Baker v. Dec International

580 N.W.2d 894 (1998) 458 Mich. 247

Gerald M. BAKER and wife, Eleanor S. Baker, Plaintiffs-Appellees,
v.
DEC INTERNATIONAL, a foreign corporation, Defendant-Appellant, and
Tri County Dairy Equipment, Inc., a Michigan Corporation, Defendant.

Docket No. 107656, Calendar No. 6.

Supreme Court of Michigan.

Argued April 7, 1998. Decided July 21, 1998.

Reber, Greer, Schuiteman, Stariha & Greer, P.C. (by Robert A. Stariha), Fremont, for plaintiffs-appellees.

Bremer & Nelson, L.L.P. (by William M. Bremer and Phillip J. Nelson), Grand Rapids, for defendant-appellee DEC International.

Fraser, Trebilcock, Davis & Foster, P.C. (by Brian D. Herrington), Lansing, for defendant-appellee Tri County Dairy Equipment Company.

BOYLE, Justice.

We granted leave in this case to determine when the statute of limitations began to run on plaintiffs' implied warranty claims under the Uniform Commercial Code. A breach of warranty occurs, and thus the statute of limitations^[1] begins to run, when tender of delivery is made.^[2] We hold that where the seller is obligated to install goods under a contract, tender of delivery does not occur until installation is completed.^[3] Furthermore, tender of delivery is not contingent on inspection or testing in the absence of a clear contractual obligation to the contrary.^[4] There are genuine issues of material fact regarding whether installation was a material term of the contract and when installation of the milking system actually took place. Therefore, summary disposition in favor of defendants is reversed, and the case remanded to the trial court for further proceedings.

I

Plaintiffs are commercial dairy farmers. They entered into a contract^[5] with defendant Tri County Dairy Equipment for the purchase of a milking machine. Tri County is a dealer for DEC International, a company that manufacturers parts for milking systems. The equipment was delivered from defendant DEC to defendant Tri County on July 26 and 28, 1989. Defendants allege that the equipment was then delivered to plaintiff's farm on or before July 31, 1989. Plaintiffs dispute this date, but concede that the component parts were delivered more than four years before suit was filed. Tri County, assisted by DEC, installed the milking system. Defendants contend, and plaintiffs dispute, that the machinery was installed and operational on September 8, 1989. The Michigan Department of Agriculture tested, approved, and licensed the milking system on September 12, 1989.

On September 10, 1993, plaintiffs filed suit against Tri County and DEC, claiming that the milking system was defective and had damaged their dairy operation. Defendants filed a motion for summary disposition for the breach of warranty claims, alleging that the four-year period of limitation^[6] had run, and the suit was time barred. The trial court granted the motion.

The Court of Appeals reversed and remanded. It held that tender of delivery did not occur until installation of the milking system was complete and that a genuine issue of fact existed regarding when installation was complete. 218 Mich.App. 248, 553 N.W.2d 667 (1996). We granted leave to appeal. 456 Mich. 899, 573 N.W.2d 615 (1997).

II

All parties agree that the warranty provisions of Michigan's version of the UCC are controlling and that the appropriate statute of limitations is M.C.L. § 440.2725; M.S.A. § 19.2725.

Section 2725 provides:

(1) An action for breach of any contract for sale must be commenced within 4 years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than 1 year but may not extend it.

(2) A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.

There have been no allegations of a warranty extending to future performance of the goods.^[7] Thus, the cause of action accrued at the tender of delivery. "Tender of delivery" is defined at M.C.L. § 440.2503(1); M.S.A. § 19.2503(1):

Tender of delivery requires that the seller put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him to take delivery.

Whether a good is a "conforming good" is defined in M.C.L. § 440.2106(2); M.S.A. § 19.2106(2). The statute describes a good as conforming when it is "in accordance with the obligations under the contract."^[8]

The Uniform Commercial Code comment following M.C.L. § 440.2503; M.S.A. § 19.2503 observes that the term "tender" has two different meanings within the section. The first contemplates an "offer coupled with a present ability to fulfill all the conditions resting on the tendering party and must be followed by actual performance if the other party shows himself ready to proceed." This is the preferred meaning unless "the context unmistakably indicates otherwise...."

