 in past due invoices (Claimant's Exhibit 15). On March 12, 2007, Bennett sent another letter to Apholz attempting to collect on the past due invoices (Claimant's Exhibit 16). In his letter, Bennett makes reference to a payment of $10,518.64 that Parks made, which resulted in IBNYS releasing all then-current orders for shipment and authorizing future orders. Bennett, however, indicated that Parks owed IBNYS $481,130.16, plus $7,216.96 in accrued finance charges, which were later reduced to comply with the lawful State interest rate.
On March 14, 2007, Apholz sent Bennett a letter responding to his February 5 and March 12, 2007 letters, indicating that the "invoices have been held in order for State Parks to exercise its rights of set-off as prescribed by the NYS Finance Law" (Claimant's Exhibit 17). Apholz stated in her letter that "[d]ue to IBNYS's failure to deliver products as specified, cover product was procured which resulted in a set-off value totaling $481,374.95" (id.). Apholz indicated that the most recent delivery in December 2006 "advanced the total invoices being held to $489,364.93, thus satisfying the set-off and leaving the balance due IBNYS at $7,989.98" (id.). Further, Apholz stated that on March 2, 2007, three checks were issued to IBNYS in the amount totaling $10,518.64 and that "[a]lthough the amount paid to IBNYS after satisfaction of the set-off is $2,528.66 more than what was owed, it is our [Parks] intention to consider this matter closed and withhold payments of the remaining invoices totaling $478,846.29"(4) (id.). According to an attachment to Apholz's letter, IBNYS had not yet delivered 89,424 pairs of sandals nor 340,000 ponchos under the original purchase orders, and that the total due upon delivery would be $177,903.04. On May 15, 2007, Bennett wrote a letter to Apholz in which he stated that Parks' "past due balance is $481,130.16 plus accrued finance charges of $14,542.17" (Claimant's Exhibit 20). In addition, Bennett asked Apholz whether Parks wanted to cancel the remainder of the sandals and ponchos order. Apholz testified that Parks subsequently received the "majority" of the remaining 89,000+ pairs of sandals and all of the 340,000 ponchos during calendar year 2007, for which Parks paid the price provided for under the 2005 purchase orders.
In sum, IBNYS/Olmsted delivered a total of 302,984 pairs of sandals between June and November 2006, of which 115,272 were delivered between June 7 and August 4, 2006 and another 187,712 were delivered between October 6 and November 1, 2006. IBNYS/Olmsted delivered another 57,592 pairs of sandals at some point between November 1, 2006 and March 14, 2007, with the remaining sandals delivered at later unknown dates in 2007. Other than the 60,000 ponchos delivered in June and July 2006, no more ponchos were delivered by Olmsted during calendar year 2006; the remaining 340,000 ponchos were delivered at some point in calendar year 2007. IBNYS claims it is owed $481,130.16 under the two 2005 purchase orders, which represents the balance owed as of December 31, 2006, plus accrued finance charges.
The parties agree that this claim should be governed by application of the provisions found in Article 2 of the Uniform Commercial Code (see UCC § 2-102), although some of their contentions sound in equity and the common law. Their arguments, and the existence and extent of defendant's alleged liability will be considered within the context of the following issues. First, whether IBNYS sustained its initial burden of demonstrating prima facie that Parks breached the contract.(5) Next, whether IBNYS breached the contract, and if so, whether that breach was excusable. Finally, if there was an unexcusable breach by IBNYS, whether Parks properly exercised the remedial rights of cover and setoff.
Did IBNYS demonstrate that Parks breached the contract?
Article 2 of the UCC provides that a buyer must pay the contract rate for any goods accepted under a contract (UCC § 2-607 ). The evidence establishes that IBNYS made deliveries of sandals and ponchos under the purchase orders to Parks, that Parks accepted and did not reject the sandals and ponchos, and that Parks did not revoke its acceptance of the goods. Further, IBNYS has established by a preponderance of the credible evidence that Parks did not pay IBNYS for all of the sandals and ponchos that were delivered by IBNYS and accepted by Parks. Accordingly, defendant's motion to dismiss the claim for failing to make a prima facie case of breach of contract, upon which the Court reserved decision at trial, is denied.
Did Parks demonstrate that IBNYS breached the contract?
