BAE Sys. Info. v . SpaceKey Components 10-CV-370-LM 4/22/13 P
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
BAE Systems Information
and Electronics Systems
Integration, Inc.
v. Civil N o . 10-cv-370-LM
Opinion N o . 2013 DNH 064 P
SpaceKey Components, Inc.
O R D E R
In an order dated January 1 1 , 2013, the court directed the
parties to show cause why three legal issues in this case should
not be decided in the manner described in that order. The
parties’ show-cause briefing is now before the court. Based
upon that briefing, and for the reasons that follow, this order
resolves the issues described in the show-cause order largely
along the lines proposed in that order.
Issue One
In their assented-to statement of the case, the parties
frame the first issue this way:
The first [issue] is a dispute over purchase
order SKC12508 and BAE Systems’ delivery of flight
RH1280B field programmable gate arrays (“FPGAs”) to
SpaceKey in 2009 and 2010. BAE Systems seeks to
recover the balance under purchase order SKC12508 that
remains unpaid by SpaceKey as well as the costs and
attorneys’ fees it has incurred to pursue collection
of this amount. (Amended Complaint Counts I I I , IV, V ,
IV.) SpaceKey contends it is entitled to damages
because the flight RH1280B FPGAs BAE Systems delivered
did not conform to BAE’s express warranties.
(Counterclaim Count Four.)
Def.’s Pretrial S’ment (doc. n o . 115) 1 ; Pl.’s Pretrial S’ment
(doc. n o . 119) 1-2. In its previous order, the court directed
SpaceKey [to] show cause why BAE should not be granted
judgment as a matter of law o n : (1) the claim for
breach of contract stated in Count IV of BAE’s amended
complaint; and (2) the claim for breach of warranty
stated in Count Four of SpaceKey’s counterclaim.
Order (doc. n o . 122) 1 3 .
The court’s proposed resolution of Issue One is based upon
a three-part rationale. First, the Uniform Commercial Code
(“U.C.C.”) permits a buyer and seller to limit the buyer’s
remedies for breach of warranty by agreement, so long as the
agreed-upon remedy does not fail of its essential purpose. See
N.H. Rev. Stat. Ann. (“RSA”) §§ 382-A:2-719(1)(a) & ( 2 ) .
Second, Section 8(b) of the 2007 Terms of Sale (“TOS”) 1 provides
that if the hardware BAE delivered thereunder did not
substantially conform to BAE’s specifications, then SpaceKey’s
sole remedy was “return within 60 days of delivery of any
nonconforming Deliverables for credit, repair or replacement, at
BAE SYSTEMS’ sole option.” Pl.’s Mot. for Leave, Rea Decl., Ex.
1
The transactions at issue in this case were governed by
two different iterations of BAE’s Terms of Sale. When used in
this order, the abbreviation “TOS” refers exclusively to the
2007 version, which governed the largest transaction. The other
relevant version will be referred to as “2008 TOS.”
2
G (doc. n o . 112-3), at 2 7 . Third, the remedy provided by the
TOS did not fail of its essential purpose, which precludes
SpaceKey from receiving any remedy for BAE’s asserted breach of
warranty other than the one described in the TOS.
SpaceKey raises a host of objections to the reasoning
outlined above. Specifically, it argues that: (1) the cases the
court cited in its previous order are irrelevant because they
involve contracts with purchase-price damage ceilings and claims
for consequential damages; (2) the cases the court cited do not
state a general rule that a refund never fails of its essential
purpose, and there is no difference between the “value” and the
“benefit” of a bargain; (3) while the return-for-credit remedy
described in Section 8(b) of the TOS is apparently fair and
reasonable, it failed in its purpose because of circumstances;
(4) the cases the court cited are distinguishable because they
do not address the sufficiency of a credit remedy, and the
failure of BAE’s RH1280s to conform to BAE’s warranties was
latent; and (5) there is no procedural basis for the court to
grant judgment as a matter of law as it proposed to do in its
previous order. The court considers each of those five
arguments, beginning with the last one.
3
A . SpaceKey’s Fifth Argument
SpaceKey argues that the court’s show-cause order lacks a
procedural foundation, and contends that the court should not:
(1) treat proposed findings of fact as if they are facts found
at trial; (2) grant summary judgment sua sponte without
identifying evidence appropriate to that procedural posture; or
(3) find facts and draw inferences unfavorable to i t .
In particular, SpaceKey objects to the following portion of
the court’s previous order:
[T]he court turns to the undisputed facts of this
case. All agree that . . . after it learned of the
alleged TID shortfall, SpaceKey submitted purchase
order (“PO”) SKC12508(C) to BAE, in which it offered
to buy 535 FPGAs with a TID of 100K rad(Si) and 100
more FPGAs with a TID of 50K rad(Si).
Order (doc. n o . 122) 1 0 . In support of its objection to that
statement, SpaceKey points to evidence that it mentioned TIDs of
50K and 100K rad(Si) in its purchase order not because it was
ordering FPGAs with those specifications but, rather, to create
contemporaneous documentation of BAE’s inability to produce
FPGAs with a TID of 300K rad(Si).
Based upon the parties’ pretrial statements, it became
evident that the trial in this case could involve several
complex factual issues. For example, BAE proposes to prove that
the FPGAs it delivered to SpaceKey actually conformed to its
warranty, and plans to do so by showing that the standards for
4
measuring TID have changed over time such that an FPGA that
would have been rated at 300K rad(Si) at some point in the past
would only test out at 100K rad(Si) today. For its part,
SpaceKey proposes to prove the value of the allegedly
nonconforming FPGAs that BAE delivered, based upon the
diminished use life of a 50K or 100K rad(Si) FPGA as opposed to
one rated at 300K rad(Si). The point of the court’s previous
order was to determine whether the complicated and no doubt
costly trial the parties envision is actually necessary, based
upon the undisputed facts and the relevant law.
In the discussion that follows, the court: (1) assumes that
the FPGAs BAE sold SpaceKey did not meet the warranted
specifications; (2) accepts as true, for purposes of this order,
SpaceKey’s explanation for the inclusion of TIDs of 50K and 100K
rad(Si) in PO SKC12508(C); and (3) relies only upon facts that
were undisputed on summary judgment, plus those contained in the
2007 TOS, which has made a belated appearance in this case. In
sum, the order that follows engages in no factfinding, only a
legal analysis of the undisputed facts, undertaken in an effort
to conserve judicial resources and those of the parties by
avoiding a costly trial of factual matters that are immaterial
to resolving the claims in this case.
5
B . SpaceKey’s First Argument
In its first argument, SpaceKey devotes considerable
attention to four of the opinions to which the court turned for
guidance on the question of when and how a contractual remedy
fails of its essential purpose. Those opinions are PDC
Laboratories, Inc. v . Hach Co., N o . 09-1110, 2009 WL 2605270
(C.D. Ill. Aug. 2 5 , 2009); Cox v . Lewiston Grain Growers, Inc.,
936 P.2d 1191 (Wash. C t . App. 1997); Leprino v . Intermountain
Brick Co.,
759 P.2d 835 (Colo. App. 1988); and Viking Yacht C o .
v . Composites One LLC, Civ. Action N o . 05-538(JEI),
2007 WL
2746713 (D.N.J. Sept. 1 8 , 2007). SpaceKey’s point is that the
cases that resulted in PDC Labs, Cox, Leprino, and Viking Yacht
are distinguishable from this case, making those opinions
irrelevant, because unlike this case, those cases all involved
claims for consequential damages asserted in the face of
contractual clauses limiting damages to the contract price.
SpaceKey also contends that the court erred by relying upon
those four cases because the courts that decided them all did so
in ways that run counter to New Hampshire law as stated in Xerox
Corp. v . Hawkes,
124 N.H. 610 (1984).
Starting with SpaceKey’s second argument, the court cannot
agree that PDC Labs, Cox, Leprino, and Viking Yacht are contrary
to New Hampshire law. In Xerox, the New Hampshire Supreme Court
6
explained that a seller can limit the remedies available for a
breach of warranty to repair or replacement, under RSA 382-A:2-
719(1)(a), and may limit or exclude consequential damages as an
available remedy, under RSA 382-A:2-719(3). See 124 N.H. at
617. A limited remedy is permissible under RSA 382-A:2-
719(a)(1) so long as it does not fail of its essential purpose,
see RSA 382-A:2-719(2), and a limitation or exclusion of
consequential damages is permissible so long as the limitation
or exclusion is not unconscionable, see RSA 382-A:2-719(3).
Substantively, the Xerox court determined that in the case
before i t , “the allegations [did] not provide the basis for a
ruling that a material issue may exist regarding possible
unconscionability of the clauses in dispute.”
124 N.H. at 618.
Regarding the interplay between RSA 382-A:2-719(2) and ( 3 ) ,
the court in Xerox explained:
[O]ther courts, interpreting the effect of the
“failure of essential purpose” Code provision in cases
where there is proof of an inability to repair non-conforming goods, have not invalidated contractual
limitations on incidental or consequential damages.
Those portions of a contract disallowing incidental
and consequential damages are considered separate and
distinct from the language dealing with repair and
replacement. Such damage limitations survive even if
the contractual provision limiting the buyer’s
remedies to repair or replacement is judicially
stricken. See Polycon Industries, Inc. v . Hercules,
Inc., 471 F. Supp. 1316, 1324-25 (E.D. Wis. 1979);
County Asphalt, Inc. v . Lewis Welding & Engineering
Corp., 323 F. Supp. 1300, 1309 (S.D.N.Y. 1970); S.M.
Wilson & Company v . Smith Intern., Inc., 587 F.2d
7
[1363,] 1375 [(9th Cir. 1978)]. In County Asphalt,
Inc. v . Lewis Welding & Engineering Corp.[,] supra,
the federal district court held that a consequential
damage limitation would not be affected by a finding
of failure of essential purpose due to inability to
repair or replace. Supra at 1309.
Xerox, 124 N.H. at 619-20. To paraphrase, the rule of Xerox is
that if an agreement between a buyer and seller includes an
exclusion of consequential damages that is not unconscionable,
that exclusion is not rendered inoperative when an agreed-upon
limited remedy fails of its essential purpose. Under such
circumstances, the buyer may seek remedies as provided elsewhere
in Article 2 of the U.C.C. See Colonial Life Ins. C o . of Am. v .
Elec. Data Sys. Corp.,
817 F. Supp. 235, 240-41 (D.N.H. 1993).
There is nothing in PDC Labs, Cox, Leprino, or Viking Yacht that
runs counter to the rule stated in Xerox.
