Opinion ID: 6497766
Heading Depth: 2
Heading Rank: 2

Heading: Fiber-Span Breached the Purchase

Text: Agreement, Entitling Transit to Damages. Fiber-Span argues that the Nodes “fully conformed” with the specifications in the Purchase Agreement (Fiber-Span Op. Br. at 47), but, it says, if breach is found, Transit should be limited to damages under the Agreement’s Warranty Provision. The argument is half right. The Bankruptcy Court did not clearly err in finding that Fiber-Span breached the Purchase Agreement by failing to deliver conforming goods. With respect to damages, however, we agree with Fiber-Span that Transit’s damages are controlled by the Warranty Provision and must be recalculated to reflect the difference in value between the Nodes as promised and the Nodes as delivered. Contrary to the Bankruptcy Court’s award, that sum excludes initial installation costs. 26
Breach of contract, like acceptance and rejection, is a question of fact. United States ex rel. N. Maltese & Sons, Inc. v. Juno Constr. Corp., 759 F.2d 253, 255 (2d Cir. 1985) (applying New York law). When a buyer accepts non- conforming goods, that acceptance does not prevent it from recovering damages for a breach. See N.Y. U.C.C. §§ 2- 607(2), 2-714(1). The calculation of those damages is also a question of fact. Vt. Microsystems, Inc. v. Autodesk, Inc., 138 F.3d 449, 452 (2d Cir. 1998). Whether the right formula was used for that calculation, however, is a question of law. Id. For a buyer to preserve its right to damages, it must notify the seller of any breach within a reasonable time after discovery. N.Y. U.C.C. § 2-607(3). The Bankruptcy Court determined the Nodes to be nonconforming because of their excessive power consumption and, consequently, their heightened external surface temperature. It also found that Fiber-Span’s retrofitting efforts brought the Nodes further out of compliance by violating the Purchase Agreement’s IP66 ingress rating, which required the Nodes be impervious to “dust” and “powerful water jets.” (J.A. at 7576.) And although Transit continued making payments under the Milestones, the Bankruptcy Court concluded that its doing so “did not waive any rights to a compliant product,” since those payments were “a business decision to move the process along, with the belief that the issue would be resolved.” (J.A. at 71.) Thus, the Bankruptcy Court found Fiber-Span in breach of the Warranty Provision. It also found that Fiber-Span breached the Repair and Support Provisions because it stopped 27 servicing, repairing, or selling spare parts to Transit after July 2013. Based on its findings of breach, the Bankruptcy Court awarded Transit $1,283,606 in restitution damages, which included the amount paid on the contract as well as the $640,000 in installation costs paid by Transit to a third party to install the Initial Build. Although the District Court agreed with the Bankruptcy Court’s findings of noncompliance and breach, it excluded the installation costs as “incidental” under N.Y. U.C.C. § 2-715(1), in accordance with the Purchase Agreement.11 Fiber-Span now argues that Transit waived its ability to object to the Nodes as non-conforming because it did not challenge the maximum power specification at testing and, therefore, may not assert breach. The Nodes consumed close to 500 watts, well above the specifications’ maximum power 11 N.Y. U.C.C. § 2-715 defines incidental damages as those “resulting from the seller’s breach includ[ing] expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.” Fiber-Span and Transit agreed that neither party would be responsible for the other’s incidental damages. They also agreed that, for roughly two years, Fiber-Span would be responsible for any “deinstallation and re-installation charges” associated with the removal and replacement of non-conforming equipment. (J.A. at 57, 406.) 28 limit of 395 watts. That fact is undisputed. The issue of waiver turns on whether Transit “evince[d] an intent not to claim” the benefit of the lower power consumption requirement. Gen. Motors Acceptance Corp. v Clifton-Fine Cent. Sch. Dist., 647 N.E.2d 1329, 1331 (N.Y. 1995). The record on this point is not entirely clear, as Transit took inconsistent positions about whether the Nodes were satisfactory or whether it was concerned about the excessive power consumption and overheating. 12 Nevertheless, the Bankruptcy Court did not 12 Compare J.A. at 490 (Transit informing Fiber-Span that it considered that it considered the Nodes to be “outside the contractual specification[,]” citing power consumption and external heat concerns), J.A. at 498 (Transit warning FiberSpan that the Nodes presented “a clear case for breach of contract”), J.A. at 500 (Transit stating that it had “no confidence” that the Nodes were a “stable product”), J.A. at 502 (Transit requesting that Fiber-Span commit to when the delivered Nodes would be replaced and retested), and J.A. at 744 (Transit raising again the Nodes’ surface temperature as an issue), with J.A. at 751 (Transit CEO emailing its parent company that the Nodes passed all “critical interoperability testing” which was a “key step in the delivery process”), J.A. at 751 (Transit CEO stating that the Nodes completed “successful FCC, safety[,] and environmental testing” allowing for installation), J.A. at 751 (Transit’s CTO stating the testing of the Nodes was witnessed by the MTA/NYCTA, who “appeared very satisfied and impressed with the signal quality”), J.A. at 753 (Transit’s CEO, again, confirming that Fiber-Span passed the necessary testing, including FCC and Underwriters Laboratories testing, and received thirty party certification), and J.A. at 813 (Transit submitting a request to 29 clearly err in finding that Transit did not intend to waive its right to the agreed-upon power consumption limit. See Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 850 N.E.2d 653, 658 (N.Y. 2006) (“Generally, the existence of an intent to forgo … a [contractual] right is a question of fact.”). The Bankruptcy Court thoroughly considered all communications on the subject, and its finding is consistent with the record. So too is the finding that the Nodes, once retrofitted, did not comply with the Purchase Agreement’s ingress protection rating specification. Fiber-Span argues, however, that because Transit expressly permitted it to retrofit the Nodes with fans to address surface temperature issues, it also waived the issue. But the Bankruptcy Court did not clearly err in finding that “there was no approval of the retrofit as a permanent solution[.]” (J.A. at 72.) Transit repeatedly made requests for a permanent solution, indicating that it viewed the retrofit as a temporary solution. Again, “waiver ‘should not be lightly presumed’ and must be based on ‘a clear manifestation of intent’ to relinquish a contractual protection.” Fundamental Portfolio Advisors, Inc., 850 N.E.2d at 658 (quoting Gilbert Frank Corp. v Fed. Ins. Co., 520 N.E.2d 512, 514 (N.Y. 1988)). There was here no such clearly manifested intent. In short, the Bankruptcy Court did not err in in any meaningful way in finding that Fiber-Span violated the Warranty Provision and the Repair and Support Provision of the MTA/NYCTA for approval of the network, stating that it has “satisfactor[il]y completed its construction of the Initial Build”).) 30 the Purchase Agreement by supplying non-conforming Nodes and eventually “refus[ing] to provide service, repair, or … spare parts” for them. (J.A. at 83.) Transit chose, however, to submit evidence of damages only with respect to the Warranty Provision. So, we agree with the Bankruptcy Court that a proper damages analysis is reserved to that provision.
