No. 81-259
IN THE SUPREME COURT OF THE STATE OF MONTANA
1982
FIRE SUPPLY & SERVICE, IZL'C. ,
Plaintiff and Appellant,
-vs-
CHIC0 HOT SPRINGS,
Defendant and Respondent.
Appeal from: District Court of the Sixth Judicial District,
In and for the County of Park, The Honorable
Jack D. Shanstrom, Judge presiding.
Counsel of Record:
For Appellant:
McKinley Anderson, Bozeman, Montana
Berg, Coil, Stokes & Tollefsen, Bozeman, Montana
For Respondent:
Huppert & Swindlehurst, Livingston, Montana
Submitted on Briefs: August 20, 1981
Decided: February 3, 1982
Mr. J u s t i c e D a n i e l J . Shea d e l i v e r e d t h e Opinion of t h e
Court.
On J u l y 2 4 , 1979, t h e p l a i n t i f f , F i r e Supply & Service,
Inc., f i l e d a n a c t i o n a g a i n s t t h e d e f e n d a n t , Chico Hot
S p r i n g s , i n Park County D i s t r i c t C o u r t t o r e c o v e r d e l i n q u e n t
payments under t h e t e r m s of a l e a s e t h e p a r t i e s had made f o r
t h e i n s t a l l a t i o n and maintenance of a f i r e a l a r m system a t
t h e Chico Hot S p r i n g s r e s o r t h o t e l . Chico Hot S p r i n g s
c o u n t e r c l a i m e d f o r t h e r e t u r n of a l l monies p a i d under t h e
l e a s e , a r g u i n g t h a t F i r e Supply had i n s t a l l e d a s y s t e m which
f a i l e d t o m e e t a l l e x p r e s s e d and i m p l i e d w a r r a n t i e s . Chico
Hot S p r i n g s a l s o s o u g h t damages r e s u l t i n g from t h e s y s t e m ' s
a l l e g e d f a i l u r e t o o p e r a t e as w a r r a n t e d . T r i a l without jury
was h e l d December 1 5 , 1980, and judgment was e n t e r e d f o r
Chico Hot S p r i n g s i n t h e amount of $5,776. F i r e Supply
appeals.
I n 1976, Chico Hot S p r i n g s , t h r o u g h i t s p r e s i d e n t ,
Michael A r t , approached F i r e Supply f o r t h e p u r c h a s e of a
f i r e a l a r m system f o r t h e Chico Hot S p r i n g s r e s o r t h o t e l ,
and r e l i e d upon F i r e S u p p l y ' s e x p e r t i s e i n recommending a n
a f f o r d a b l e system t h a t would p r o v i d e r e l i a b l e p r o t e c t i o n f o r
t h e h o t e l ' s p r o p e r t y and g u e s t s . Near t h e end of November
1976, F i r e Supply i n s t a l l e d an a u t o m a t i c f i r e a l a r m s y s t e m
c o n s i s t i n g of s e v e r a l h e a t d e t e c t i o n devices wired t o a
l a r g e and c o m p l i c a t e d c o n t r o l p a n e l . F i r e Supply a l s o
i n s t a l l e d manual " p u l l " a l a r m s t a t i o n s t h r o u g h o u t t h e h o t e l .
On November 26, 1976, t h e p a r t i e s s i g n e d a "Lease Agreement"
which p r o v i d e d t h a t Chico Hot S p r i n g s would l e a s e t h e s y s t e m
f o r $178.25 p e r month f o r a f i v e - y e a r t e r m . F i r e Supply
was o b l i g a t e d t o i n s p e c t t h e s y s t e m a t l e a s t once e v e r y s i x
months. Upon e x p i r a t i o n o f t h e f i v e - y e a r tern, Chico Hot
S p r i n g s had t h e o p t i o n t o e i t h e r renew t h e l e a s e f o r a n o t h e r
f i v e - y e a r t e r m o r t o p u r c h a s e t h e s y s t e m f o r one d o l l a r , i n
which e v e n t F i r e S u p p l y ' s d u t y t o s e r v i c e t h e s y s t e m w a s
terminated.
C h i c o Hot S p r i n g s c o n t e n d s t h a t a f t e r t h e l e a s e w a s
e x e c u t e d , t h e p a r t i e s a g r e e d t h a t Chico Hot S p r i n g s would
make payments d u r i n g t h e summer months o n l y , and n o t make
payments d u r i n g t h e w i n t e r months when t h e r e s o r t ' s b u s i n e s s
w a s slow. F i r e Supply c o n t e n d s t h a t no s u c h agreement w a s
made, d e s p i t e t h e f a c t t h a t Chico Hot S p r i n g s o f f e r e d i n t o
e v i d e n c e a w r i t t e n m o d i f i c a t i o n showing t h a t i t s lease
payments w e r e n o t t o b e g i n u n t i l J u l y 1, 1977. In addition,
F i r e S u p p l y ' s r e c o r d s show t h a t on November 26, 1976, Chico
Hot S p r i n g s p a i d $2,139 f o r t h e s y s t e m ' s i n s t a l l a t i o n , and
t h e n d i d n o t make any monthly payments u n t i l J u l y 1977.