In PDC Labs, the agreement between the buyer and the seller
included a limitation on remedies, see 2009 WL 2605270, at * 2 ,
subject to analysis under section 2-719(2) of the U.C.C., but
does not appear to have included an exclusion of consequential
damages. As a result, there was no call for the court in PDC
Labs to choose between the Xerox rule, or the alternative rule,
situated on the other side of the “deep division of opinion,”
Colonial Life,
817 F. Supp. at 240 (quoting McKernan v . United
Techs. Corp., Sikorsky Aircraft Div.,
717 F. Supp. 6 0 , 71 (D.
Conn. 1989)) (internal quotation marks omitted), on the issue of
8
the relationship between sections 2-719(2) and (3) of the U.C.C.
S o , too, with Leprino. Like the court in PDC Labs, the court in
Leprino was faced with a contract that included a limitation of
remedies but not an express exclusion of consequential damages.
See 759 P.2d at 836. Like the PDC Labs court, the Leprino court
assessed the conscionability of the limitation of remedies
provision under section 2-302 of the U.C.C., see PDC Labs,
2009
WL 2605270, at * 2 ; Leprino,
759 P.2d at 836-37, but did not
assess the conscionability of an exclusion of consequential
damages because neither agreement included such a provision.
Thus, as in PDC Labs, the court in Leprino never had the
opportunity to consider the application of the Xerox rule, much
less make a decision that ran contrary to i t .
In Cox, when the buyer picked up a load of winter wheat
seed from the seller, the seller “issued a delivery ticket to
the truck driver . . . [that] limited [the seller]’s liability
to the purchase price of the seed.” 936 P.2d at 1194. Judge
Thompson referred to the provision set forth in the delivery
ticket in a manner that evokes both sections 2-719(2) and ( 3 ) ,
as “the limitation of remedies clause (exclusionary clause).”
Cox,
936 P.2d at 1195. There is no indication, however, that
the delivery ticket in Cox included an express exclusion of
consequential damages of the sort addressed by section 2-719(3).
9
Absent an exclusion of consequential damages other than the
exclusion that might be implied by the limitation of remedies to
the purchase price of the seed, the facts of Cox are similar to
those of PDC Labs and Leprino. But, in any event, whatever the
legal status of the language in the delivery ticket, Judge
Thompson ruled that “the [trial] court did not err in finding
the exclusionary clause unconscionable.” Id. at 1198. Because
the decision in Cox did not involve an award of consequential
damages in the face of a conscionable exclusion of consequential
damages, nothing in that opinion contravenes the Xerox rule.
Finally, there is Viking Yacht. Of the four opinions
SpaceKey identifies as making rulings that run contrary to New
Hampshire law, this is the only one that unambiguously involved
both a limitation of remedies and an exclusion of consequential
damages. See 2007 WL 2746713, at * 4 . The problem with
SpaceKey’s analysis of Viking Yacht is that Judge Irenas
followed the Xerox rule. First, he determined that if the
limitation of remedies to replacement or refund applied, that
remedy would fail of its essential purpose. See Viking Yacht,
2007 WL 2746713, at * 6 . Having made that determination, Judge
Irenas continued:
This leaves the question of the validity of the
exclusion of consequential and incidental damages
clause. As noted in Chatlos Sys., Inc. v . Nat’l Cash
Register Corp. (NCR Corp.), 635 F.2d 1081, 1086 (3d
10
Cir. 1980), “[s]everal cases have held that when a
limited remedy fails of its purpose, an exclusion of
consequential damages also falls, but approximately
the same number of decisions have treated that
preclusion as a separate matter.” In Chatlos, the
Third Circuit adopted the latter approach. Chatlos
involved an exclusive repair remedy, which the Court
held was unenforceable due to the untimeliness of the
repair of the faulty installation of a computer
system. Id. at 1086. The Court held that the
exclusion of consequential damages should be reviewed
independently, and should stand if not unconscionable.
Id.; see also N.J. Stat. § 12A:2-719(3). However, it
also stated that unconscionability is to be decided
under the circumstances, and it is relevant to
consider the failure of the essential purpose of a
contractual remedy when making this determination.
Id.
2007 WL 2746713, at * 7 . In other words, the law of the Third
Circuit as expressed in Chatlos, which Judge Irenas applied in
Viking Yacht, is identical to New Hampshire law, as announced in
Xerox. And, indeed, after determining that the limited remedy
in Viking Yacht failed of its essential purpose, Judge Irenas
conducted a separate analysis of unconscionability. See Viking
Yacht,
2007 WL 2746713, at * 7 . Accordingly, there is no basis
for arguing that Viking Yacht runs counter to New Hampshire law.
Not only is there nothing in PDC Labs, Cox, Leprino, or
Viking Yacht that runs counter to New Hampshire law, but,
perhaps more importantly, even if any of those opinions had
taken the approach to the relationship between sections 2-719(2)
and (3) that the Xerox court rejected, this court relied on
those opinions for what they had to say on an issue unrelated to
11
the interplay between sections 2-719(2) and (3) of the U.C.C.
In its show-cause order, the court agreed with SpaceKey that
Xerox offers little guidance on the question of how to determine
whether a limited remedy fails of its essential purpose, and
then turned to opinions in cases from outside New Hampshire.
But, the court drew no rules of law from those opinions other
than their discussions of the principles and mechanics for
determining whether a limited remedy fails of its essential
purpose.
Beyond that, the factual distinction SpaceKey uses to argue
the irrelevance of those out-of-state cases, i.e., the fact that
they involved buyers who sought consequential damages, played no
part in the court’s discussion or analysis. Thus, the
possibility of an award of consequential damages in those cases
does nothing to undermine the validity of the court’s reliance
on them. Moreover, the fact that the plaintiffs in PDC Labs,
Cox, Leprino, and Viking Yacht sought consequential damages is a
distinction without a difference. In those cases, the
plaintiffs argued that they were entitled to seek consequential
damages because a contractual limitation of remedies to a refund
of the purchase price failed of its essential purpose. Here,
SpaceKey argues that it is entitled to seek a partial refund of
its purchase price because a contractual limitation of remedies
12
to return for credit failed of its purpose. The remedies sought
and the contractual limitations in the out-of-state cases are
different from those in this case. However, the legal principle
is the same: in order to be entitled to seek a remedy for breach
of warranty other than one specified by a contract between a
buyer and a seller, the buyer must establish that the agreed-
upon remedy, whatever it may b e , fails of its essential purpose.
In sum, SpaceKey’s first argument is without merit.
C . SpaceKey’s Second Argument
SpaceKey’s second argument is that: (1) the cases the court
cited do not establish a general rule that a refund never fails
of its essential purpose; and (2) there is no meaningful
difference between the “value” and the “benefit” of a bargain.
The court begins by noting that, notwithstanding the
argument that SpaceKey appears to be making in Section II of its
memorandum, the resolution of Issue One proposed in the show-
cause order does not rely on a general rule that a refund remedy
can never fail of its essential purpose. Such a remedy can
fail. Cox, Leprino, Viking Yacht, and PDC Labs describe
circumstances under which that might happen. That said, the
court turns to the argument SpaceKey makes in the body of
Section I I .
13
SpaceKey develops the main part of its second argument by
contending that: (1) the purpose of a remedy for breach of
warranty is to receive conforming goods; (2) nothing in White v .
Microsoft Corp., 454 F. Supp. 2d 1118 (S.D. Ala. 2006); Stearns
v . Select Comfort Retail Corp., N o . 08-2746 J F ,
2009 WL 1635931
(N.D. Cal. June 5 , 2009); or Taylor Investment Corp. v . Weil,
169 F. Supp. 2d 1046 (D. Minn. 2001), stands for the proposition
that “the mere availability of a refund – without regard to
whether conforming goods can be obtained with that sum – is
enough to prevent a remedy from failing of its essential
purpose,” Def.’s Mem. (doc. n o . 124) 1 4 ; and (3) both Stearns
and White “involved remedies that did, in fact, provide the
plaintiffs with what they wanted – conforming goods,”
id. at 1 5 .
SpaceKey summarizes the main part of that argument this way:
Neither Stearns [v. Select Comfort Retail Corp.,
N o . 08-2746 J F , 2009 WL 1635931 (N.D. Cal. June 5 ,
2009)] nor White [v. Microsoft Corp., 454 F. Supp. 2d
1118 (S.D. Ala. 2006)] stands for “the proposition
that a buyer who returns a defective product for a
refund does receive the substantial value of his or
her bargain,” irrespective of whether a conforming
product can be obtained. Nor do any of the other
authorities the Court cites. With respect, SpaceKey
suggests that the law is to the contrary – a refund
cannot serve its essential purpose unless it permits
the acquisition of a conforming substitute.
Id. at 20 (quoting Order (doc. n o . 122) 9 ) (citation to the
record omitted).
14
SpaceKey gets off on the wrong foot by contending that the
purpose of any remedy is to provide the buyer with conforming
goods. The purpose of a remedy is not a one-size-fits-all
proposition. Rather,
both the statutory language [of the U.C.C.] and the
comment [to section 2-719(2)] refer to “its [i.e., the
remedy’s] essential purpose … ” (emphasis added).
That i s , 2-719(2) should be triggered when the remedy
fails of its essential purpose, not the essential
purpose of the Code, contract law, or equity.
James J. White & Robert S . Summers, Uniform Commercial Code §
13-10(a), at 603 (6th ed. 2010); see also 4B Lary Lawrence,
Lawrence’s Anderson on the Uniform Commercial Code § 2-719:128,
at 110 (3d ed. 2010) (“The determination that a limited remedy
has failed of its essential purpose is a two-step process.
First, the essential purpose of the limited remedy must be
determined.”) (citing Cooley v . Big Horn Harvestore Sys., Inc.,
813 P.2d 736, 744 (Colo. 1991));
id., § 2-719:129, at 111
(“Whether a remedy has failed of its essential purpose is
limited to an examination of the essential purpose of the
limitation . . . .”) (citing Waukesha Foundry, Inc. v . Indus.
Eng’g, Inc.,
91 F.3d 1002, 1010 (7th Cir. 1996)) (emphasis
added).
Plainly, the essential purpose of a repair or replacement
remedy is to put conforming goods in the hands of the buyer. A
repair remedy fails of its essential purpose, which is “to cure
15
the defect,” when “the seller is unwilling or unable to repair
the defective goods within a reasonable period of time,” White &
Summers, supra, § 13-10(a), at 603, or “when the seller is
willing and able to repair, but the repairs cannot be done,” id.