Because IBNYS delivered goods that were accepted by Parks, the burden rests on Parks to defend its nonpayment by establishing that IBNYS was in breach of the contract with respect to those goods (see UCC § 2-607). Parks contends that IBNYS breached the contract by failing to make timely delivery of the sandals and ponchos, an argument which requires the Court to determine whether the contract contained a term for time of delivery, and if so, what that term was.
It is undisputed that the two purchase orders on their face did not contain terms setting forth an explicit delivery schedule or fixed delivery dates. Thus, the Court is called upon to exercise its "role in interpreting a contract . . . to ascertain the intention of the parties at the time they entered into the contract" (Evans v Famous Music Corp. 1 NY3d 452, 458 ). Claimant contends that delivery dates were not a negotiated part of the final purchase orders and that it could deliver the sandals and ponchos at any time. Defendant argues that, in the absence of an explicit term in the contract that specifies delivery dates, delivery must be made within a "reasonable time," that the reasonable delivery time in this case was, essentially, on a schedule that would meet COTW's demand for sandals and ponchos for the 2006 season, and that IBNYS failed to make delivery within reasonable time.
Determination of the existence of a negotiated term of delivery brings the Court to consideration of claimant's objection at trial to the admission into evidence of the parties' discussions prior to the issuance of the purchase orders regarding delivery dates on the ground that the Parol Evidence Rule prohibits consideration of such evidence, an objection upon which the Court reserved decision at trial. The Parol Evidence Rule, as codified in Article 2 of the UCC, provides that the terms of a written contract or confirmatory memoranda "intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented (a) by course of dealing(6) or usage of trade . . . or by course of performance . . . and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement" (UCC § 2-202).
Disputing claimant's contention that there was no schedule agreed to whatsoever, defendant makes passing reference to Appendix B to the purchase orders, which states that delivery shall be made within 30 calendar days of receipt of the purchase orders (see Claimant's Exhibit 4, ¶ 45). It is manifest, however, that the parties did not intend that the sandals and ponchos be delivered within this period, as the evidence demonstrates that both parties were well aware that the manufacture, shipping, repackaging and delivery of the products could not possibly be accomplished within 30 days. Notably, defendant has never asserted or argued that IBNYS's failure to deliver the product within 30 days constituted a breach of the purchase orders. The Court therefore finds that the purchase orders and Appendix B were not the final expression of the parties' agreement and were not intended to be a "complete and exclusive statement" of the delivery term (see UCC § 2-202[b]). Thus, the Parol Evidence Rule does not apply to exclude evidence of consistent additional delivery terms or the parties' course of dealing to explain or supplement what the parties intended with regard to delivery dates, and claimant's objection to evidence of the parties' understanding before or at the time of that the purchase orders were issued as to the time of delivery is overruled.
The Court is therefore left with purchase orders that do not specify any delivery dates. In the absence of expressly specific dates for delivery in the parties' agreement, Article 2 of the UCC sets forth that "[t]he time for shipment or delivery . . . shall be a reasonable time" (UCC § 2-309 ). "What is a reasonable time for taking any action depends on the nature, purpose and circumstances of such action" (UCC § 1-204 ; see also Murray Co. v Lidgerwood Mfg. Co., 241 NY 455, 459 ). Evidence of what the parties understood before or at the time the contracts were entered into is admissible to enable the Court to determine what constitutes a reasonable time (see Steinman v Olafson, 1 Misc 2d 50 [App Term, 2d Dept 1955]; Murray Co. v Lidgerwood Mfg. Co.).
It is uncontroverted that the COTW attraction is open seasonally from May through October, that the sandals and ponchos are used throughout the operating season, and that the 2005 purchase orders were issued for the purpose of supply product for the 2006 operating season. The evidence demonstrates that IBNYS's agents were aware of these facts (see T:136-137). Further, IBNYS had provided sandals and ponchos to the COTW for the 2005 season, including an emergency order to address a shortfall, which confirms IBNYS's knowledge of the nature of the COTW's seasonal usage, and that the COTW needed sandals and ponchos for the 2006 season.