The second meaning refers to an offer of goods "under a contract as if in fulfillment of its conditions even though there is a defect when measured against the contract obligation."

We are persuaded that the latter definition of "tender of delivery" is more appropriate under these facts. Under M.C.L. § 440.2507; M.S.A. § 19.2507, tender of delivery is a condition to both the buyer's duty to accept the goods and his duty to pay for them. The first definition would be more appropriate where there is nonacceptance of the goods by the buyer. In order for the seller to be entitled to acceptance or payment, the seller must show that he is ready, willing, and able to perform before seeking remedies for breach of contract.^[9]

The second definition of tender anticipates a latent defect in the goods, though performance of the contract otherwise appears to be fulfilled. Professor Hawkland, discussing the two definitions of tender, observed that the term tender is occasionally used "`` in Article 2 of the UCC as an offer by the seller to deliver what he believes incorrectly to be conforming goods.'"^[10] Delineating tender of delivery in this manner is consistent with the policy rationale of providing "a finite period in time when the seller knows that he is relieved from liability for a possible breach of contract for sale or breach of warranty,"^[11] since a seller could not plausibly believe that mere physical delivery would constitute fulfillment of the contract where installation is required under the terms of the contract.

There is support for the holding that the second definition is the more appropriate definition to be applied to UCC 2-725(2). In Standard Alliance Industries v. Black Clawson Co.,^[12] 587 F.2d 813, 819 (C.A.6, 1978), the court observed:

We think that "tender" as used in UCC § 2-725(2) is the latter and not the former. A contrary interpretation would extend the statute of limitations indefinitely into the future since a defect at the time of delivery would prevent proper "due tender" from taking place until it was corrected. Under section 2-725, a cause of action accrues upon initial installation of the product regardless whether it functions properly or not so long as the warranty does not extend to future performance.

In applying the second meaning of tender to the facts of this case, tender would not have occurred until the defendant offered conforming goods. The goods would not be conforming, pursuant to M.C.L. § 440.2106(2); M.S.A. § 19.2106(2), unless the goods were in accordance with the contract obligations. If installation were a term of the contract, then mere physical delivery would not fulfill defendant's contractual obligation. Only when the component parts were fully installed could the defendant be viewed as tendering goods "as if in" fulfillment of its contractual responsibilities.^[13]

We further hold that "tender of delivery" is not contingent upon inspection, testing, or acceptance in the absence of a clear contractual provision to the contrary. Our holding is consistent with many other jurisdictions' interpretations of the UCC.^[14] In the many of these cases, the buyer contends that the presence of a latent defect precludes the tender of delivery of conforming goods.^[15] We agree that this argument must fail, because otherwise the limitation period provided in the statute would never apply until the seller tenders nondefective conforming goods.^[16] This argument would be contrary to the purpose of the statute, which is to provide "a finite period in time when the seller knows that he is relieved from liability for a possible breach of contract for sale or breach of warranty."^[17]

III

Under the facts of this case, the Court of Appeals erred regarding defendant DEC in holding that the statute of limitations began to run after installation. DEC had no contractual obligation to install the milking machine. DEC's agreement was to sell the machinery to Tri County, who in turn sold the goods to the Bakers.

As to defendant Tri County, there is no clear indication that installation was a material term of the contract. Whether the contract between the parties embodied installation is a question properly determined by the trier of fact.^[18] Plaintiff contends that the system was not fully installed until September 12, 1989. Defendant, on the other hand, maintains that the system was demonstrated to the plaintiff (necessarily implying that the system was installed) on September 8, 1989. Because there is a genuine issue of material fact regarding when the milking system was installed, the Court of Appeals was correct in reversing summary disposition in favor of defendant Tri County and remanding the issue to the trial court for further proceedings.

Accordingly, we affirm the decision of the Court of Appeals with respect to defendant Tri County. We reverse the decision of the Court of Appeals and reinstate the trial court's order granting summary disposition to defendant DEC.

BRICKLEY, MICHAEL F. CAVANAGH, and MARILYN J. KELLY, JJ., concur with BOYLE, J.