Indeed, all of the opinions SpaceKey cites for the proposition
that the purpose of a remedy is to provide the buyer with
conforming goods were issued in cases involving repair and/or
replacement remedies. See Def.’s Mem. (doc. n o . 124) 12-14.
SpaceKey, however, has cited no opinion in which a court
has determined that the purpose of a refund remedy is to provide
the buyer with conforming goods, and the court’s own research
has uncovered no authority for that proposition. A refund
remedy fails of its essential purpose under the circumstances
described in PDC Labs, Leprino, Cox, and Viking Yacht, and may
also fail if the seller: (1) is “unable or unwilling to provide
a refund . . . within a reasonable time” Arias/Root Eng’g v .
Cinn. Milacron Mktg. Co., 945 F.2d 408 (table decision),
1991 WL
190114, at *6 (9th Cir. Sept. 2 5 , 1991); or (2) “conceal[s]
facts regarding the breach of warranty until such time that
recision by the buyer could not be pursued . . . because it
would cause sever[e] financial strain,” Evans Indus., Inc. v .
Int’l Bus. Machs. Co., N o . Civ.A. 01-0051,
2004 WL 241701, at *9
(E.D. L a . Feb. 6, 2004) (quoting Ritchie Enters., Inc. v .
16
Honeywell Bull, Inc., 730 F. Supp. 1041, 1049 (D. Kan. 1990)).
That a refund remedy does not fail in the same way as a repair
or replacement remedy would fail tends to suggest that the
essential purposes of those two kinds of remedies are also
different as well.
The lack of authority for the proposition that the purpose
of a refund remedy is to provide the buyer with conforming goods
is entirely understandable. With a repair or replacement
remedy, the power to put a conforming product in the hands of
the buyer rests with the seller. If the seller repairs or
replaces a defective product, the result is that the buyer will
end up with the product it bargained for, provided by the
seller.
A refund remedy is different. Rather than placing the
buyer in the position it bargained for, such a remedy puts the
buyer back in the position it occupied before it struck a
bargain the seller could not fulfill and could not correct
through repair or replacement. Instead of putting a conforming
product into the hands of the buyer, the seller puts the buyer’s
money back into his or her hands. The purpose of such a remedy
is to make the buyer whole financially, not to provide it with a
conforming product. See White & Summers, supra, § 13-10(b), at
607 (describing purchase-price refund as “an alternate, or
17
‘backup,’ remedy for cases where the primary repair-or-replace
remedy fails of its essential purpose”).
A buyer might use a refund to purchase a conforming product
from another vender, if available, but that is the buyer’s
choice, not the purpose of the refund remedy. Thus, SpaceKey
overstates the essential purpose of a refund remedy when it
argues that “[t]he plaintiff in White was assured of receipt of
a functional Xbox 360 either directly from Microsoft [as a
result of a repair-or-replacement remedy], or by buying a new
unit himself with his refund.” Def.’s Mem. (doc. n o . 124) 1 8 .
Repair or replacement would have provided the plaintiff in White
with a functional Xbox 360; a refund would have provided him
with the ability to purchase a new Xbox, or anything else that
cost as much as a new Xbox.
The distinction between putting the buyer where it hoped to
end up and putting the buyer back on the starting line is the
source of the court’s distinction between giving the buyer the
benefit of its bargain, i.e., a conforming product, and giving
the buyer the value of its bargain. In this context, a
bargain’s value is measured relatively broadly, and encompasses
more than just its benefit. As Judge Irenas explained in Viking
Yacht: “the Court recognizes that a remedy need not put a party
in precisely the same position as the party would have been had
18
the breach not occurred, [but] a party is nonetheless entitled
to the substantial value of his bargain.” 2007 WL 2746713, at *6
(citing U.C.C. § 2-719). Indeed, the commentary to section 2-
719 provides that a contractual remedy must give way if it
deprives “either party of the substantial value of the bargain,”
not the benefit of the bargain. RSA 382-A:2-719 cmt. 1
(emphasis added).
That principal was the basis for decisions such as those in
Marr Enterprises, Inc. v . Lewis Refrigeration Co., 556 F.2d 9 5 1 ,
955 (9th Cir. 1977) (affirming district court’s enforcement of
refund remedy for defective brine refrigeration unit); Garden
State Food Distributors, Inc. v . Sperry Rand Corp., Sperry
Univac Division,
512 F. Supp. 975, 978 (D.N.J. 1981) (ruling
that where buyer purchased computer system with patent defects,
refund remedy was neither inadequate nor failed of its essential
purpose); White,
454 F. Supp. 2d at 1128 (holding that three
different remedies, including purchase-price refund “would
actually ensure that [the buyer] received the substantive value
of his bargain”); and Stearns,
2009 WL 1635931, at *6 (holding
that “full refund of the purchase price provide[d] substantially
the same value as the non-defective bed for which the parties
initially bargained”). Those four opinions all stand for the
proposition that when a buyer cannot be provided with the
19
benefit of its bargain through repair or replacement, it is
remedy enough for the seller to take back the nonconforming
goods and give the buyer a refund, thus making it financially
whole.
Moreover, none of the four opinions cited in the preceding
paragraph says anything that ties the ability of a refund remedy
to achieve its essential purpose to the availability of a
conforming product. Thus, as SpaceKey states, White, Stearns,
and Taylor do not stand for the proposition that “the mere
availability of a refund – without regard to whether conforming
goods can be obtained with that sum – is enough to prevent a
remedy from failing of its essential purpose.” Def.’s Mem.
(doc. n o . 124) 1 4 . While literally accurate, that statement
does not advance the ball because none of the buyers in those
cases argued that the unavailability of a conforming product in
the marketplace caused an available refund remedy to fail of its
essential purpose.
SpaceKey correctly observes that in Viking Yacht, Judge
Irenas recognized “cases in which parties purchase defective
items, and can be made whole with a refund remedy which allows
them to purchase the items from a different vendor.” 2007 WL
2746713, at *6 n.10 (citing Garden State Food,
512 F. Supp. 975;
Ritchie,
730 F. Supp. 1041; Arcata Graphics C o . v . Heidelberg
20
Harris, Inc., 874 S.W.2d 1 5 , 29 (Tenn. C t . App. 1993)). And,
the court appreciates both a buyer’s interest in being able to
use a refund to purchase a non-defective replacement for a
defective product and the fact that no such replacement product
is available in this case. But, SpaceKey has cited no case that
stands for the proposition that “a refund cannot serve its
essential purpose unless it permits the acquisition of a
conforming substitute.” Def.’s Mem. (doc. n o . 124) 2 0 . The
lack of any such authority, in turn, is not difficult to
explain, given that the U.C.C. “requires only a ‘minimum
adequate remed[y],’” RSA 382-A:2-719 cmt. 1 , not a perfect
remedy.
A refund remedy does not fail of its essential purpose so
long as it makes the buyer whole; such a remedy fails when a
refund alone would leave the buyer in a hole. That is the
teaching of opinions such as PDC Labs, Cox, Leprino, and Viking
Yacht. In those cases, buyers purchased and used non-conforming
products and then suffered significant financial losses as a
result of using them. It is because of cases such as those that
this court readily agrees with SpaceKey’s observation that there
is no general rule that a refund never fails of its essential
purpose. A refund remedy can fail of its essential purpose in
several ways, as the court has already pointed out. But, this
21
is not a case in which a seller has refused to make good on such
a remedy, nor is it a case in which a refund would have been
insufficient to make whole a buyer that accepted nonconforming
goods and put them to use, to its financial detriment.
To summarize the foregoing, and in response to SpaceKey’s
second argument, the court reaches the following legal
conclusions: (1) the purpose of a refund remedy is to make the
buyer financially whole, not to provide it with conforming
goods; (2) in Stearns and White, the available refund remedy
would have made the buyers financially whole, but, standing
alone, would not have provided them with conforming goods; and
(3) a refund remedy does not fail of its essential purpose if a
buyer is unable to use its refund to purchase a conforming
substitute for a nonconforming product.
D. SpaceKey’s Third Argument
SpaceKey’s third argument is that Section 8(b) of TOS
includes an “apparently fair and reasonable clause” that
“because of circumstances” has failed in its purpose. In
addition, SpaceKey notes the lack of evidence that the limited
remedy was the subject of separate negotiation. The court
considers each part of SpaceKey’s argument in turn.
SpaceKey frames its “because of circumstances” argument in
the following way:
22
[T]he particular circumstances of this transaction
made this general term [i.e., the limitation of
remedies to return for credit, repair, or replacement]
fail of its essential purpose. BAE cannot repair the
RH1280B to make it conform to its express warranties.
Replacement would simply substitute one nonconforming
product for another. And there is no dispute that a
refund – even if one were provided for in the TOS –
would accomplish nothing, because no substitute
products exist.
Def.’s Mem. (doc. n o . 124) 2 4 . The problem with that argument
is that SpaceKey does not identify any legally sufficient
circumstance that would cause a refund (or credit) remedy to
fail of its essential purpose.
The U.C.C. provides that “[w]here circumstances cause an
exclusive or limited remedy to fail of its essential purpose,
remedy may be had as provided in this chapter.” RSA 382-A:2-
719(2). The commentary to the Code elaborates: “[U]nder
subsection ( 2 ) , where an apparently fair and reasonable clause
because of circumstances fails in its purpose or operates to
deprive either party of the substantial value of the bargain, it
must give way to the general remedy provisions of this Article.”
Id. cmt. 1 . As a leading treatise explains, “this provision ‘is
not concerned with arrangements which were oppressive at their
inception, but rather with the application of an agreement to
novel circumstances not contemplated by the parties.’” White &
Summers, supra, § 13-10(a), at 603 (quoting 1 N.Y. State Law
23
Revision Comm’n, 1955 Report 584 (1955)) (emphasis added).
Another treatise explains the concept this way:
Whether an exclusive remedy has failed of its
essential purpose is controlled by whether there has
been such a change of circumstances subsequent to the
making of the contract as to cause such a failure.
That i s , “the word ‘circumstances’ in U.C.C. § 719(2)
would seem to refer to circumstances not within the
contemplation of the parties at the time of
contracting and circumstances not within the control
of the complaining party.”
4B Lawrence, supra, § 2-719:125, at 108 (quoting Envirex, Inc.
v . Eco. Recovery Assocs., Inc., 454 F. Supp. 1329, 1336 (M.D.
P a . 1978)) (citation omitted).