Parks' agent Apholz testified that the parties discussed a phased delivery schedule that encompassed delivery of the product from April through June 2006. IBNYS's CEO Healey testified that there was no negotiation concerning delivery dates, that any delivery dates that were discussed were mere expressions of Parks' desired delivery dates, and that Healey did not promise delivery on any specific dates. The Court, however, rejects as incredible Healey's testimony that there was no negotiation with respect to delivery dates or schedules, because he himself addressed the issue during the negotiation process. To wit, in letters to Parks during the negotiations, Healey suggested a phased delivery of product (see Defendant's Exhibit A, August 24, 2005 ["From a delivery standpoint, we suggest a schedule of bimonthly shipments . . . I will work out a mutually agreeable delivery schedule with Larry (Siegmann)"]; Defendant's Exhibit B, August 31, 2005 ["Our plan is to give the Cave of the Winds staff a phased delivery beginning in December which will give our work activity people a steady stream of work from November through August. We can work out a mutually agreeable delivery schedule with Larry to accomplish this and to help you with your warehousing needs"]). Thus, the Court concludes that in this matter, a "reasonable time" for delivery - and one to which the parties agreed - was a phased delivery during the 2006 operating season that would provide the COTW with ponchos and sandals on a to-be-determined schedule that would meet both IBNYS's need to give Olmsted's client's steady work and the COTW's demand for product in sufficient amount and timing such that warehousing of the product was necessary.
The evidence is abundantly clear that IBNYS failed to deliver the ponchos and sandals in sufficient quantities and in time for the product to meet the COTW's demand during the 2006 season. The evidence clearly demonstrates that almost 100,000 patrons - nearly 25 percent of the COTW's attendance for the 2006 season - had visited the attraction prior to the July 4th weekend, but that by that time, IBNYS had delivered only 15,120 pairs of sandals and only 30,000 ponchos, or 3.36 percent and 7.5 percent, respectively, of the total orders. While there was no evidence that IBNYS had knowledge of the specific attendance figures at the COTW, there were ten meetings or telephone contacts between agents of IBNYS and Parks from the end of April 2006 through the end of June - each followed by confirmatory correspondence to Healey from Apholz (see Defendant's Exhibits G - N) - in which the parties discussed delays, "slippage," and other issues relating to non-delivery of the product. In this correspondence, while reciting IBNYS's non-compliance with earlier projected delivery dates and summarizing IBNYS's revised anticipated delivery dates, Apholz expressly stated Parks' concerns (see Defendant's Exhibit G, April 28, 2006 [Parks might have to "turn customers away"]; Defendant's Exhibit I, May 17, 2006 ["If the sandals do not arrive in time to meet the needs of the park patrons . . . staff may have to resort to reclaiming discarded sandals and sanitizing them for redistribution to the public"]; Defendant's Exhibit M, June 14, 2006 [IBNYS's anticipated shipments of sandals, if delivered as expected, would "leave the regions short by 35,000 . . . (for) the July 4 requirements"]). Apholz testified that during this period of time, telephone calls from staff at COTW escalated from "concerned" to "frantic" (T:471). Indeed, Michael Scolnick testified at his EBT that he, on behalf of Olmsted, offered on April 26, 2006 to provide Parks with labor for the purpose of reclaiming and sanitizing discarded sandals (T:311), manifesting knowledge on the part of IBNYS that the COTW's supply needs were not being met. After the July Fourth weekend, IBNYS delivered approximately 100,000 pairs of sandals between July 11 and August 4, 2006, representing another 22 percent of the total sandal order. The COTW did not receive any more sandals from IBNYS until October 2006 nor any more ponchos until 2007. Thus, during the 2006 season, IBNYS delivered only 25 percent of the sandal order and only 7.5 percent of the poncho order for the entire season; the remainder of the product was delivered at the end of the season or after its end. Clearly, this was not compliant with the "reasonable time" for delivery that the contract required, and the Court finds that IBNYS was in breach of the contract for failing to timely deliver the product.
Was the breach of contract by IBNYS excusable?
IBNYS argues that it is excused from performance of the delivery term because timely delivery was made impracticable by the occurrence of a contingency upon which the contract was based. IBNYS further argues that Parks' cooperation with respect to providing the logos/artwork was not reasonably forthcoming, and that the delays in delivery were caused thereby.