The p a r t i e s t h e n e x e c u t e d a new lease agreement on J u l y
1, 1977, and r e s c i n d e d t h e f i r s t a g r e e m e n t . The new a g r e e -
ment w a s i d e n t i c a l t o t h e f i r s t one e x c e p t t h a t t h e f i v e -
y e a r l e a s e t e r m began J u l y 1, 1977. F i r e Supply's records
show t h a t Chico Hot S p r i n g s was $1,248 d e l i n q u e n t i n i t s
payments from December 1976 u n t i l J u n e 1978, b u t t h a t t h i s
amount w a s w r i t t e n o f f F i r e S u p p l y ' s books when t h e new
l e a s e was e x e c u t e d .
F i r e S u p p l y ' s r e c o r d s a l s o show t h a t Chico Hot S p r i n g s
p a i d $178.25 p e r month b e g i n n i n g on J u l y 1, 1977, b u t m i s s e d
t h e November 1977, F e b r u a r y 1978, and May 1978 payments.
C h i c o Hot S p r i n g s t h e n p a i d $356 p e r month d u r i n g J u n e , J u l y
and August, 1978. A t t h e end o f August 1978, C h i c o Hot
S p r i n g s w a s c u r r e n t on i t s a c c o u n t and owed F i r e Supply
nothing. The r e c o r d s t h e n show t h a t from September 1978
t h r o u g h J u n e 1979, C h i c o Hot S p r i n g s made o n l y f i v e monthly
payments. On July 1, 1979, Chico Hot Springs owed $1,226 to
the plaintiff.
On June 24, 1979, Fire Supply sent Chico Hot Springs
the following letter:
"Your account with us for the lease of the
alarm system at Chico Hot Springs is now seven
months past due. If your check in the amount
of $1,587.83 is not received by this office
by noon on July 4, 1979, we will repossess the
alarm system and this past due account will be
turned over for collection."
Upon receiving this letter, Chico Hot Springs' attorney
telephoned Fire Supply to request a meeting to discuss the
system's performance and the payment schedule. Fire Supply
however, refused to either meet with Chico Hot Springs or
inspect the system. Chico Hot Springs did not send the
requested payment to Fire Supply and refused to allow Fire
Supply to repossess the system. The system remained on the
hotel premises.
On July 14, 1979, a fire destroyed one of the hotel's
guest rooms and endangered the entire hotel. The system did
not sound an alarm, either automatically or after an employee
pulled the manual alarm. Although the system's control
panel had been routinely observed by hotel employees, there
was no indication that the system was malfunctioning. It
was later determined by Fire Supply that the control panel
light which indicates a system malfunction had burned out,
but that this would not prevent the alarm from sounding.
Fire Supply obtained a court order to prevent Chico Hot
Springs from interfering with the removal of.the'system, and
the system was finally removed from the hotel in November
1979. Fire Supply then filed this action to recover the
payments due it under the agreement, contending that Chico
Hot Springs breached the agreement by not making the required
monthly payments. Chico Hot Springs counterclaimed, con-
tending that the system did not work properly after it was
installed.
The record reveals that Chico Hot Springs called Fire
Supply several times after the system was installed to
indicate there were problems with the system. In December
1978, a susbstantial fire had broken out in the resort's
snack bar, causing several thousand dollars worth of damage.
The fire detection system failed to activate the hotel's
alarm, but the fire was discovered by a night watchman.
Chico Hot Springs notified Fire Supply of the system's
failure, but Fire Supply took no action to identify or
correct any problems. Chico Hot Springs also contends that
the June 24, 1979 letter it received constituted a breach of
the parties' agreement, which entitles it to damages.
The trial court found that Chico Hot Springs relied
upon Fire Supply's expertise to furnish a system that would
afford reliable protection; that the parties' agreement was
actually a sales contract rather than a lease agreement;
that Fire Supply had tolerated for three years a schedule
whereby Chico Hot Springs made no payments during the winter
and then caught up in the summer, and that there appeared to
have been a tacit agreement to that payment schedule. The
court also found that the system was not the "best" system
for the hotel as expressly warranted by Fire Supply and that
the system was neither merchantable nor fit for the purpose
for which it was intended. The court ordered Fire Supply to
return to Chico Hot Springs all monies paid under the agreement
($5,526) and awarded $250 damages for repairs to the fire-
damaged guest room.
Fire Supply appeals to this Court to determine whether
the trial court's judgment was correct. We affirm that
judgment, but do not consider the measure of damages because
it has not been challenged in this appeal.
The trial court found that "[allthough the Contract
between the parties is structured in terms of a lease, it
provides that at the end of the lease period, the fire alarm
system can be purchased for $1.00; accordingly, the true
nature of the transaction was a 'sale' and should be so
construed." We agree.