Fiber-Span argues Transit’s damages are measured by calculating the “difference … between the value of the goods accepted and the value they would have had if they had been [as] warranted.” (Fiber-Span Op. Br. at 36 (quoting N.Y. U.C.C. § 2-714).) And, it says, because Transit’s only evidence of damages are invoices totaling $66,687, an amount Transit had already deducted from its final invoice, no additional damages should be awarded. In response, Transit argues that the Bankruptcy Court rightly concluded that FiberSpan breached the Purchase Agreement, and so damages of $1,283,606 were properly awarded for the full purchase price plus initial installation. We conclude that the Bankruptcy Court erred by calculating damages as the full purchase price of the Initial Build and its installation. Transit is only entitled to the difference in value as defined by N.Y. U.C.C. § 2-714. Under the Warranty Provision, through which damages to Transit must flow, the first choice of relief is framed as follows: “Materials not meeting the warranties will be replaced, repaired and/or re-performed as applicable,” by Fiber-Span. (J.A. at 406.) If that non-monetary path had been followed by Fiber-Span, the company may have been on the hook for de-installing and re-installing the repaired or replaced Nodes. But Fiber-Span did not choose that path, so we turn to 31 the backup relief contemplated by the Warranty Provision, which provides that, “[i]f [Fiber-Span] is unable to repair, replace, or re-perform, [Fiber-Span] shall refund all costs incurred by [Transit] associated with warranty.” (J.A. at 406.) The operative language is “all costs incurred by [Transit] associated with warranty[,]” and the question is how to define those costs. Certain cases recognize the availability of a full refund of the purchase price of goods under N.Y. U.C.C. § 2-719. In those instances, however, the contract at-issue explicitly provided for a refund of the purchase price. See, e.g., President Container Grp. II, LLC v. Systec Corp., 467 F. Supp. 3d 158, 168 (S.D.N.Y. 2020) (“The warranty provision provides that [the seller’s] ‘liability in connection with this transaction is expressly limited to the repair or replacement … or refund of purchase price.’”); APS Tech., Inc. v. Brant Oilfield Mgmt. & Sales, Inc., 2015 WL 5707161, at  (S.D.N.Y. Sept. 29, 2015) (“The [purchase agreement] contained a one-year limited warranty …, disclaimed all other warranties, and limited [the seller’s] remedies to repair, replacement or refund of the purchase price of the equipment.”). That is not what the parties agreed to here. The Bankruptcy Court in effect read the phrase “refund of purchase price” into the Purchase Agreement. In our view, the operative language is at least ambiguous. See Eternity Glob. Master Fund Ltd. v. Morgan Guar. Tr. Co. of N.Y., 375 F.3d 168, 173 (2d Cir. 2004) (contract terms are ambiguous if they “could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in 32 the particular trade or business” (citation and internal quotation marks omitted)). Consequently, it is permissible to look to the default damages provision set out in N.Y. U.C.C. § 2-714, which states that “[t]he measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted.” That conclusion is supported by the circumstances as they developed. Transit accepted the goods (albeit under protest), proclaimed their satisfactory quality to the MTA/NYCTA, insisted on and received modifications to them, and then used them for several years before replacing them. Interpreting the words “refund all costs incurred by [Transit] associated with warranty” to mean that Transit was free to use the goods, which proved serviceable for longer than the period of the warranty, and then pay nothing – because of a full refund – is at odds with the “overriding goal of UCC remedies[.]” United States for Use & Benefit Saunders Concrete Co., Inc. v. Tri-States Design Const. Co., Inc., 899 F. Supp. 916, 923 (N.D.N.Y. 1995) (citation omitted). That goal is “to put the wronged party in as good a position as it would have been if the other party had fully performed.” Id. The result Transit wants, by contrast, is to be put in a far better position than it would have been absent the breach. Accordingly, the Bankruptcy Court should have calculated the difference in value between the non-conforming Nodes and the contracted-for Nodes, rather than awarding a full refund.13 The only evidence of such damages apparent to 13 Although it is likely now apparent, we also hold that Transit is not entitled to the initial installation costs. The 33 us from the appellate record is the $66,687 that Transit withheld after submitting a final installment on the Milestone 7 invoice. Still, on remand, Transit should have the opportunity to highlight for the Bankruptcy Court any other evidence of the difference in value, should such evidence exist in the trial record.