WEAVER, Justice (concurring in part and dissenting in part).

I concur with the majority's decision to reverse the judgment of the Court of Appeals and reinstate the order granting summary disposition to defendant DEC International (DEC). However, I dissent from the majority's affirmance of the Court of Appeals with regard to defendant Tri County. I would hold that installation is not a prerequisite to tender of delivery, and that in this case tender of delivery was made when the component parts were delivered to plaintiffs' farm. Accordingly, as to defendant Tri County, I would reverse the decision of the Court of Appeals and reinstate the trial court's order granting summary disposition as to both defendants.

I agree with the majority that the cause of action accrued at the time of delivery, and that "tender of delivery" is defined at M.C.L. § 440.2503(1); M.S.A. § 19.2503(1):

Tender of delivery requires that the seller put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him to take delivery.

The majority states that tender has not occurred until the defendant offers conforming goods under M.C.L. § 440.2106(2); M.S.A. § 19.2106(2), which would require that the goods be installed. Subsection 2106(2) provides:

Goods or conduct including any part of a performance are "conforming" or conform to the contract when they are in accordance with the obligations under the contract.

The majority contends that "[i]f installation were a term of the contract, then mere physical delivery would not fulfill defendant's contractual obligation." Op., p. 898.

The difficulty with this reasoning is that installation is part of the defendant's conduct under the contract, not a definition of a characteristic of the goods.^[1] For example, if a contract provided that defendant would install a machine and that defendant would provide a yearly service call on that machine for three years, the majority's reasoning would lead one to say that the goods were not conforming until they were both installed and serviced for three years.

I also find the majority's conclusion to be incorrect in light of the contract between the parties. Even if, as the majority suggests, there were an installation exception to the tender of delivery rule in the UCC, it could only be triggered by a provision in the contract that clearly provides for installation. Review of the appendix shows that there was no such provision.

Of course, parties to a contract involving the sale of a system requiring installation could avoid § 2725, e.g., with an express contract provision specifically designating that "tender of delivery" would not be complete until the system was installed, or otherwise explicitly set a different time of accrual to avoid § 2725's accrual provisions. But there is no evidence of such a contractual provision here.

Where a contract requires a seller both to provide goods and to install them, tender of delivery still occurs upon tender of delivery of the component parts under § 2725. Therefore, I would hold that tender of delivery does not require that the goods be installed.

The majority complains that this rule "reache[s] ``the perverse conclusion that the statute of limitations began to run before the breach occurred.'" Op., p. 895, n. 4 (emphasis added). This is a misstatement. Under the UCC, "A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made...." M.C.L. § 440.2725(2); M.S.A. .§ 19.2725(2). Thus, although plaintiffs may not have discovered the defect at the time the statute of limitations began to run, the breach has nevertheless occurred, according to the UCC, upon tender of delivery.

Section 2725 specifically provides that the aggrieved party's lack of knowledge of the breach is irrelevant. The UCC limitation provision at issue, § 2725, turns on "tender of delivery," not on inspection or acceptance/rejection. We should interpret § 2725 to give meaning to this choice. With respect to sales of goods that require installation, there might be merit in a statute of limitation that would not begin to run until installation or licensing of a system, but the language of § 2725 does not contemplate such a rule. The UCC will cease to be uniform if we depart from its plain language and create a rule that the limitation period does not begin to run until a system is installed or licensed.

I recognize that there is case law supporting a rule that, with respect to sales of goods requiring installation, "tender of delivery" does not occur until the goods are installed. Williston criticizes one such authority as improperly "mix[ing] into its reasoning the thrust of the discovery rule, stating that only after installation was completed was the buyer in a position to determine whether or not the equipment was conforming." 3 Williston, Sales (5th ed.), § 25-55, p. 717. White & Summers state that under § 2725, "the clock ticks even though the buyer does not know the goods are defective." 1 White & Summers, Uniform Commercial Code (4th ed.), § 11-9, p. 607. White & Summers also distinguish § 2725 from tort statutes of limitation that do not run until the plaintiff discovers or reasonably should have discovered the breach. Id. A rule that, with respect to sales of goods requiring installation, tender of delivery does not occur until goods are installed, appears to rest on the rationale that the buyer cannot inspect or test the goods until they are installed. This rationale is unpersuasive in the context of § 2725's provision that a cause of action accrues when the breach occurs (i.e., upon tender of delivery in breach of warranty actions) "regardless of the aggrieved party's lack of knowledge of the breach." On this basis, I disagree with the authorities suggesting that tender of delivery does not occur until installation with respect to sales of goods that require installation.