In SpaceKey’s view, a refund remedy would have failed of
its essential purpose because there was no other vendor from
which it could have obtained an FPGA that conforms to the 300K
rad(Si) TID that BAE allegedly warranted for its RH1280B. The
unavailability of a 300K rad(Si) FPGA, however, is not a novel
circumstance not contemplated by the parties. If there had been
another vendor selling 300K rad(Si) FPGAs at the time SpaceKey
made its agreement with BAE, and that vendor later went out of
business, that, perhaps, would have been a novel circumstance
not contemplated by the parties. In this case, however,
SpaceKey knew from the outset that BAE was the one and only
source for Actel legacy FPGAs. Thus, if the remedy provided by
the TOS is oppressive, it has been so since the inception of the
24
agreement, which places it beyond the reach of RSA 382-A:2-
719(2). In that regard, this case has much in common with Proto
Construction & Development Corp. v . Super. Precast, Inc., 52
U.C.C. Rep. Serv. 2d (CBC) 9 2 1 , N o . 99-CV-2851(NG), 2002 WL
1159593 (E.D.N.Y. May 2 8 , 2002). Professor Lawrence had this to
say about Proto:
Given that both parties were aware that there was a
substantial risk of delay when they entered into the
contract, and that the parties, both of which are
sophisticated companies, allocated the risk of that
delay to the buyer, the buyer was not deprived of the
substantial value of the bargain by enforcing the
limitation of liability clause.
4B Lawrence, supra, § 2-719:138, at 130. Here, both parties are
sophisticated companies, both knew that BAE was the sole source
of Actel legacy FPGAs, and they allocated any risks associated
with BAE’s status as the sole source of those FPGAs to SpaceKey.
In its third argument, SpaceKey also makes the following
contention:
There is another flaw to the Court’s reasoning
here. BAE’s TOS is a preprinted form. There is no
evidence in this case that it was separately
negotiated by BAE and SpaceKey. Cox, 936 P.2d at 1196
(requiring that “exclusion of remedies be explicitly
negotiated and set forth with particularity”).
Def.’s Mem. (doc. n o . 124) 1 7 . There are at least two problems
with that argument. First, Cox is based on the law of
Washington, and with regard to the particular rule on which
SpaceKey relies, the states are not in agreement. As the Cox
25
court explained in the context of resolving a conflict-of-law
question:
Idaho courts also strictly construe limitation of
remedy clauses. Clark v . International Harvester Co.,
581 P.2d 7 8 4 , 796–97 ([Idaho] 1978). Washington
disfavors disclaimers and finds them to be ineffectual
unless they are explicitly negotiated and set forth
with particularity. Berg v . Stromme, 484 P.2d 380
([Wash.] 1971) (Berg rule). See also Schroeder v .
Fageol Motors, Inc., 544 P.2d 20 ([Wash.] 1975).
Washington also requires that any exclusion of
remedies be explicitly negotiated and set forth with
particularity. Baker v . City of Seattle, 484 P.2d 405
([Wash.] 1971). Thus, Washington’s requirements for
disclaimers and limitations on remedies differs from
Idaho’s rules, and an actual conflict exists between
the laws of the two states.
936 P.2d at 1196 (parallel citations omitted). Absent any
argument that New Hampshire would come down on Washington’s side
on the issue over which Washington disagrees with Idaho, this
court declines to apply the Cox rule to this case. And, perhaps
more importantly, unlike SpaceKey, which is a sophisticated
business entity, the buyer in Cox was a consumer, see
id. at
1194, and it is well understood that the U.C.C. provides greater
protection to consumers than to business people, see White &
Summers, supra, § 13-10(a), at 605.
In sum, there is no merit to SpaceKey’s argument that the
limited remedy set out in the TOS qualifies as a remedy that was
fair and reasonable at the outset but ended up depriving
26
SpaceKey of the substantial value of its bargain as a result of
circumstances arising after the inception of the agreement.
E . SpaceKey’s Fourth Argument
SpaceKey’s fourth argument has two parts. First, it argues
that the opinions on which the court relied in its analysis are
distinguishable, and therefore irrelevant, because they do not
address the impact or meaning of a credit remedy as opposed to a
refund remedy. Second, SpaceKey argues that the failure of
BAE’s FPGAs to conform with its warranty was, in fact, a latent
defect. The court considers each argument in turn.
In the first part of its argument, SpaceKey contends that:
(1) a credit is different from a refund; and (2) without any
evidence before it concerning the volume of SpaceKey’s business
with BAE, the court has no basis for concluding that the credit
remedy available to SpaceKey would have given SpaceKey the
benefit of its bargain with BAE. SpaceKey’s point is that a
customer who did $5 million worth of business with BAE every
week might find a $5 million credit nearly equivalent to cash,
while a customer that did $2 million worth of business with BAE
in a year might find a credit to be much less valuable. In
SpaceKey’s view, this case needs to be rescheduled for a trial
at which it could introduce evidence concerning the magnitude of
its demand for BAE products which, in turn, would establish
27
whether a credit with BAE would have provided it with the value
of its bargain with BAE.
Broadly speaking, SpaceKey is correct to focus on the lack
of evidence in this case. But, the problem is not the lack of
record evidence concerning SpaceKey’s demand for BAE products.
The problem is the lack of any evidence that SpaceKey ever
attempted to use the remedy it now says failed of its essential
purpose.
“Ordinarily, the buyer must provide the seller a reasonable
opportunity to carry out the exclusive or limited remedy before
the buyer can successfully argue failure of essential purpose.”
White & Summers, supra, § 13-10(a), at 603 (citations omitted);
see also 4B Lawrence, supra, § 2-719:140, at 134 (“Although the
software purchased could not be repaired, the exclusive remedy
of repair or replacement or return of the price paid did not
fail of its purpose where the buyer did not ask for price
back.”) (citing Valley Paving, Inc. v . Dexter & Chaney, Inc., 42
U.C.C. Rep. Serv. 2d (CBC) 433, 2000 WL 1182800 (Minn. C t . App.
Aug. 2 2 , 2000)). When a buyer has given the seller the
opportunity to carry out a limited remedy, then there is a
question for the jury concerning whether the remedy achieved its
essential purpose, or failed to do s o .
28
But where, as here, the buyer did not give the seller the
opportunity to carry out the remedy, there are no facts for the
jury to find. See Nat’l Rural Telecomms. Coop. v . DIRECTV,
Inc., 319 F. Supp. 2d 1040, 1055 (C.D. Cal. 2003) (holding that
where “NRTC never requested a refund of its Committed Member
Payments . . . NRTC [had] not raised a genuine issue of material
fact that Section 11.01 of the Agreement [i.e., the refund
provision] fails of its essential purpose”). Because SpaceKey
never attempted to return the nonconforming FPGAs for credit
with BAE, a fact that is undisputed, there would no basis for a
jury to determine that the credit remedy failed of its essential
purpose, which means that there is no triable issue concerning
the failure of that remedy.
In its reply, SpaceKey makes two attempts to evade the
consequences of eschewing the return-for-credit remedy. It
begins with this:
BAE argues that SpaceKey’s claims should be
disposed of without trial because it did not make a
formal attempt to invoke the limited remedies in the
TOS. The court should disregard this argument.
First, it is not an argument that the Court proposed
in the Order. Nor is it an argument that BAE had
previously made.
Def.’s Reply (doc. n o . 132) 3-4. SpaceKey is mistaken. The
show-cause order includes the following relevant passage:
[W]here, as here, the buyer has not attempted to use a
limited remedy to which it has agreed, there is no
29
issue of fact for a jury to resolve, and the question
of whether that remedy fails of its essential purpose
may be decided as a matter of law.
Order (doc. n o . 122) 4 (citing Nat’l Rural Telecomms., 319 F.
Supp. 2d at 1055). SpaceKey next points out the undisputed
facts that BAE could not repair the FPGAs and that there were no
conforming FPGAs available in the marketplace, and recites the
well established rule “that the law does not require a useless
act.” Def.’s Reply (doc. n o . 132) 4 (quoting McGranahan v . Std.
Constr. Co.,
101 N.H. 4 6 , 47 (1957)). Plainly, seeking to use
the repair or replacement remedies provided by Section 8(b)
would have been useless acts. But, Section 8(b) also gave
SpaceKey a third remedy, return for credit, and because there
was nothing about that remedy, on the facts of this case, that
would have caused it to fail of its essential purpose,
attempting to return the allegedly nonconforming FPGAs for a
credit would not have been a useless act, notwithstanding the
lack of conforming FPGAs in the marketplace. In short, there is
no excuse for SpaceKey’s decision to bypass the return-for-
credit remedy.
The second part of SpaceKey’s fourth argument is that the
failure of BAE’s FPGAs to conform to its warranty was, in fact,
a latent defect. According to SpaceKey: (1) BAE disclosed its
inability to produce FPGAs with a TID of 300K rad(Si) in the
30
spring of 2009, after SpaceKey’s customers had spent up to two
years incorporating the anticipated 300K rad(Si) FPGA into their
satellite systems; (2) that late disclosure made the TID
shortfall “functionally identical to a ‘latent’ defect of the
type described in the Court’s authorities,” Def.’s Mem. (doc.
n o . 124) 2 8 , thus bringing SpaceKey’s claims “comfortably within
the latent defect paradigm,” id.; and (3) under the latent-
defect paradigm, a refund (or credit) remedy fails of its
essential purpose. Accepting, for the sake of argument, the
somewhat counterintuitive proposition that a product
characteristic listed by a buyer in its purchase order could
ever qualify as a latent defect,2 there is fundamental problem
with SpaceKey’s attempt to bring its claims within the latent-
defect paradigm: the use to which SpaceKey put the allegedly
defective FPGAs.
In Cox, the buyer purchased seed, planted i t , and then
discovered that it had a low germination rate. See 936 P.2d at
1195. In Leprino, the buyer purchased bricks, installed them,
and then discovered that they were susceptible to staining. See
759 P.2d at 836. In Viking Yacht, the buyer purchased gel coat,
2
As noted above, the court does not construe PO SKC12508(C)
as an order for FPGAs with TIDs of 50K or 100K rad(Si), but only
as evidence that, when the purchase order was issued, SpaceKey
knew that BAE was not going to delivering FPGAs with a TID of
300K rad(Si).
31
applied it to several boats, and then discovered that the gel
coat was subject to cracking when it hardened. See 2007 WL
2746713, at * 6 . In each of those three cases, the buyer was a
consumer, and each of those consumers suffered damages as a
result of using the defective product. The farmer in Cox
planted the defective seed on 865 acres, and that seeding
yielded no harvest, resulting in damages substantially in excess
of the cost of the defective seed. See
936 P.2d at 1195. The
builder in Leprino incurred the cost of removing the defective
bricks from a structure he had built and rebuilding with
conforming bricks, which “far exceeded the costs of merely
purchasing new bricks.”