Claimant argues that any delays in the delivery of the sandals and ponchos should be excused because UCC § 2-615 "excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting" (UCC § 2-615, Official Comment 1). As set forth in the UCC, "[e]xcept so far as a seller may have assumed a greater obligation . . . [d]elay in delivery or non-delivery in whole or in part by a seller . . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made" (UCC § 2-615 [a]).
The purchase orders have no provision by which IBNYS expressly assumed the risk of delay or non-delivery of the sandals and ponchos, and thus, IBNYS is not precluded from asserting the applicability of UCC § 2-615. However, to be excused for non-performance under UCC § 2-615, IBNYS must prove "(1) a contingency (2) the impracticability of performance as a consequence of the occurrence of that contingency, and (3) that the nonoccurrence of the contingency was a basic assumption of the contract" (Canusa Corp. v A & R Lobosco, Inc., 986 F Supp 723, 731, fn 6 [EDNY 1997]). "In short, [IBNYS] must demonstrate either that (1) the contingency that made performance commercially impracticable was not foreseeable at the time of contracting, or (2) the contract contains specific, exculpatory language excusing non-performance under certain circumstances" (Bende & Sons, Inc. v Crown Recreation, Inc., 548 F Supp 1018, 1022 [EDNY 1982], affd 722 F2d 727 [2d Cir 1983]). While the evidence demonstrates that Parks was aware that IBNYS would be obtaining the sandals and ponchos from an overseas manufacturer, IBNYS has failed to persuade the Court that "contingencies in the process of foreign manufacture, shipment, customs clearance and ultimate delivery of the goods to Niagara Falls" (Claimant's Post-Trial Brief, at 17) were unforeseeable. To the contrary, while the specific problems encountered by IBNYS that may be attributable to its use of a foreign manufacturer may not have been foreseeable, it is not unforeseeable that delays would be occasioned by dealing with a foreign manufacturer with whom IBNYS had no prior dealings. The Court notes that IBNYS's recitation of "numerous contingencies such as storms [and] shortage of shipping containers" (Claimant's Brief, at 17) as causes of delay is unsupported by the evidence adduced at trial. While claimant has established that it did not expressly assume the risk of delays in delivery, there is no express exculpatory language in the purchase orders that would excuse its delays in deliveries, and IBNYS has failed to demonstrate that delays occasioned by its use of a foreign manufacturer were unforeseeable contingencies. Accordingly, IBNYS's reliance upon UCC § 2-615 to excuse delivery delays is unavailing.
Claimant further argues that any delivery delays should be excused pursuant to UCC
§ 2-311, which provides that "where one party's cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party in addition to all other remedies (a) is excused for any resulting delay in his own performance; and (b) may also either proceed to perform in any reasonable manner or after the time for a material part of his own performance treat the failure to specify or to cooperate as a breach by failure to deliver or accept the goods" (UCC § 2-311 ). To succeed on this theory, IBNYS must demonstrate that Parks' provision of the logo and artwork was not "seasonably forthcoming" or "at or within the time agreed or if no time is agreed at or within a reasonable time" (UCC § 1-204 [emphasis added]), and that Parks' alleged delay in furnishing the logo and artwork delayed the commencement of production, which resulted in delays in delivery by IBNYS.(7)
The purchase orders called for the logos to be printed on the sandals and ponchos, and the
evidence clearly establishes that Parks' cooperation in providing the logos was necessary for IBNYS to perform its contractual obligations. The evidence also establishes that Parks sent its logo in a jpeg format to IBNYS on November 8, 2005, and that Scolnick was looking for the Parks and COTW logos in jpeg format on November 14, 2005, and that Healey was looking for the COTW artwork in jpeg format on November 18, 2005. Thus, as of mid-November 2005, it appears that IBNYS and Olmsted were under the impression that the logos in a jpeg format were satisfactory. Amy Ortman credibly testified that Scolnick asked for the logos in an electronic format other than jpeg in late December 2005, and thus, it was not until that time that Parks became aware that the jpeg format provided in November was problematic and that the logos were needed in an alternative format. Ortman then met IBNYS's request for the alternative format logos on January 3, 2006. Based upon the record before it, the Court finds that once Parks was informed in late December 2005 that the jpeg format was not acceptable, it acted within a few weeks to provide the logos in the appropriate form. Inasmuch as IBNYS offered no proof that this short period of time was not reasonable, it has not proven that Parks' cooperation was "not seasonably forthcoming" (UCC § 2-311).