This rule is consistent with many other jurisdictions' interpretations of the UCC.^[2] The lead case discussing installation is Long Island Lighting Co. v. Transamerica Delaval, Inc., 646 F. Supp. 1442 (S.D.N.Y., 1986). There the court held that the tender of delivery was made when the diesel engines were shipped to the buyer, not when they were installed, even though the seller had continuing responsibility for supervising the installation.

Although there is not a unanimity of result among the other courts,^[3] I would find those cases holding that installation is not a prerequisite to delivery represent the betterreasoned line of cases. The statute of limitations adopted by the UCC is designed to provide a point of finality for businesses, after which they could destroy their business records without the fear of a subsequent breach of warranty action arising from the past. See Hawkland, Uniform Commercial Code Service, § 2-725:02.

The plaintiffs had a remedy against defendants for four years, but failed to use it in a timely manner. Plaintiffs have now asked this Court to change the clear language of the UCC because they filed their suit over a month late. I cannot write to modify the UCC language, despite my sympathy for these plaintiffs.

Accordingly, I would reverse the decision of the Court of Appeals and reinstate the trial court's order granting summary disposition.

MALLETT, C.J., and TAYLOR, J., concur with WEAVER, J.

NOTES

[1] M.C.L. § 440.2725; M.S.A. § 19.2725

[2] M.C.L. § 440.2503; M.S.A. § 19.2503

[3] See 3 Foran, Williston on Sales (5th ed.), § 25-55, p. 716. See also Shero v. Home Show USA, Ltd., 193 A.D.2d 1072, 598 N.Y.S.2d 408 (1993); City of Willmar v. Short-Elliott-Hendrickson, Inc., 475 N.W.2d 73, 80-81 (Minn., 1991); Dreier Co. v. Unitronix Corp., 218 N.J.Super. 260, 270, 527 A.2d 875 (1986); Dowling v. Southwestern Porcelain, Inc., 237 Kan. 536, 544, 701 P.2d 954 (1985); Unitron Graphics v. Mergenthaler Linotype Co., 75 A.D.2d 783, 428 N.Y.S.2d 243 (1980); Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737 (C.A.2, 1979); Val Decker Packing Co. v. Corn Products Sales Co., 23 Ohio Misc. 162, 411 F.2d 850, 851 (C.A.6, 1969).

[4] By placing "emphasis on the date of physical delivery rather than on the terms of the specific contract before it," the dissent's bright-line rule would reach "the perverse conclusion that the statute of limitations began to run before the breach occurred." St. Anne-Nackawic Pulp Co., Ltd. v. Research-Cottrell, Inc., 788 F. Supp. 729, 736 (S.D.N.Y., 1992) (discussing the result reached in Cincinnati v. Dorr-Oliver, Inc., 659 F. Supp. 259 (D.Conn., 1986)).

[5] See appendix, post at 902.

[6] M.C.L. § 440.2725; M.S.A. § 19.2725.

[7] Where a warranty explicitly extends to future performance, the cause of action accrues when the breach is or should have been discovered. Williston on Sales, n. 3 supra, § 25-58, p. 722.

[8] Professor Anderson observes that "it can easily be deduced that the obligation of the seller is to deliver the goods called for by the contract with the buyer. When the goods satisfy the requirements of the contract in every respect, the goods are said to be ``conforming.'" 1 Anderson, Uniform Commercial Code (3d ed.), § 2-106:17, p. 605.

Furthermore, "[n]on-conformity cannot be viewed as a question of the quantity and quality of goods alone, but of the performance of the totality of the seller's undertaking." Wilke v. Cummins Diesel Engines, Inc., 252 Md. 611, 618, 250 A.2d 886 (1969); Southland Mobile Home Corp. v. Chyrchel, 255 Ark. 366, 372, 500 S.W.2d 778 (1973). See also Campbell v. Pollack, 101 R.I. 223, 230, 221 A.2d 615 (1966).