759 P.2d at 837. The boat builder in
Viking Yacht was faced with the costs of replacing the defective
gel coat it used, which far exceeded the cost of the gel coat.
See
2007 WL 2746713, at * 6 .
Here, by contrast, while SpaceKey was a buyer, it was not a
consumer of BAE’s FPGAs. SpaceKey did not design or launch any
satellites. Its customers did. What SpaceKey did was resell
the FPGAs it purchased from BAE to its own customers. And, it
is undisputed that SpaceKey was able to use the FPGAs it
purchased from BAE exactly as it had intended to use them, with
the intended results. It resold the 50K and 100K rad(Si) FPGAs
for the same price its customers had agreed to pay for 300K
32
rad(Si) FPGAs. Because SpaceKey was a reseller rather than a
consumer, and because its use of the defective FPGAs was just as
remunerative as its use of non-defective FPGAs would have been,
SpaceKey is situated entirely differently from the buyers in
Cox, Leprino, and Viking Yacht, and its claims fall well outside
the latent-defect paradigm.
The familiar flaw in SpaceKey’s argument is that it
conflates itself with its customers. See Order (doc. n o . 58) 37
(“[T]he court cautions SpaceKey that at least two of its four
categories of damages involve damages that are not SpaceKey’s to
claim. For example, because SpaceKey does not own or operate
spacecraft, reduced spacecraft uselife is not a detriment
SpaceKey has suffered.”). SpaceKey used BAE’s FPGAs for resale,
and it is undisputed that the 50K and 100K rad(Si) FPGAs
performed exactly as well for SpaceKey as 300K rad(Si) FPGAs
would have performed. Moreover, not that the end use of the
FPGAs is even an issue in this case given that SpaceKey is
making the breach of warranty claim, the court further notes
that SpaceKey’s customers installed the 50K or 100K rad(Si)
FPGAs in their satellites knowing that that they had TIDs of 50K
or 100K rad(Si). Thus, SpaceKey’s customers are distinguishable
from: (1) the farmer in Cox who bought seed that was certified
to have a germination rate of at least eighty-five percent but
33
ultimately performed at a rate of between twenty-two and forty-
two percent, see 936 P.2d at 1194-95; (2) the builder in Leprino
who used stainable bricks that he expected to be stain-
resistant; and (3) the boat builder in Viking Yacht that applied
crack-prone gel coat that it expected to be crack proof.
F. Summary
Before examining the two legal claims at the heart of Issue
One, it will be useful for the court to summarize the legal
conclusions it has reached to this point. First, the purpose of
a refund or credit remedy for breach of warranty is not to
provide the buyer with conforming goods; it is to make the buyer
whole financially. Second, the availability of a conforming
product in the marketplace has no bearing on the sufficiency of
a refund or credit remedy. Third, where the seller i s , at the
outset of the agreement, the sole source for a particular
product, the lack of a conforming substitute is not a
circumstance that causes a refund or credit remedy to fail of
its essential purpose. Fourth, a buyer must attempt to use a
limited remedy before it may be heard to argue that any such
remedy has failed of its essential purpose. Finally, the
latent-defect exception to RSA 382-A:2-719(1)(a), as established
in the decisional law, extends only to buyers who used the
products they purchased for their intended purposes and suffered
34
damages in excess of the amount they could recover from a refund
remedy.
Having established the foregoing legal principles, the
court turns to the two questions posed in its show-cause order:
(1) whether BAE is entitled to judgment as a matter of law on
the claim for breach of contract stated in Count IV of its
amended complaint; and (2) whether BAE is entitled to judgment
as a matter of law on the claim for breach of warranty stated in
Count Four of SpaceKey’s counterclaim. The court begins with
SpaceKey’s claim and then turns to BAE’s claim.
1 . SpaceKey’s Claim for Breach of Warranty
For purposes of the following analysis, the court assumes,
without deciding, that BAE warranted, among other things, that
the FPGAs it delivered to SpaceKey would have a TID of 300K
rad(Si) and that BAE breached its warranty by, among other
things, delivering FPGAs with TIDs of 50K or 100K rad(Si). It
is undisputed that the TOS provided a limited, exclusive remedy
for that particular kind of warranty breach: return within sixty
days of delivery for credit, repair, or replacement. It is
undisputed that SpaceKey did not attempt to avail itself of any
of those three remedies. Rather than attempting to return the
nonconforming FPGAs, it bypassed the contractual remedies, sold
35
the FPGAs to its customers, and withheld payment for the final
200 of them.
Because SpaceKey never attempted to use any of its
contractual remedies, it is precluded from arguing that the
return-for-credit remedy failed of its essential purpose. See
White & Summers, supra, § 13-10(a), at 603. Because SpaceKey
cannot prove that the contractual remedy failed of its essential
purpose, it is bound by the limitation of remedies in the TOS.
See RSA 382-A:2-719(2). And, because SpaceKey has no remedy
available to it other than the contractual remedies it declined
to seek, there is no reason to try the question of the actual
value of the FPGAs BAE delivered to SpaceKey. In other words,
even if SpaceKey could prove that the FPGAs BAE delivered were
worth less than the contract price under the theory it advances,
BAE is entitled to judgment as a matter of law that SpaceKey is
entitled to no further remedy for BAE’s purported breach of
warranty.
2 . BAE’s Claim for Breach of Contract
Under the common law of New Hampshire, “[a] breach of
contract occurs when there is a failure without legal excuse to
perform any promise which forms the whole or part of a
contract.” Axenics, Inc. v . Turner Constr. Co., ___ N.H. ___,
___, N o . 2011-219, 2013 WL 960175, at *6 (Mar. 1 3 , 2013)
36
(quoting Lassonde v . Stanton, 157 N.H. 5 8 2 , 588 (2008)). As a
defense to BAE’s claim for breach of contract, SpaceKey has
contended that BAE’s breach of warranty, coupled with its own
statutory right to deduct damages from the amount it owed BAE,
see RSA 382-A:2-717, gave it a legal excuse for failing to
perform its promise to pay BAE $1.8 million for the last 200
FPGAs BAE delivered. It is difficult to see how that defense
survives the limitation on remedies stated in Section 8(b) of
the TOS.
Even if Section 8(b) did permit SpaceKey to interpose
section 2-717 as a legal excuse for not paying full price for
the last 200 FPGAs, the TOS includes another line of defense in
the form of a provision in Section 6 requiring SpaceKey’s
payments to BAE to “be made . . . without recourse, setoff, or
discount.” Pl.’s Mot. for Leave, Rea Decl., Ex. G (doc. n o .
112-3), at 2 7 . In its first summary-judgment order in this
case, the court denied BAE summary judgment on SpaceKey’s
counterclaim for breach of warranty and, for that reason, denied
BAE summary judgment on its claim for breach of contract. In so
doing, the court left for another day a determination of whether
Section 6 of the TOS precludes SpaceKey from relying on RSA 382-
A:2-717. The day to answer that question has arrived.
37
Under the heading “Deduction of Damages From the Price,”
New Hampshire’s enactment of the U.C.C. provides that “[t]he
buyer on notifying the seller of his intention to do so may
deduct all or any part of the damages resulting from any breach
of the contract from any part of the price still due under the
same contract.” RSA 382-A:2-717. Under the heading “Payment,”
Section 6 of the TOS provides, in pertinent part:
Unless otherwise specified in writing by BAE SYSTEMS,
terms of payment for Buyer are the earlier of net
thirty (30) days from the date of invoice or upon
delivery. Payment shall be in U.S. dollars, net cash,
Nashua, New Hampshire. Payments are unconditional and
shall be made as specified in the Order, without
recourse, set off, or discount.
Pl.’s Mot. for Leave, Rea Decl., Ex. G (doc. n o . 112-3), at 2 7 .
BAE contends that the third sentence of Section 6 leaves
SpaceKey without a legal excuse for failing to pay for the last
200 FPGAs. SpaceKey responds by arguing that Section 6
addresses the question of how it was obligated to make payments
and “speaks the language of negotiable instruments,” Def.’s O b j .
to Summ. J. (doc. n o . 44) 1 4 , thus making it irrelevant to
determining whether it had a legal right to withhold payment for
the last 200 FPGAs. BAE has the better argument.
According to SpaceKey, when BAE drafted Section 6, i t : (1)
used the term “unconditional” to override RSA 382-A:2-511(3),
which provides that payment by check is conditional; (2) used
38
the term “without recourse” to “eliminate or reduce its
liability as an endorser upon receipt and endorsement of a
customer’s check,” Def.’s O b j . to Summ. J. (doc. n o . 44) 15
(citing RSA 382-A:3-415); and (3) used the term “set off” to
“eliminate a particular defense to payment of the instrument,”
id. (citing Community Bank v . Ell,
564 P.2d 685, 687 (Or.
1977)). SpaceKey also argues that “[a]lthough not defined, the
term ‘discount’ doubtless refers to the common commercial
practice of granting discounts for prompt or early payment,”
id., and that the reference to discount in Section 6 was
“intended to negate any . . . infiltration of trade usage
regarding discounts,”
id., into the agreement between itself and
BAE. After acknowledging that the concept of “setoff” does have
applications beyond the law of negotiable instruments, SpaceKey
points out that setoff and recoupment are distinct legal
concepts, and argues that it is relying upon RSA 382-A:2-717 to
invoke its right to recoupment, not setoff.
There are distinctions to be drawn between setoff and
recoupment. The definition of “setoff” includes the following:
1 . A defendant’s counterdemand against the plaintiff,
arising out of a transaction independent of the
plaintiff’s claim. . . . 2 . A debtor’s right to
reduce the amount of a debt by any sum the creditor
owes the debtor; the counterbalancing sum owed by the
creditor.
39
Black’s Law Dictionary 1496 (9th ed. 2009). The definition of
“recoupment” includes these components:
2 . The withholding, for equitable reasons, of all or
part of something that is due. . . . 3 . Reduction of
a plaintiff’s damages because of a demand by the
defendant arising out of the same transaction. . . .
4 . The right of a defendant to have the plaintiff’s
claim reduced or eliminated because of the plaintiff’s
breach of contract or duty in the same transaction.
Id. at 1388.
According to SpaceKey, Section 6 of the TOS does not help
BAE because it withheld payment to BAE not as a setoff but,
rather, as “a recoupment counterclaim under Section 2-717.”