Moreover, IBNYS has failed to prove that the extended delays in manufacturing and shipping the product to the COTW were caused by any delay by Parks in sending the logos to IBNYS or Olmsted. To be sure, any delay in sending the logos that were to be imprinted on the sandals and ponchos would necessarily delay production of the product. However, the evidence establishes that the period from commencement of manufacturing to delivery would be approximately four months, and thus, as the logos were furnished by Parks on January 3, 2006, the first deliveries should have been made sometime in May 2006. However, the first deliveries of sandals and ponchos were not made until June 2006, and those deliveries included a mere fraction of the purchase order quantities. Once the manufacturing process began, it defies logic for IBNYS to contend that subsequent delays of the remainder of the sandals and ponchos were directly attributable to any delay in obtaining the logos. IBNYS argues essentially that there were indirect delays occasioned by the delay in getting the logos, as a cascade of events began when one of the two Pakistani factories that was committed to production of the sandals and ponchos became unavailable when the logos were not timely received in Pakistan. However, it was not until April 2006 - three months after Parks provided the logos - that IBNYS became aware that the second Pakistani factory had become unavailable. When IBNYS became aware of the situation, it moved swiftly to secure another manufacturer in China, but doing so consumed several weeks while a letter of credit was negotiated. Therefore, the Court is not persuaded that the extended delays in production and shipping of the product were caused by any delay by Parks in providing the logos. Rather, the Court attributes the delivery delays to the failure of IBNYS, Olmsted, and its supplier to keep abreast of their manufacturing situation in Pakistan, which resulted in a loss of manufacturing time of at least three months.
Claimant next argues that Parks' failure to pay IBNYS the contract price for the goods accepted is in contravention of the preferred source statute (see State Finance Law § 162), as Parks aggressively negotiated with IBNYS with "price alone as its consideration" (Claimant's Post-Trial Brief, at 27). Claimant argues that Parks failed to act in good faith because it knew that there were risks of delay in international shipment and that it "sought to silently shift those risks to a 'preferred' source party that [Parks] knew had no capacity to bear them" (id., at 27-28). Further, claimant argues that Parks acted in bad faith with the intention of imposing on IBNYS a bargain that is clearly unconscionable and in contravention of State Finance Law § 162. Claimant urges the Court to exercise its power under UCC § 2-302 to annul the unconscionable delivery term to "preserve the intent and purpose of Section 162 of the State Finance Law" (id., at 29), and argues that IBNYS should be awarded the full value of the goods delivered on the two causes of action for goods had and received and unjust enrichment.(8)
"An unconscionable contract has been defined as one which 'is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforcible according to its literal terms' " (Gillman v Chase Manhattan Bank, N.A., 73 NY2d 1, 10 , quoting 1 Corbin on Contracts, § 128, p.400). "A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made - i.e., some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party" (id. [internal quotes and citations omitted]). "The procedural element of unconscionability requires an examination of the contract formation process and the alleged lack of meaningful choice. The focus is on such matters as the size and commercial setting of the transaction (see UCC 2-302), whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability and whether there was disparity in bargaining power" (id., at 10-11).
The plain answer to IBNYS's arguments is that the evidence clearly demonstrates that Healey, who has a long and successful history as a CEO, and was not inexperienced or an unsavvy negotiator, voluntarily entered into an agreement to provide product at a price that proved to be too low. Indeed, upon cross-examination at trial, Healey acknowledged that "if [he] felt [that IBNYS] could not manufacture that product at that price, then [he] didn't have to enter into the contract" (T:195). Further, IBNYS had extensive dealings with Parks regarding state procurement, and there was no evidence that Parks employed any deceptive or high-pressure tactics during negotiations. While Healey testified, in essence, that Parks drove a hard bargain, that does not equate to untoward behavior. In sum, it is clear to the Court that it was Healey's desire to provide vocational opportunities to Olmsted's consumers that motivated him to offer a lower price so that IBNYS would be awarded the procurement, and there was no evidence of other external factors that would support a finding of an unconscionable agreement.