[9] See 17A Am.Jur.2d, Contracts, § 613, p. 621. See also Crowder v. Aurora Co-operative Elevator Co., 223 Neb. 704, 711, 393 N.W.2d 250, (1986) ("Tender is essential in fixing certain rights and duties attendant to a contract for sale of goods").

[10] 2 Hawkland, Uniform Commercial Code Series, § 2-503:2, p. 2-931 (emphasis added). See also Ontario Hydro v. Zallea Systems, Inc., 569 F. Supp. 1261 (D.Del., 1983); Allied Semi-Conductors Int'l, Ltd. v. Pulsar Components Int'l, Inc., 907 F. Supp. 618 (E.D.N.Y., 1995).

[11] Cincinnati v. Dorr-Oliver, Inc., n. 4 supra at 263, quoting Ontario Hydro v. Zallea Systems, Inc., n. 10 supra at 1267.

[12] See also Jandreau v. Sheesley Plumbing & Heating Co., 324 N.W.2d 266, 271 (S.D., 1982).

[13] The dissent cites Neibarger v. Universal Cooperatives Inc., 439 Mich. 512, 486 N.W.2d 612 (1992), for the proposition that the installation services were incidental to the contract for the milking machinery. While this is true, the predominant purpose test is only relevant in determining whether the UCC controls. It has no effect on the overall contractual obligations defendants owed to the plaintiff, and no effect on tender of delivery for the purposes of M.C.L. § 440.2725; M.S.A. § 19.2725.

Long Island Lighting Co. v. Transamerica Delaval, 646 F. Supp. 1442 (S.D.N.Y., 1986), is the only case cited by the dissent for the proposition that installation is not required to effectuate tender of delivery. In that case, the seller had continuing responsibility for supervising installation. The opinion distinguishes the facts of the case from New York City v. Pullman, Inc., 662 F.2d 910 (C.A.2, 1981), cert. den. sub. nom. Rockwell Int'l Corp. v. New York City, 454 U.S. 1164, 102 S. Ct. 1038, 71 L. Ed. 2d 320 (1982), in coming to the conclusion that tender of delivery occurred upon delivery. However, neither the official comments to UCC 2-503 nor other case law is discussed in reaching the holding. Because the analysis in Long Island Lighting is cursory and does not address all the countervailing considerations, it is questionable whether its holding represents the "better reasoned" view. Op. at 901.

[14] Many courts have held that contractual provisions for postdelivery testing or inspection do not toll the accrual of breach of warranty claims. See Cincinnati, Ohio v. Dorr-Oliver, n. 4 supra; H. Sand & Co., Inc. v. Airtemp Corp., 738 F. Supp. 760 (S.D.N.Y., 1990); Ontario Hydro v. Zallea Systems, Inc., n. 10 supra.

[15] See Cincinnati v. Dorr-Oliver, n. 4 supra at 263; Ontario Hydro v. Zallea Systems, Inc., n. 10 supra at 1267.

[16] See Ontario Hydro v. Zallea Systems, Inc., n. 10 supra at 1267.

[17] Id. Our decision today merely holds that a seller has not tendered delivery within the meaning of M.C.L. § 440.2725; M.S.A. § 19.2725 until he has satisfied the requisite contractual obligations, which may or may not include installation. The holding today is not premised on the discovery rule. We agree that the plain language of the statute renders a buyer's actual knowledge (or lack thereof) of defects totally irrelevant for the purposes of the accrual of the cause of action. We note, however, that a plain reading of M.C.L. § 440.2725; M.S.A. § 19.2725, places an affirmative obligation on the buyer to determine if the goods are defective and to seek remedies within the four-year period of limitation.