Def.’s O b j . to Summ. J. (doc. n o . 44) 1 6 . There are several
problems with that argument. First, it is not at all clear that
section 2-717 grants a buyer a right to recoupment. As one
treatise explains:
Lawyers, from force of habit, are inclined to
call this remedy of deduction by the name
“recoupment.” Actually, however, there is a
theoretical difference between deduction and
recoupment. Recoupment does not proceed on the
assumption that the buyer owes the price upon the
acceptance of defective goods. . . . Deduction, on
the other hand, is based on the assumption that a
buyer who has accepted the goods owes the contract
price from which he is entitled to deduct damages
resulting from nonconformities in the goods. In many
cases the dollar amounts under recoupment and
deduction will be the same, but in some cases they
will differ due to the fact that quasi-contractual
principles are employed to determine the amount due
where recoupment is the theory, whereas contractual
principles are used where deduction is asserted.
40
Deduction is similar to counterclaim in that both
proceed on the assumption that the buyer is liable for
the price of the accepted goods. Deduction, however,
may be used as a self-help remedy until the seller
sues for the price, at which point deduction may be
asserted as an affirmative defense. . . .
Deduction is often used as a self-help remedy.
Commonly, the buyer will notify the seller that the
goods did not conform to the contract, that the dollar
value of the nonconformity comes to a certain amount,
and that a check is enclosed for the price of the
goods as diminished by this amount.3
2 William D. Hawkland, Uniform Commercial Code Series § 2-717:1
(2012) (footnotes omitted). At the very least, SpaceKey may not
be entirely accurate in its characterization of section 2-717 as
a recoupment provision.
More importantly, however, whatever the true nature of the
right granted by section 2-717 may b e , that right is commonly
described as a setoff. As Professors White and Summers have
explained:
If there is a minor defect in a product sold and
if the buyer chooses to retain the product, he has the
right under sections 2-711, 2-714, and 2-717 to set
off his damages against the seller. Whether he can
set off all of these damages in the first installment
or whether he must prorate them is not clear under 2-
3
Here, SpaceKey made no contemporaneous effort to establish
the dollar value of the alleged nonconformity of the last 200
FPGAs and diminish its payment accordingly. Under SpaceKey’s
theory of damages, those FPGAs were worth something (between one
third and one twelfth of the contract price), yet it has paid
BAE nothing for them. Thus, SpaceKey’s current reliance on
section 2-717 is substantially undermined by its conduct, which
evinces a form of self help other than the one described in
section 2-717.
41
717. It is clear that he cannot stop paying entirely.
Rather, he simply reduces the total amount of his
payments by the amount of his damages. Assume for
example that a windshield cracked two months after the
buyer purchased a car. Assume further that it would
cost $300 to replace the windshield and that the buyer
chose to keep the car. In those circumstances buyer’s
damages under 2-714 would not normally exceed $300 and
the buyer would typically be permitted to set off that
amount – if indeed it could be proven that the
windshield broke because it was defective and not
because it was subjected to improper use.
2 James J. White & Robert S . Summers, Uniform Commercial Code §
17-9(d), at 218 (5th ed. 2008) (footnote omitted, emphasis
added).
Professors White and Summers are not alone in referring to
the right granted by section 2-717 as a right of setoff. See,
e.g., Twin Disc, Inc. v . Big Bud Tractor, Inc., 772 F.2d 1329,
1336 (7th Cir. 1985) (“Section 2-717 . . . allows a buyer to
offset breach of contract damages”); Carlisle Corp. v . Uresco
Constr. Mats., Inc.,
823 F. Supp. 2 7 1 , 274 (M.D. P a . 1993)
(“Section 2-717 of the [U.C.C.] allows set-off”); Samuel, Son &
C o . v . Sierra Stainless, Inc., N o . 3:09-cv-00291-RAM,
2010 WL
4237993, at *6 (D. Nev. Oct. 1 9 , 2010) (describing section 2-717
as permitting offsets); Chainworks, Inc. v . Webco Indus., Inc.,
N o . 1:05-CV-135,
2006 WL 461251, at *11 (W.D. Mich. Feb. 2 4 ,
2006) (“Section 2-717 grants a buyer a right of setoff”); Ning
Shing (U.S.A.), Inc. v . Howard Berger Co., N o . CIV. 97-604(WGB),
1998 WL 684244, at *4 (D.N.J. Mar. 1 6 , 1998) (stating that
42
section 2-717 “recognizes a buyer’s right to setoff”); Midwest
Grain Prods., Inc. v . Envirofuels Mktg., Inc., Civ. A . N o . 95-
2355-EEO, 1996 WL 445070, at *7 (D. Kan. July 1 2 , 1996)
(characterizing section 2-717 as granting buyer “remedy of
setoff”); Sencom Sys., Inc. v . W.R. Bonsal Co., N o . 85 C 8250,
1986 WL 10989, at *3 (N.D. Ill. Sept. 2 9 , 1986) (discussing
“plaintiff’s right of setoff under U.C.C. § 2-717”); Berdex
Int’l, Inc. v . Milfico Prepared Foods, Inc.,
630 N.E.2d 9 9 8 ,
1001 (Ill. App. C t . 1994) (explaining that section 2-717 allows
buyer “to file a counterclaim in the nature of a setoff”); Lee
v . Coastal AgroBus., Inc., N o . 09 CVS 1719,
2012 WL 2356522, at
*3 (N.C. Super. C t . June 2 1 , 2012) (describing section 2-717 as
permitting offsets). While acknowledging Judge Boudin’s
observation that “the two terms [i.e., ‘recoupment’ and
‘setoff’] are not always used with precision,” ITV Direct, Inc.
v . Healthy Solutions, LLC,
445 F.3d 6 6 , 71 n.3 (1st Cir. 2006),
this court has no difficulty construing the “without offset”
language in Section 6 as precluding SpaceKey from invoking the
right provided by RSA 382-A:2-717.
Finally, however, even if SpaceKey were not precluded from
engaging in self-help pursuant to RSA 382-A:2-717, whatever that
form of self-help may be called, the section 2-717 jurisprudence
establishes that under the circumstances of this case, SpaceKey
43
had no damages to recoup by means of a deduction from the amount
it owed BAE. It is undisputed that SpaceKey has sold all of the
200 allegedly nonconforming FPGAs to its customers for the same
amounts those customers had agreed to pay for conforming FPGAs.
Under those circumstances, a section 2-717 deduction would give
SpaceKey a windfall, which is impermissible. See 4A Lawrence,
supra, § 2-717:11, at 976 (“It is generally inappropriate to
allow a party a windfall due to the breach by the other party.”)
(citing Lindstrom v . Patriot Homes, Inc., 709 N.W.2d 112 (Wis.
C t . App. 2005)).
In Carbontek Trading C o . v . Phibro Energy, Inc., Carbontek
contracted to sell Phibro a load of coal, and Phibro contracted
to sell that same coal to Elkraft Power C o . See 910 F.2d 3 0 2 ,
303 (5th Cir. 1990). Both contracts included specifications
regarding the quality of the coal. See
id. The coal Carbontek
provided did not comply with the specifications because was
mixed with a substance called “pet coke,” which was considered a
contaminate. See
id. Phibro told Elkraft that “[a]s full
compensation for the contamination . . . we will from the
invoice value deduct a lump sum of USD 192,000.” Id. at 306.
Elkraft then “paid Phibro the original contract price less
$192,000.” Id. at 304. Phibro, in turn, deducted $192,000 from
its payment to Carbontek. See id.
44
Carbontek sued Phibro for the full amount due under the
parties’ contract. After a bench trial, the judge made the
following relevant findings and rulings:
Phibro’s acceptance [of the contaminated coal] was
subject to its right to claim damages for the
inclusion of approximately 10% pet coke, under UCC
section 2-714. The damages would be the difference
between the value of the goods delivered and their
value had the cargo not been controverted, and under
UCC section 2-717, Phibro could deduct such damages
from the price due under the contract.
Carbontek, 910 F.2d at 305. The trial court, however, did not
allow Phibro to deduct from its payment to Carbontek the full
$192,000 it deducted from its invoice to Elkraft. The court of
appeals modified the judgment to incorporate the full deduction.
It began its analysis this way:
Phibro argues that $192,000 is a reasonable
calculation of the difference in fair market value
between the conforming and nonconforming coal, because
that is the reduction in Elkraft’s price that Elkraft
required in return for accepting the nonconforming
coal. Under New York law, “when a seller delivers
nonconforming goods to ultimate buyers, the
intermediate buyer may claim as damages the amount it
had to pay the ultimate buyers to compensate them for
the delivery of the defective goods.” Happy Dack
Trading C o . v . Agro-Industries, Inc., 602 F. Supp.
986, 994 (S.D.N.Y. 1984) (citing Rite Fabrics, Inc. v .
Stafford-Higgins Co., 366 F. Supp. 1 (S.D.N.Y. 1973)).
In Happy Dack, the court accepted as a reasonable
measure of damages a specified amount of compensation
that an intermediate buyer of resin agreed to pay the
ultimate buyer in exchange for the ultimate buyer’s
agreement to keep the defective resin. Because the
parties fixed the amount of compensation pursuant to
arm’s length bargaining, the court concluded that that
amount could be considered the difference in fair
45
market value between conforming and nonconforming
resin. Happy Dack, 602 F. Supp. at 994. Phibro
argues that the district court should have applied the
same principle in this case.
Carbontek, 910 F.2d at 305-06. The court of appeals agreed with
Phibro: “In accordance with Happy Dack . . . we think $192,000
is a reasonable measure of Phibro’s damages.” Id. at 306. In
accordance with Carbontek, it would seem that zero would be a
reasonable measure of SpaceKey’s damages, given the undisputed
fact that in its role as an intermediate buyer, SpaceKey, unlike
Phibro, received full payment from the ultimate buyers for the
allegedly nonconforming goods it sold them.
Adam Metal Supply, Inc. v . Electrodex, Inc., 386 S o . 2d
1316 (Fla. Dist. C t . App. 1980), also involved an intermediate
buyer that was situated similarly to Phibro and SpaceKey. In
that case, the seller delivered 200 sheets of nonconforming
aluminum. See id. at 1317. The intermediate buyer refused to
pay for any of i t . See id. The seller “sued for the purchase
price [and] [t]he court denied [the seller] any relief because
it found that the shipment was nonconforming [which] thereby
entitled [the intermediate buyer] to a set-off [equaling the
full contract price] of $3,069.” Id. at 1318. On appeal, that
setoff was reduced because the intermediate buyer was able to
use forty percent of the nonconforming aluminum to make fixtures
46
it sold to the ultimate buyer that had originally contracted to
purchase fixtures made from conforming aluminum. See id.