Once IBNYS was in breach, did Parks properly exercise the remedial rights of cover and setoff?
Here, because IBNYS's tender of delivery of goods failed to conform to the contract, Parks had the right to accept the whole tender, reject the whole tender, or accept part and reject part (see UCC § 2-601). Because Parks accepted each tender of sandals and ponchos, Parks was required to notify IBNYS of its breach within a reasonable time after the breach, or "be barred from any remedy" (UCC § 2-607[a]). Thus, Parks' right to exercise any remedy turns on whether it timely notified IBNYS of its breach of the contract, a point which the parties dispute.
It is clear that following IBNYS's failure to deliver the goods in a timely manner, Parks did not explicitly notify IBNYS that it considered IBNYS to be in breach of the purchase orders. However, the UCC does not require an explicit, unequivocal statement that the buyer considers the seller to be in breach. Rather, the Official Comment to UCC § 2-607 explains that:
The content of the notification [of breach] need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched. There is no reason to require that the notification which saves the buyer's rights under [UCC § 2-607] must include a clear statement of all the objections that will be relied on by the buyer, as under the section covering statements of defects upon rejection (§ 2-605). Nor is there reason for requiring the notification to be a claim for damages or of any threatened litigation or other resort to a remedy. The notification which saves the buyer's rights under  Article  need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.
(UCC § 2-607, Official Comment 4). Adequate notice may be found in communication from the buyer to the seller that evinces the buyer's view that the transaction is problematic (see Computer Strategies v Commodore Bus. Machs., 105 AD2d 167, 176 [2d Dept 1984], rearg denied 110 AD2d 743 [2d Dept 1985] [buyer gave "sufficient notice of its dissatisfaction through its oral communications and, when the delays grew longer, through letters"]; Cliffstar Corp. v Elmar Indus., 254 AD2d 723, 724 [4th Dept1998] [buyer's "repeated complaints and requests for service were sufficient to preserve [buyer's] right to sue"]).
The evidence clearly demonstrates that Parks communicated to IBNYS that the failure to deliver any sandals and ponchos by April and May 2006 was extremely troublesome and problematic. The series of telephone calls and meetings between agents of Parks and IBNYS was held during those months, during which the problems with delivery and the ever-changing delivery schedule were discussed, and each meeting was followed by a letter of summary from Apholz to Healey (see Defendant's Exhibits G-N). IBNYS was indisputably aware by very early in the 2006 season that the COTW was experiencing a shortage of sandals and ponchos, that the shortage was having an adverse impact on the COTW, and that Parks was extremely concerned about deliveries not being made and that it needed deliveries to accommodate patron demand. In the Court's view, the evidence establishes that Parks communicated to IBNYS as early as late April 2006 - and certainly by the end of May 2006 - that the transaction was troublesome. Thus, the Court concludes that Parks notified IBNYS of its breach in failing to timely deliver the product.
UCC § 2-607 also requires that the notification be made within a "reasonable time" of discovering the breach (see Cuba Cheese v Aurora Val. Meats, 113 AD2d 1012, 1012 [4th Dept 1985] ["Timely notification is governed by the standard of reasonableness"]). As noted above, "what is a reasonable time for taking any action depends on the nature, purpose and circumstances of such action" (UCC § 1-204 ). The evidence clearly establishes that both parties anticipated deliveries of product to commence no later than April 2006, and that by the end of that month - and even prior to the opening of the COTW attraction for the 2006 season - IBNYS had been notified of Parks' dissatisfaction with the lack of deliveries. Thus, the Court concludes that notification of the breach was made within a reasonable time of Parks' discovery of it.
Claimant, however, argues that "[a]t no time did [Parks] notify Claimant that its acceptance of goods, or [Parks'] 'assent to performance,' was done under a reservation of rights by [Parks] (See UCC §1-207)" (Claimant's Post-Trial Brief, at 26). However, UCC § 1-207 "does not affect or impair the provisions of [the UCC] such as those under which the buyer's remedies for defect survive acceptance without being expressly claimed if notice of the defects is given within a reasonable time" (UCC § 1-207, Official Comment 2). Therefore, Parks' failure to indicate that it was accepting goods under reservation of rights does not preclude it from exercising its remedies under Article 2 of the UCC.
