Leite v. State of New York
2023 NY Slip Op 03379 (2023)
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Rule of Law:
When a contract for the sale of goods includes provisions for both prompt payment and the buyer's right to inspect prior to shipment, the buyer's right to inspect is generally paramount, especially where the contract does not explicitly require payment before inspection.
Facts:
- In late March 2020, during the initial phase of the COVID-19 pandemic, the New York Department of Health (DOH) issued four purchase orders to Hichens Harrison Capital Partner, LLC (Hichens) to acquire ventilators and anesthesia equipment manufactured in China.
- Three purchase orders issued on March 28, 2020, authorized Hichens to supply 5,000 ventilators and 100 anesthesia machines, while a fourth order the next day was for 500 additional anesthesia machines.
- One purchase order for each item specified payment was 'Due Now,' and another specified 'Net 30,' with all orders including Appendix A ('Standard Clauses') and Appendix B ('Additional Standard Terms (COVID-19 Related Transactions)').
- Pedro Alberto M. Leite, president of Hichens, demanded immediate payment, stating it was necessary to secure the products, and warned on April 1, 2020, that late payment risked losing the entire production.
- On April 7, 2020, Sean Carroll, Chief Procurement Officer at the Office of General Services, informed Leite that the State needed to inspect the inventory first and would wire payment immediately 'upon successful inspection,' identifying the State's designated agent in China for this purpose.
- Two days later, the State endeavored to arrange a warehouse visit for inspection but was informed that the inventory was no longer available, as Hichens had sold it to the government of Sao Paulo, Brazil, on April 5, 2020.
- On April 15, 2020, Carroll emailed Leite, advising that the State was withdrawing the purchase offers.
Procedural Posture:
- Claimants (Pedro Alberto M. Leite, also known as Peter Leite, and Hichens Harrison Capital Partner, LLC) filed a second amended claim against the State of New York in the Court of Claims for breach of contract, intentional and negligent inducement to contract, and promissory estoppel.
- Defendant, the State of New York, filed a motion to dismiss the second amended claim.
- The Court of Claims informed the parties it would treat defendant's motion to dismiss as a motion for summary judgment.
- The Court of Claims granted defendant's motion for summary judgment and dismissed the second amended claim.
- Claimants appealed the order of the Court of Claims to the Appellate Division, Third Department.
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Issue:
Does a buyer's contractual right to inspect goods prior to payment and shipment supersede a 'Due Now' payment term, such that the seller's failure to allow inspection constitutes a material breach warranting contract termination?
Opinions:
Majority - Lynch, J.
Yes, a buyer's contractual right to inspect goods prior to payment and shipment supersedes a 'Due Now' payment term when the contract's provisions, read together, connect the right of inspection to payment obligations and do not explicitly require payment before inspection. The court affirmed the dismissal of the claim, holding that the State had a contractual right to inspect the goods before payment, and claimants' failure to allow this inspection and subsequent sale of the inventory constituted a material breach. The court reasoned that Appendix B, paragraph 4, specifically authorized the defendant (State) to inspect goods prior to shipment, and paragraph 11 stipulated that the defendant would not be responsible for payment for rejected goods. Construing these provisions to give effect to each, the court concluded they linked the State's inspection right to its payment obligations. While purchase orders required prompt payment, they lacked a specific due date or an express requirement for payment before inspection, aligning with UCC 2-513(1), which grants a buyer the right to inspect goods before payment or acceptance. The court found claimants' failure to permit inspection and the subsequent sale of the goods a material breach justifying the State's termination. Furthermore, claimants' asserted earlier cancellation on April 3, 2020, for lack of payment was invalid because Appendix B, paragraph 9, required written termination notice with a 30-day cure period for the State, which claimants failed to provide.
Analysis:
This case clarifies the interpretation of conflicting contract terms, specifically between 'Due Now' payment clauses and inspection rights, particularly in emergency procurement scenarios. It reinforces the principle that contract provisions should be read in harmony to give effect to each, and that specific inspection rights can take precedence over general payment timelines, especially when supported by the UCC. The ruling also underscores the importance of strict adherence to contractual termination procedures, preventing parties from unilaterally claiming breach without following agreed-upon notice and cure provisions.