(applying U.C.C. §§ 607(3)(a), 7 1 4 , and 7 1 7 ) . The application
of Adam Metal to the undisputed facts of this case is self-
evident; SpaceKey’s resale of all the nonconforming FPGAs for
full price eliminates its right to any setoff under section 2-
717.
To similar effect is the decision in Society National Bank
v . Pemberton, 409 N.E.2d 1073 (Akron Mun. C t . 1979). In that
case, a lender sued on a promissory note given in exchange for a
loan that one of the defendants had used to purchase a truck.
See
id. at 1075. After “[t]he plaintiff acknowledged at trial
that any defenses available against [the dealership that sold
the truck] would also be available against the plaintiff,”
id.,
the court was faced with determining the amount the defendant
was entitled to deduct from the amount he owed on the note, as a
result of the dealer’s breach of warranty. The court first
stated the rule 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.”
Id. at 1077 (citing
U.C.C. § 2-714(2)). Then it calculated damages:
47
The court finds the purchase price of the
contract ($4,489.20) to be a reasonable indication of
the market value of the truck if it had been as
warranted. The price at which the truck was resold
($2,425) after being repossessed from the defendant is
a valid indication of its actual market value absent
the seller’s glowing representations. The defendant
is entitled to the difference between these two values
as damages for breach of express warranty.
Id. Applying that reasoning to this case yields the same result
as applying the reasoning from Carbontek and Adam Metal:
SpaceKey’s resale of the allegedly nonconforming FPGAs to its
customers for the same amount they would have paid for
conforming FPGAs establishes that the market value of the
nonconforming FPGAs was the same as the market value of
conforming FPGAs, which left SpaceKey without any damages
resulting from BAE’s alleged breach of warranty.
Based on the foregoing, the court concludes that, as with
SpaceKey’s counterclaim for breach of warranty, BAE’s claim for
breach of contract involves no triable issue of fact. As a
matter of law, SpaceKey had no legal excuse not to pay for the
last 200 FPGAs but, even if it had such an excuse, the
undisputed facts of the case show that SpaceKey suffered no
damages that could have been lawfully deducted from the amount
48
it owed BAE. 4 Accordingly, BAE is entitled to judgment in the
amount of $1.8 million against SpaceKey on its claim for breach
of contract.
3 . The Remainder of Issue One
The court’s show-cause order, and the parties’ subsequent
briefing, do not reach the full extent of Issue One. While it
would appear that the court’s disposition of BAE’s Count IV and
SpaceKey’s Count Four would render BAE’s Counts I I I , V , and VI
moot, that is not for the court to decide at this juncture, as
the court did not include those counts in its show-cause order.
In addition, Issue One appears to involve a claim for costs and
attorney’s fees stated in Count IV of BAE’s amended complaint.
That claim also remains to be resolved.
Issue Two
In their assented-to statement of the case, the parties
frame the second issue this way:
4
In a previous order, the court noted the possibility that
an intermediate buyer such as SpaceKey, that had been paid in
full, could be at risk of injury as a result of buying and
reselling defective merchandise, see Order (doc. n o . 58) 30-32.
But SpaceKey has made no requests for factual findings that, if
granted, would preclude the court from employing the reasoning
of Ed S . Michelson, Inc. v . Nebraska Tire & Rubber Co., 63 F.2d
597 (8th Cir. 1933), and ruling that SpaceKey has not adequately
demonstrated damages.
49
The second issue concerns the parties’ rights and
obligations with respect to purchase orders BAE
Systems accepted from SpaceKey prior to the
termination of the Consultant Agreement on February 8 ,
2010. BAE Systems refused to fill these accepted
purchase orders and eventually terminated them. BAE
Systems seeks a declaratory judgment that it properly
terminated three unfilled purchase orders pursuant to
its rights under the applicable terms of sale.
(Amended Complaint Count I.) SpaceKey contends that
BAE Systems accepted five purchase orders prior to
February 8 , 2010 (not three), that BAE Systems
improperly refused to fill these purchase orders, and
that it is entitled to the benefit of the bargain
damages it suffered as a result.
Def.’s Pretrial S’ment (doc. n o . 115) 2 ; Pl.’s Pretrial S’ment
(doc. n o . 119) 2 . In its previous order, the court directed
BAE [to] show cause why SpaceKey should not be granted
judgment as a matter of law on what remains of the
request for declaratory judgment stated in Count I of
BAE’s amended complaint, and [directed] SpaceKey [to]
show cause why BAE should not be granted judgment as a
matter of law on the portion of Count One of
SpaceKey’s counterclaim in which it asserts that BAE
breached the Consultant Agreement by failing to
process the pending purchase orders.
Order (doc. n o . 112) 17 (footnote omitted).
Notwithstanding the court’s directive that SpaceKey show
cause why BAE should not be granted judgment as a matter of law
on a portion of Count One of SpaceKey’s counterclaim, SpaceKey’s
memorandum in response to the show-cause order is directed
exclusively to Issue One, and its response to BAE’s memorandum
is directed exclusively to refuting BAE’s arguments concerning
Count I of its amended complaint. Because SpaceKey’s failure to
50
pay for the last 200 FPGAs gave BAE the right to defer shipments
or deliveries on all of SpaceKey’s pending purchase orders,
SpaceKey had no legal right to have its pending purchase orders
filled by BAE, as discussed more fully in the court’s previous
order. See doc. n o . 1 2 2 , at 16-17. Accordingly, BAE is
entitled to judgment as a matter of law on the portion of Count
One of SpaceKey’s counterclaim in which it asserts that BAE
breached the Consultant Agreement by failing to process five
pending purchase orders.
The parties d o , however, engage on the first part of Issue
Two, the court’s directive to BAE to show cause why SpaceKey
should not be granted judgment as a matter of law on the
remainder of Count I of BAE’s amended complaint. BAE argues
that: (1) the court should abstain from ruling on the extent of
its obligation to perform under the unfilled purchase orders;
(2) the 2007 TOS gave it the right to require payment before
delivery on the unfilled purchase orders and later terminate
them; and (3) the court may resolve Issue Two even if a trial is
necessary to resolve the breach-of-warranty counterclaim
addressed in Issue One. BAE’s third argument is moot, as no
trial is necessary to resolve SpaceKey’s counterclaim for breach
of warranty. BAE’s first argument is beside the point, as the
court proposed in its earlier order to do nothing more than rule
51
on BAE’s request for a declaratory judgment. In its amended
complaint, BAE asks the court to declare that it properly
terminated SpaceKey’s pending purchase orders. BAE does not ask
the court to determine what its obligations might be if the
court rules that BAE did not have the right to terminate those
purchase orders. Thus, all that remains is BAE’s second
argument, which is not persuasive, largely for the reasons
articulated in SpaceKey’s responsive memorandum.
In Count I of its amended complaint, BAE seeks a
declaratory judgment that it rightfully terminated some number
of pending purchase orders submitted to it by SpaceKey due to
SpaceKey’s failure to pay in advance for the items it sought to
purchase. In its previous order, the court proposed to grant
SpaceKey judgment as a matter of law on that issue, on grounds
that: (1) the purchase orders BAE terminated were all subject to
the 2008 TOS; (2) the 2008 TOS did not grant BAE the right to
demand advance payment; and (3) without a right to advance
payment, BAE had no right to terminate SpaceKey’s pending
purchase orders when SpaceKey declined to make payment in
advance. BAE now argues that: (1) the 2007 TOS, which governed
the purchase and sale of FPGAs, gave it the right to require
advance payment for all future purchases, not just those
governed by the 2007 TOS; and (2) SpaceKey’s failure to pay in
52
advance, on demand, for items subject to the purchase orders
pending on February 8 , 2010, gave BAE the right, pursuant to RSA
382-A:2-309, to terminate those purchase orders. BAE’s argument
is based upon an erroneous construction of Section 6 of the 2007
TOS.
All agree that the 2008 TOS, which governed the
transactions in which BAE terminated SpaceKey’s purchase orders,
did not grant BAE a right to demand prepayment. The 2007 TOS
did grant BAE such a right, in the following two sentences drawn
from Section 6 of that document:
If Buyer shall fail to make any payment in accordance
with the terms and conditions hereof, BAE SYSTEMS, in
addition to its other rights and remedies, may, at its
option, defer shipments or deliveries hereunder, or
under any other contract with Buyer. BAE SYSTEMS
reserves the right to require payment before delivery
if credit information on Buyer is lacking or
unfavorable.
Pl.’s Mot. for Leave, Rea Decl., Ex. G (doc. n o . 112-3), at 2 7 .
Here is the crux of BAE’s argument that the Section 6 of the
2007 TOS gave it the right to demand prepayment in connection
with purchase orders that were subject to the 2008 TOS:
When this passage [i.e., the language quoted above] is
read as a whole, the phrase “hereunder, or any other
contract with Buyer” establishes not only the scope of
the right to defer deliveries, but also the scope of
the right to demand payment before delivery. Thus,
upon a buyer’s payment default, [Section] 6 allows BAE
Systems to defer delivery and demand payment before
delivery on all contracts pending with the buyer. . .
. With respect to [Section] 6, the term “delivery” in
53
the sentence establishing the right to demand payment
before delivery is informed by - and builds upon – the
phrase in the prior sentence “deliveries hereunder, or
under any other contract with Buyer.” By comparison,
had the right to demand payment before delivery been
intended only to apply to the order “hereunder” . . .
then the sentence would have employed either the term
“Order” or “Deliverables.” . . . The absence of
those defined terms [from Section 6 ] is meaningful
because it demonstrates an intention for the right to
demand payment before delivery to apply to all pending
orders with the buyer, not just the specific order to
which the terms of sale [is] attached.
Pl.’s Resp. (doc. n o . 125) 5-6 (emphasis added).
There are at least three problems with BAE’s construction
of Section 6. First, according to its plain language, the
sentence describing BAE’s right to defer shipments or deliveries
applies to shipments or deliveries required by both the contract
under which the Buyer has failed to make payments, and “under
any other contract with Buyer,” but the next sentence describes
BAE’s right to “require payment before delivery” (emphasis
added), while saying nothing about any deliveries under other
contracts with the Buyer. In other words, BAE’s proposed
construction reads something into the second sentence that its
drafter could have written into i t , but did not. Relatedly, use
of the term “delivery” rather than “deliveries” in the sentence
granting BAE the right to require prepayment further suggests
that the right to require prepayment was restricted to delivery
54
under the contract at issue while the right to defer extended to
deliveries under all of the contracts between BAE and SpaceKey.