Inasmuch as Parks timely notified IBNYS of the breach, defendant may avail itself of the remedies set forth in Article 2 of the UCC. Defendant contends that Parks properly obtained cover product and setoff damages equaling the difference between the price of the cover goods and the contract price. The remedy of obtaining cover product and damages is among the remedies set forth in UCC § 2-711. However, the remedies in that section are "those available to a buyer who has not accepted the goods" (UCC § 2-711, Official Comment 1 [emphasis added]).(9) The Official Commentary to UCC § 2-711 further states that "[t]he remedies available to a buyer with regard to goods finally accepted appear in the section dealing with breach in regard to accepted goods [UCC § 2-714]" (id.). Thus, because Parks accepted all of the sandals and ponchos that were delivered by IBNYS, the remedy of cover is not available to it, and having accepted the goods, Parks' remedy under Article 2 of the UCC resides in UCC § 2-714.
UCC § 2-714 provides that a buyer that has accepted goods and given notification under UCC § 2-607 (3) "may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable" (UCC § 2-714 ). A delay in delivery constitutes a non-conformity of tender within the meaning of the Article 2 remedial provisions (see Fertico Belgium v Phosphate Chems. Export Assn., 70 NY2d 76 ). With respect to recovery of damages, UCC § 2-717 provides that a buyer may deduct - or setoff - all or part of any damages resulting from the seller's breach from any part of the price remaining due under the contract, provided that the buyer notifies the seller of its intention to do so. "[N]o formality of notice [of intent to conduct a setoff] is required and any language which reasonably indicates the buyer's reason for holding up his payment is sufficient" (UCC § 2-717, Official Comment 2).
The evidence establishes that Parks stopped paying invoices submitted by IBNYS in June 2006, and that Parks gave IBNYS notice of its intention to take a setoff against payable invoices in December 2006 during a collection telephone call from IBNYS's Director of Finance, Bennett, to Apholz (T:126; 276-278). Thus, in summary, as of December 2006, IBNYS had breached the contract due to untimely delivery, IBNYS had been notified by Parks of its breach, product had been delivered by IBNYS and accepted by Parks notwithstanding the breach, payable invoices continued to mount, and Parks asserted defendant's right to take a setoff against amounts that were owing as of December 2006. The question remains, then, as to which product was nonconforming, or untimely, such that Parks could properly setoff against it.
On October 11, 2006, Apholz wrote to Healey an email that stated "[f]or the record, we [Parks] anticipate shipment of the complete order regardless of the time it takes" (Claimant's Exhibit 12 [emphasis added]), and Healey credibly testified that he subsequently confirmed with Apholz that "the order should be completed regardless of the time it takes" (T:124). Clearly, this statement induced IBNYS to continue delivery of product notwithstanding that the contract had been breached and that the COTW season was at its end.
"Where . . . failure to deliver within a reasonable time has been waived, or where the buyer has led the seller to the reasonable belief that belated delivery would be accepted as within the terms of the contract, then the buyer may not urge that the subsequent tender was untimely" (Murray Co, 241 NY 455, supra at 460). The first condition - waiver of IBNYS's failure to deliver within a reasonable time - is not supported by the record, as there is no evidence that Parks intended "the voluntary and intentional abandonment of a known right, which, but for the waiver, would have been enforceable" (Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175, 184 ). However, Apholz's October 11 email in conjunction with other evidence of Parks' delay in notifying IBNYS of Parks' intention to setoff against amounts owing supports a finding that Parks led IBNYS to the reasonable belief that any additional delivery - albeit belated - would be accepted as within the terms of the contract. In other words, after October 11, 2006, IBNYS reasonably believed that it should continue to deliver sandals and ponchos, and that it would be paid the contract price for such deliveries. Thus, Parks may not maintain that any tender accepted after Apholz's email dated October 11, 2006 was untimely.
As noted above, Parks gave IBNYS timely notice under UCC § 2-607 (3) that Parks considered IBNYS to be in breach of the delivery term. Further, IBNYS was adequately put on notice in December 2006 that Parks intended to conduct a setoff against invoices that were then due. However, on October 11, 2006, Parks led IBNYS to the reasonable belief that delivery after that date was acceptable to Parks and that IBNYS would be paid for product delivered after that date. Thus, Parks was entitled to offset against invoices for sandals and ponchos that were delivered after notice of IBNYS's breach of the delivery term and prior to October 11, 2006, but defendant is liable to IBNYS for the contract price of any sandals and ponchos that were delivered after October 11, 2006. The amount of damages that Parks is entitled to setoff will be "as determined in any manner which is reasonable" (UCC § 2-714) at a trial on damages.
