By: Thomas S. Tripodianos Published: February 2010

Buyer and seller's e-mail exchange was not an enforceable written agreement.

Question. Owner issued a request for proposal ("RFP") to various potential suppliers for the design, manufacture and installation of a geothermal heating system at Owner's New York facility. In response to the RFP, Contractor offered to design, manufacture, inspect, test and install a solar system. Owner informed Contractor of the energy savings it expected to realize at the facility. Contractor represented to Owner that it could design, manufacture, inspect, test and install a solar system that would perform in a superior manner compared to a geothermal system. Contractor also represented several times in writing that it had manufactured several solar systems of the size and type contained in Owner's RFP.

As a result of their negotiations, Contractor prepared a final quotation for the design, manufacture, inspection, testing and installation of a solar system. In reliance on the representations and warranties contained in Contractor' final quotation, Owner agreed to purchase a solar system from Contractor. Owner and Contractor executed an equipment purchase agreement ("Purchase Agreement") for the solar system ("Equipment"); the Purchase Agreement incorporated the final quotation that Contractor had prepared and required that time was of the essence for the delivery of the Equipment.

The Purchase Agreement contained implied warranties of merchantability, fitness for a particular purpose and warranties arising from course of dealing or usage of trade. The Purchase Agreement also contained several express warranties, including a performance warranty that the Equipment would perform in accordance with the performance requirements as set forth in the specifications, that the Equipment would be designed and manufactured to conform to the specifications, and that the Equipment would be merchantable, of good material and workmanship, free from defects and fit and sufficient for the intended purpose.

Due to Contractor' fault, the delivery and installation of the system fell behind the schedule set forth in the Purchase Agreement.

Since its installation, the solar system has never functioned according to the terms of the Purchase Agreement and has been shut down on numerous occasions for repair. The system failed within the first eleven months of operation and had to be shut down for repairs. Contractor has undertaken several repair attempts on a number of occasions. Since it installed the system Contractor has replaced several parts of the system. Defendant Contractor paid for the replacement parts and repairs, acknowledging that the problems were due to its conduct and were its responsibility.

On repeated occasions Contractor admitted that the system was manufactured in a defective manner and that it could not function for its intended and/or particular purpose. On several occasions Owner requested that Contractor replace the system.

Contractor modified the Purchase Agreement and provided an additional warranty of future performance for one year that, if the system failed within one year, Contractor would replace the system. The system failed shortly thereafter and Owner asked Contractor to manufacture and deliver a new system.

Owner and Contractor had several meetings regarding the design, manufacture, inspection, testing, installation and operation of a replacement system to be supplied at Contractor' cost. Owner and Defendant Contractor came to an agreement relating to the replacement system ("Replacement Agreement"). The Replacement Agreement provided that Contractor would design, manufacture, inspect, test and install a replacement solar system with what Contractor described as "better technology" and continue to repair the existing system until the replacement system could be installed.

The Replacement Agreement also provided that, in exchange for Contractor' agreement to provide a new solar system and for continuing to repair the existing one, Owner would award Contractor and certain of its affiliates preferred vendor status for identified projects.

Owner and Contractor had several meetings about the design, manufacture, inspection, testing, installation and operation of the replacement system under the terms of the Replacement Agreement; Contractor began performance under the terms of the Replacement Agreement; and Owner awarded certain projects to Contractor and/or certain of its affiliates pursuant to the preferred vendor status arrangement. Sometime thereafter Contractor requested an inspection of the existing system at the facility. Contractor conducted an inspection of the existing system at the Facility. Contractor' repair crew arrived at the Facility to begin a round of repairs, which Contractor had estimated would take four to five weeks to complete.

At approximately the same time Owner met with Contractor. At that meeting, Contractor took the position, for the first time, that Owner was at fault for the performance failures because of misuse of the system. These were the same performance failures that Contractor had previously admitted were due solely to its defective manufacturing. After the meeting, Contractor refused to design, manufacture, inspect and test the replacement system and refused to continue to repair the existing system as required under the terms of the Replacement Agreement.

Question. With respect to the Replacement Agreement, there are three issues that the parties dispute:

(1) whether the Replacement Agreement was a new agreement or was a modification of the Purchase Agreement;
(2) whether a written Replacement Agreement exists and; if not,
(3) whether there is an enforceable oral Replacement Agreement based on the doctrine of partial performance.


1. New agreement or modification of the Purchase Agreement?
Owner contends that the Replacement Agreement is a new agreement, not a modification of the Purchase Agreement. Contractor, on the other hand, contends that the Replacement Agreement is a modification of the Purchase Agreement. The characterization of the Replacement Agreement is only important if the Replacement Agreement is an oral agreement.

If the Replacement Agreement was an oral agreement and that the Replacement Agreement was a modification of the Purchase Agreement, then Owner's claim would fail. Pursuant to the Purchase Agreement, "[n]o amendment to this Agreement shall be effective unless it is in writing and signed by duly authorized representatives of both parties." Therefore, under this paragraph, no oral modification of the Purchase Agreement would be enforceable. For purposes of discussion let’s accept Owner's assertion that the Replacement Agreement is a new agreement and not merely a modification of the Purchase Agreement.