The second problem with SpaceKey’s construction is that it
ignores the fact that in addition to specifying different
consequences, i.e., deferral and prepayment, the two sentences
quoted above have different triggering events. The first
sentence gave BAE the right to defer shipments if SpaceKey
failed to make payments. The second sentence gave BAE the right
to demand prepayment “if credit information on Buyer [was]
lacking or unfavorable.” BAE’s construction of Section 6, and
its attempt to rely on the right to demand prepayment stated
therein, fails to acknowledge the proviso that its right to
demand prepayment was triggered by something not at issue in
this case: the availability and/or content of credit information
on SpaceKey.
Finally, BAE’s construction of Section 6 of the 2007 TOS,
and its extrapolation from that construction, has the inevitable
effect of adding something to the 2008 TOS that was not placed
there by its drafter. The 2008 TOS, which applied to the
purchase orders BAE terminated, gave BAE the right to terminate
purchase orders under a variety of circumstances, but did not
give BAE the right to terminate a purchase order if SpaceKey
breached the terms and conditions of some other contract.
55
In New Hampshire, it is well established that “[w]hen
interpreting a written agreement, [a court should] give the
language used by the parties its reasonable meaning, considering
the circumstances and the context in which the agreement was
negotiated, and reading the document as a whole.” In re Taber-
McCarthy, 160 N.H. 1 1 2 , 115 (2010) (citing Czumak v . N.H. Div.
of Devt’l Servs.,
155 N.H. 3 6 8 , 373 (2007)). Here, Section 6 of
the 2007 TOS gave BAE a right t o : (1) defer shipments or
deliveries under all contracts with SpaceKey, if SpaceKey failed
to make any payment required under any contract subject to the
2007 TOS; and (2) demand payment in advance for shipments under
any particular contract subject to the 2007 TOS, if credit
information on SpaceKey was lacking or unfavorable.
The right upon which BAE relies to establish the validity
of its termination of SpaceKey’s pending purchase orders, i.e.,
a right to demand prepayment under all agreements with SpaceKey
once SpaceKey defaulted on its payment obligations under any
agreement, appears nowhere in any iteration of the TOS. While
the court can appreciate why BAE might now wish that the 2007
TOS included such a term, it does not have the power to effect
such a radical rewriting of that document. See Centorr-Vacuum
Indus., Inc., v . Lavoie, 135 N.H. 6 5 1 , 654 (1992). For the
foregoing reasons, SpaceKey is entitled to judgment as a matter
56
of law on BAE’s request for a declaratory judgment that it
rightfully terminated SpaceKey’s pending purchase orders.
In summary, BAE has said nothing to sway the court from the
analysis of Issue Two described in its previous order. BAE is
not entitled to the declaratory judgment it seeks in Count I ,
but is entitled to judgment as a matter of law on the
counterclaim SpaceKey asserts in Count One based upon BAE’s
failure to fill its pending purchase orders. In view of that
stalemate, it would appear that nothing remains of those claims
for further resolution. BAE did not properly terminate the
three purchase orders it says are at issue, but it did properly
defer filling them, and nothing has happened to remedy the
situation that allowed BAE to take that action. Thus, those
purchase orders remain in limbo, and it is up to the parties, in
the first instance, to determine how they wish to deal with
them.
Issue Three
In their assented-to statement of the case, the parties
frame the third issue this way:
The third and final issue concerns the amount, if
any, SpaceKey is due for commissions under the
Consultant Agreement. BAE Systems seeks a declaratory
judgment that it owes no commissions and, in
particular, that whatever commissions may have once
been owed under purchase order SKC12508 have been
offset by the costs and attorneys’ fees BAE Systems
has already incurred in this litigation to collect the
57
outstanding balance owed for SKC12508. (Amended
Complaint Count II.) BAE Systems contends this offset
is expressly authorized under the Consultant
Agreement. SpaceKey seeks a damage award for the
commissions allegedly due under SKC12508 as well as
for commissions on an assortment of other sale
transactions that were completed – or should have been
completed – between 2008 and 2010. (Counterclaim
Count Two.)
Def.’s Pretrial S’ment (doc. n o . 115) 2 ; Pl.’s Pretrial S’ment
(doc. n o . 119) 2 . In its previous order, the court directed
BAE [to] show cause why SpaceKey should not be granted
judgment as a matter of law o n : (1) what remains of
the request for declaratory judgment stated in Count
II of BAE’s amended complaint; and (2) the claim for
commissions on the sales of the 435 FPGAs for which
BAE has received payment in full, stated in Count Two
of SpaceKey’s counterclaim.
Order (doc. n o . 112) 20 (footnote omitted).
In Count II of its amended complaint, BAE seeks, among
other things, a declaration that SpaceKey is not entitled to any
commissions under the parties’ Consultant Agreement. In Count
Two of its counterclaim, SpaceKey seeks, among other things,
commissions it says it earned on the sale of the 435 FPGAs for
which it paid SpaceKey in full. In its previous order, the
court proposed to grant SpaceKey summary judgment on those
issues, based on the inapplicability of the provision in the
Consultant Agreement on which BAE based its failure to pay
commissions on the consummated sales of 435 FPGAs. Nothing in
58
BAE’s response to the court’s show-cause order persuades the
court to move away from the rationale set out therein.
Under the heading “Compensation for Services,” Section 4A
of the Consultant Agreement provides, in pertinent part:
As full compensation for services performed by
CONSULTANT [i.e., SpaceKey] hereunder, BAE SYSTEMS
agrees to pay CONSULTANT, upon completion of each sale
by BAE SYSTEMS of Products to a Qualified Buyer in the
Territory a fee equal to five per cent (5%) of the Net
Sales Price of said Products . . . . The fee shall be
earned on a proportional basis upon receipt by BAE
SYSTEMS of each installment of the Net Sales Price.
It is understood that if a sales contract should be
rescinded, revoked or repudiated by a buyer for
reasons beyond BAE SYSTEMS’ control or by BAE SYSTEMS
for a buyer’s breach of contract or by either party
for force majeure causes, CONSULTANT shall not be
entitled to a fee with respect to such sales, except
pro rata, to the extent of any amount BAE SYSTEMS may
have previously received and to which the buyer
asserts no claim for refund or any recovery that BAE
SYSTEMS obtains based on buyer’s breach, after
deduction of BAE SYSTEMS’ costs, including attorneys’
fees.
Pl.’s Mot. Summ. J., Rea Decl., Ex. B (doc. n o . 5 7 - 4 ) , at 2-3.
In BAE’s view, SpaceKey the buyer, which had been brought to BAE
by SpaceKey the consultant, repudiated its agreement with BAE to
purchase FPGAs by “refus[ing] to acknowledge the terms of the
contract for the sale of the FPGAs and to pay what the contract
obligate[d] [it] to pay.” Pl.’s Resp. (doc. n o . 125) 9. BAE
also notes SpaceKey’s claim for a substantial refund of the
amount it has already paid for the first 435 FPGAs.
59
Given the court’s determination, with respect to Issue One,
that SpaceKey has suffered no compensable injury as a result of
the alleged nonconformance of the first 435 FPGAs that BAE
delivered, there is nothing in the Consultant Agreement to
protect BAE from its obligation to pay commissions on the sales
of those FPGAs. As for BAE’s argument that SpaceKey repudiated
its agreement with BAE by failing to pay for the final 200
FPGAs,5 the court concludes that under even the most generous
plain-meaning analysis, the action BAE wants to call
“repudiation” is nothing other than a breach of SpaceKey’s
agreement to pay for the FPGAs BAE delivered. Moreover, even if
SpaceKey’s failure to pay for those FPGAs could somehow be
understood as a repudiation of the contract, BAE does not even
attempt to address the contractual requirement that for it to
escape liability for paying SpaceKey a commission, SpaceKey’s
repudiation must have been “for reasons beyond BAE SYSTEMS’
control.” Pl.’s Mot. Summ. J., Rea Decl., Ex. B (doc. n o . 57-
4 ) , at 2 .
S o , here is where things stand with respect to Issue Three.
BAE has failed to show cause why SpaceKey should not be granted
judgment on the portion of Count II of BAE’s amended complaint
5
Plainly, there is no basis for BAE to argue that SpaceKey
repudiated its agreement to purchase the first 435 FPGAs;
SpaceKey took delivery of those parts and paid for them in full.
60
in which BAE asks the court to determine that it owes SpaceKey
no further commissions. BAE has also failed to show cause why
SpaceKey is not entitled to a five percent commission on the
sales of the first 435 FPGAs. What remains to be resolved,
however, is the amount of commissions that SpaceKey may be owed
on other transactions, including the sale of the final 200
FPGAs, for which SpaceKey now owes BAE $1.8 million. Resolution
of that issue will also entail determining whether BAE is
entitled to deduct from any commissions it may owe the costs it
has incurred in recovering payment from SpaceKey for the last
200 FPGAs.6
Conclusion
With regard to the claims involved in Issue One, even if
the court were to make all the factual findings requested by
SpaceKey, BAE would be entitled to a judgment of $1.8 million,
which is the amount that SpaceKey has not paid BAE for the last
200 FPGAs. Two matters remain to be determined: (1) whether BAE
is entitled to the costs and attorneys’ fees it has incurred to
secure its judgment against SpaceKey; and (2) the final
disposition of Counts I I I , V , and VI of BAE’s amended complaint.
6
Given the way the parties have phrased Issue Three, it
seems as if BAE may be arguing that it is entitled to deduct
from the commissions it owes in the first 435 FPGAs the costs it
has incurred in securing payment for the last 200 of them.
61
The claims involved in Issue Two are a wash; as a matter of law,
BAE had no right to terminate SpaceKey’s purchase orders, but
because BAE did have a right to defer deliveries under those
purchase orders, SpaceKey has no claim against BAE for failing
to fill them. With regard to the claims involved in Issue
Three, BAE had no right to withhold the commissions SpaceKey
earned for selling the first 435 FPGAs. Two aspects of Issue
Three remain: (1) the amount of commissions, if any, that
SpaceKey is due on sales other than its sales of the first 435
FPGAs; and (2) whether, and to what extent, BAE is entitled to
use its litigation expenses to offset whatever commissions it
may owe SpaceKey.
In light of the foregoing, the parties shall confer and
determine how they wish to go about resolving the relatively few
issues that remain in this case. Within thirty days from the
date of this order, they shall notify the court, in writing, how
they wish to proceed. The court expects that the parties will
be able to come to an agreement on this matter.
SO ORDERED.
LandyaMc^perty
United Stacks Magistrate Judge
April 22, 2013
62
cc: Jonathan M . Shirley, Esq.
Jeffrey C . Spear, Esq.
Daniel E . Will, Esq.
Joshua M . Wyatt, Esq.
63