It is the conclusion of this Court that Parks was in breach of contract in failing to pay for the sandals and ponchos that it received. However, claimant was also in breach of contract for failing to deliver the sandals and ponchos in a timely manner, and defendant may properly setoff any damages incurred for deliveries received prior to October 11, 2006. The Chief Clerk is directed to enter interlocutory judgment in favor of claimant. Any motions or objections not previously ruled upon are hereby DENIED. The claim will be scheduled for trial on the issue of damages as soon as possible.
Let interlocutory judgment be entered accordingly.
December 21, 2010
Albany, New York
W. BROOKS DeBOW
Judge of the Court of Claims
1. At trial, defendant proffered for admission Defendant's Exhibit JJ and claimant objected to its admission. The Court overruled the objection at trial, but neglected to formally receive the exhibit into evidence at trial. The Court received Exhibit JJ from claimant at a conference on May 18, 2010, and the record was closed on that date. In accordance with its ruling at trial, Exhibit JJ is received into evidence for impeachment purposes.
2. All references to the trial transcript are designated by "T".
3. At trial, the Court reserved decision on claimant's objections to the introduction of portions of defendant's Exhibits A and B that would address the parties' understanding as to when the sandals and ponchos under the two purchase orders that are the subject of this litigation were to be delivered, on the ground that the introduction of such evidence would violate the Parol Evidence Rule (see UCC § 2-202). As discussed in greater detail below, claimant's objections are overruled.
4. The remaining invoices included other Parks procurements that were not part of the COTW procurement.
5. "The contract" to which this Decision refers is the aggregate of the parties' obligations arising under the two purchase orders of October 2005.
6. "[C]ourse of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct" (UCC § 1-205).
7. While claimant argues that "[a]s the party with the burden of proof [under UCC § 2-607 (3) to prove breach], [Parks] also must establish that its admitted delay in approving the logo artwork was not the cause of the delayed deliveries" (Claimant's Brief, at 24), it is IBNYS - the party seeking to excuse its non-performance - who bears the burden of establishing that delivery delays should be excused because Parks' cooperation was "not seasonably forthcoming" (UCC § 2-311).
8. Claimant argued at trial and in its post-trial submission that it is entitled to recovery under the theories of unjust enrichment and goods had and received, but without exposition of how the evidence fits within those theories. Inasmuch as a valid and enforceable contract exists and the Court has found that defendant has breached the contract, claimant's resort to quasi-contract theories is unnecessary (see Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382, 388 ).
9. This Court is aware that the majority decision of the Court of Appeals in Fertico Belgium v Phosphate Chems. Export Assn., 70 NY2d 76 (1987) could be read to afford Parks the right to accept the goods and seek the remedy of cover, but defendant does not rely on that decision in arguing its right to cover and setoff. Moreover, Fertico involved an exceptional fact pattern which the majority stated "does not fit squarely within the available Uniform Commercial Code remedies" (id. at 83). In the Fertico case, a seller of fertilizer breached its agreement to deliver fertilizer in a timely manner to a buyer-trader. The buyer-trader was forced to purchase cover product from a third party to avoid breaching its obligation to its buyer, but subsequently received delivery of the fertilizer from the breaching seller. The Court of Appeals held that under these "exceptional circumstances," the buyer had the right under UCC §§ 2-711 and 2-712 to seek cover in order to avoid breaching its obligation to a third party (Fertico, at 79). The facts in the case at bar are distinguishable from those in Fertico inasmuch as (1) Parks did not pre-pay for the goods it accepted while the buyer-seller in Fertico did so, (2) Parks was an end user, not a buyer- trader caught between its seller's breach and its obligation to its buyer, and (3) the Fertico seller delivered the late product without prompting, whereas here, as discussed in greater detail below, Parks induced delivery of the late product so that it would have sufficient quantities of invoiced product against which to apply a setoff for cover product.