2. Written or oral agreement?
Assuming that the Replacement Agreement is a new agreement, separate and distinct from the Purchase Agreement, there is a question whether the e-mail exchange between the parties is sufficient to create a written agreement. Under § 2-201(1) of New York's Uniform Commercial Code, "a contract for the sale of goods for the price of $500.00 or more is not enforceable an authorized agent of the defendant has signed a writing indicating the existence of the contract." Owner asserts that the Contractor’s e-mail of to Owner constitutes the Replacement Agreement. That e-mail states as follows:

John,
This is to confirm that we have reached an agreement combining Contractor's commitment to replace the solar system with Owner's commitment to award business to Contractor.
1. Contractor to repair the existing system,-allowing Owner to operate the system. Owner will bear 50% of the repair cost including testing.
2. Contractor will fabricate a new system. Contractor will bear the cost of the new system- Owner will bear the cost of removing the existing system [f]rom its location and installing the new system in that location.

Owner will commit to award the following business to Contractor:
{LISTING OF FUTURE PROJECTS OMITTED}

For this business Contractor would have a ‘Preferred Vendor Status' = Rights of first refusal.
Precondition:
Contractor must be technically qualified and competitive.
You and I will have to work out the contract and submit it to the respective management for approval and signature.


Agreements to agree are not recognized as binding obligations under New York law. There is a strong presumption against finding binding obligation in agreements which include open terms, call for future approvals and expressly anticipate future preparation and execution of contract documents. There is an established a framework for analyzing whether a written instrument constitutes a binding preliminary agreement or an unenforceable agreement to agree.

Ordinarily, where the parties contemplate further negotiations and the execution of a formal instrument, a preliminary agreement does not create a binding contract. Under some circumstances, however, preliminary agreements can generate contractual obligations. One example of such an agreement is where the parties have agreed on all points that require negotiation including whether to be bound, but agree to memorialize their agreement in a more formal document. Such an agreement is fully binding; it is preliminary only in form-only in the sense that the parties desire a more elaborate formalization of the agreement.

Furthermore, there is a four-part test for determining whether the parties intended their written statements to constitute a binding contract. These factors are: (1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.

The first factor, the language of the agreement, is the most important. In this case, the language of Contractor’s e-mail to Owner demonstrates that his e-mail was not a fully binding preliminary agreement. Although Contractor used the word "Agreement" in the subject line of his e-mail and noted that this e-mail "confirm[s] that we have reached an agreement," it is clear that, when read in its entirety, this e-mail does not constitute an agreement under New York law. Most particularly, the last line of the e-mail, in which Contractor stated that he and Owner would have to "work out the contract and submit it to the respective management for approval and signature[,]"makes clear that this e-mail is not a formal memorialization of an intent to be bound. To the contrary, this email indicates that the parties still have to "work out the contract" and that, before the parties are bound, they have to submit the contract to management for approval.

Furthermore, it is clear from subsequent e-mails in this exchange between Contractor and Owner that the parties had not agreed to all of the terms of the alleged contract. In a subsequent e-mail Owner wrote to Contractor that, although Owner is "in agreement to move forward" as Contractor proposed, there were "two clarifications" that he "planned to include on the proposal," and he indicated that he would begin to work with Owner's legal counsel to formalize Contractor’s proposals and that he would call later "to confirm that Owner was "ready to move forward as [he had] outlined."

One month later, in an e-mail Owner wrote to Contractor that he was forwarding "the current draft of the formal agreement" and informed him that "[t]his draft is still being reviewed internally at Owner, so [Owner] may make some changes as well...." He also asked Contractor to "review [the draft] and send [him] any comments that [he might] have." In addition, he stated that he would set up a call with Contractor and others "to go through a detailed review of any questions, additions or changes that [Contractor might] have." Finally, Owner stated that he thought the parties were "moving forward to a successful closure of this issue, but want[ed] to make sure [the parties] close on the formal contract as soon as possible."

Given the strong presumption against finding binding obligation in agreements which include open terms, call for future approvals and expressly anticipate future preparation and execution of contract documents, it is clear that the e-mail exchange between Contractor and Owner does not constitute a written contract.


3. Applicability of partial performance exception to § 2-201(1)
Since we have concluded that the e-mail exchange does not constitute a written Replacement Agreement, we must next determine whether the "partial performance" exception to § 2-201(1)'s writing requirement applies to this case.

Section 2-201(3), which allows for this exception, provides that
[a] contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable
(a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or
(b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or
(c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Section 2-606).

Owner contends that, under the terms of the Replacement Agreement, Contractor agreed to "design, manufacture, inspect, test and install a replacement solar system at the Facility ... [and] agreed to repair the existing solar system at the Facility until the replacement solar system was delivered." Owner also claims that "[t]he Replacement Agreement ... provided that, in exchange for Contractor’s agreement to provide a new solar system and for continuing to repair the existing Equipment, Contractor would be awarded preferred vendor status for identified Owner projects." Finally, Owner asserts that Contractor began performance under the terms of the Replacement Agreement, and in reliance thereon, Owner awarded certain projects to Contractor to their preferred vendor status arrangement.

Partial performance’ as a substitute for the required writing can validate the contract only for the goods which have been accepted or for which payment has been made and accepted. The reasoning is that if the subject of a contract is an indivisible unit, even part performance under the contract tends to prove the existence of the entire contract.

In this case, there is no doubt that the replacement solar system is a single indivisible unit. What is at issue, however, is whether both parties partially performed under the Replacement Agreement. Owner alleges that Contractor began performance under the terms of the Replacement Agreement and that, "in reliance [on Contractor performance, Owner awarded certain projects to Contractor pursuant to their preferred vendor status arrangement.

These allegations when accepted as true support a claim for breach of the Replacement Agreement and defeat the argument that the Replacement Agreement is unenforceable under the Statute of Frauds

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