A buyer has the right to inspect for defects in goods under a sales contract "at any reasonable place and time and in any reasonable manner" under M.C.L. § 440.2513; M.S.A. § 19.2513. A buyer acts to his detriment if he does not become aware of latent defects, or does not seek the appropriate remedies for breach of implied warranties within the four-year period. The fact that a buyer's knowledge is irrelevant for the purposes of the accrual of the statute of limitations should not preclude the buyer from having the opportunity to inspect after the seller has tendered goods that otherwise conform to the contract.

[18] The dissent maintains that because installation was not an express term of the contract, tender of delivery does not require installation of the goods. Op. at 900. The provision of the UCC dealing with parol evidence is M.C.L. § 440.2202; M.S.A. § 19.2202, which provides:

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing 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....

Professor Anderson notes that

[b]y definition, the parol evidence rule is not applicable when the writing is not the complete contract, in which case apart from UCC § 2-202 there is no applicable regulation of the matter. When the parties did not regard their purchase order as the final expression of their agreement, parol evidence is admissible to establish what that agreement was. [2 Anderson, Uniform Commercial Code (3d ed.), § 2-202:51, p. 168.]

While review of the appendix, post at 902, shows that there was no express provision regarding installation, we note that there is also no provision declaring that the contract was intended to serve as a complete integration of the agreement between the parties.

[1] As in Neibarger v. Universal Cooperatives, Inc., 439 Mich. 512, 486 N.W.2d 612 (1992), the overall thrust of the dealings between the parties reveals that the transaction was a sale of goods, and that the installation and training services were incidental to the contract for the purchase of the milking system.

[2] "Tender of delivery" is not contingent upon inspection, testing, or acceptance. Cincinnati, Ohio v. Dorr-Oliver, Inc., 659 F. Supp. 259 (D.Conn., 1986). The plaintiff buyer and the defendant seller entered into a contract for the purchase of sixteen centrifuges for the thickening of excess activated sludge at plaintiff's waste water treatment plant. The centrifuges were delivered on July 22, 1974. The parties' contract required extensive testing before and after installation. The equipment was not accepted by the plaintiff until November 5, 1981.

In H. Sand & Co., Inc. v. Airtemp Corp., 738 F. Supp. 760 (S.D.N.Y., 1990), the court held that even the delivery of nonconforming goods can constitute a tender of delivery and that within the meaning of the UCC "tender and delivery" occurred upon the shipment of the goods and not upon installation and inspection. The plaintiff ordered four centrifugal chillers from the defendant for installation in a local Port Authority Bus Terminal. The plaintiff came into physical possession of the goods by March of 1978, but contended that "tender and deliver" did not occur until the installation and inspection of the fourth and last centrifuge in January of 1979.

[3] In Dreier Co., Inc. v. Unitronix Corp., 218 N.J.Super. 260, 527 A.2d 875 (1986), the court held that when dealing with computer systems the cause of action for a breach of warranty cannot occur until the entire system, hardware and software, is delivered and completely installed. "Tender and Delivery" in terms of computer software must be viewed in the context of the complexity of computer systems. Plaintiff purchased a computer system from the defendant, consisting of hardware and "custom programmed software" for the plaintiff's needs. The defendant warranted that the equipment would be in good working order following installation within a period of 180 days. City of Willmar v. Short-Elliott-Hendrickson, Inc., 475 N.W.2d 73 (Minn., 1991). Defendant sold plaintiff a series of rotating biological contractors (RBC's) for its wastewater treatment facility. The defendant argued that the statute of limitations began to run on the date of delivery of the goods. The Court held that until the RBC's had been fully installed and tested, there could be no tender of delivery of goods, but once the goods failed to meet the standards after installation and testing, the statute of limitations began to run.

Dowling v. Southwestern Porcelain, Inc., 237 Kan. 536, 701 P.2d 954 (1985). The plaintiff purchased a silo from the defendant and a third party in 1978. The parties stipulated that the third party would "assist [the plaintiff] in setting up and in training your erection and service people." The plaintiff found that the silo was not keeping the stored grain well. The third party was of business, so plaintiff asked defendant to correct the problem. The defendant attempted to do so, unsuccessfully. The court held that the statute of limitation did not begin to run until the installation of the silo was complete, because the plaintiff purchased a "package deal" and not just the raw material needed to build the silo. Id. at 543, 701 P.2d 954.