A sale is a contract under which title to goods passes
from the seller to a buyer for a price. Section 30-2-
106(1), MCA. The fact that the agreement was entitled a
"lease" rather than an "installment sale contract" does not
mean that the parties are not subject to Montana's Commercial
Code. In circumstances where the purported "lease" gives the
"lessee" the option to acquire the "leased" goods upon
expiration of the "lease" term for nominal consideration,
the "lease" is commercially indistinguishable from an install-
ment sales contract. Section 30-1-201(37), MCA; Whitworth
v. Krueger (1976), 98 Idaho 65, 558 P.2d 1026, 1029.
Chico Hot Springs had the option upon expiration of the
"lease" term to purchase the fire alarm system for the nominal
consideration of one dollar. This agreement was an executory
sale contract in which Fire Supply retained title to the
system as a form of security in the event Chico Hot Springs
failed to pay as agreed.
The parties' written contract originally provided that
Fire Supply would install and periodically inspect and
service the fire alarm system for a five-year period beginning
November 26, 1976, and that Chico Hot Springs was to pay
$178.25 in advance each month during the five-year period.
I n t h e e v e n t t h a t Chico Hot S p r i n g s d e f a u l t e d by f a i l i n g t o
make p u n c t u a l monthly payments, t h e c o n t r a c t p r o v i d e d t h a t
F i r e Supply had t h e r i g h t t o r e t a k e immediate p o s s e s s i o n of
t h e system, w i t h o u t n o t i c e t o Chico Hot S p r i n g s . The c o n t r a c t
f u r t h e r p r o v i d e d t h a t upon F i r e S u p p l y ' s r e p o s s e s s i o n of t h e
system, " t h i s agreement s h a l l t h e n c e f o r t h t e r m i n a t e w i t h o u t
p r e j u d i c e t o any r i g h t o r c l a i m f o r a r r e a r s of r e n t . . . ."
T h a t c o n t r a c t , however, w a s l a t e r r e s c i n d e d and an
i d e n t i c a l one w a s e x e c u t e d , e x c e p t t h a t t h e monthly payments
were t o b e g i n on J u l y 1, 1977, and r u n f o r a p e r i o d o f f i v e
y e a r s from t h a t d a t e . Chico Hot S p r i n g s c o n t e n d s t h a t t h e
c o n t r a c t was t h e n f u r t h e r m o d i f i e d by an o r a l agreement t o
a l l o w i t t o make d o u b l e payments d u r i n g t h e summer months
and n o t make some o f t h e w i n t e r months' payments. Fire
Supply d e n i e s t h a t s u c h an agreement was made. The t r i a l
c o u r t found t h a t F i r e Supply t o l e r a t e d t h i s payment s c h e d u l e
f o r t h r e e y e a r s and t h a t t h e r e was a t a c i t agreement s u p p o r t i n g
t h a t schedule.
Although t h i s c o n t r a c t and any m o d i f i c a t i o n s would
o r d i n a r i l y be s u b j e c t t o t h e s t a t u t e of f r a u d s b e c a u s e t h e y
i n v o l v e goods w i t h a v a l u e g r e a t e r t h a n $500 ( s e c t i o n s 30-2-
2 0 1 ( 1 ) , - 2 0 9 ( 3 ) , MCA), t h e r e i s an a p p l i c a b l e e x c e p t i o n
under s e c t i o n 30-2-209(4), MCA, i n which a n a t t e m p t e d o r a l
m o d i f i c a t i o n can o p e r a t e as a w a i v e r t o a s s e r t t h e s t a t u t e
of frauds defense. I n Farmers E l e v a t o r Co. of Reserve v.
Anderson ( 1 9 7 6 ) , 170 Mont. 175, 552 P.2d 63, w e h e l d t h a t a
d e f e n d a n t ' s r e p e a t e d a c t s o f d e l i v e r y o f g r a i n t o an e l e v a t o r
a f t e r t h e d a t e o r i g i n a l l y agreed c o n s t i t u t e d a modification
of t h e d e l i v e r y t e r m s , and t h a t a l t h o u g h t h e m o d i f i c a t i o n
was u n e n f o r c e a b l e under t h e s t a t u t e o f f r a u d s , it o p e r a t e d
a s a waiver t o a s s e r t t h a t defense.
-7-
Here, Fire Supply installed a fire alarm system in the
hotel in November 1976, but Chico Hot Springs made no payments
to Fire Supply for eight months. Rather than repossess the
system, Fire Supply accommodated Chico Hot Springs by modifying
the contract so that the monthly payments would not be due
until July 1, 1977. Chico Hot Springs then began making
payments each month beginning in July 1977, but missed
payments for the winter months of November 1977, February
1978, and May 1978. It then made double monthly payments
during June, July and August 1978, but missed payments for
September and November 1978, and for February through May
1979. In June 1979 it again made a double payment. An
October 2, 1978 letter from Fire Supply to Chico Hot Springs
reveals that Fire Supply was willing to tolerate this payment
schedule, but would begin charging interest on late payments.
The trial court was correct in finding that this payment
schedule, although at variance with the terms of the contract,
constituted a course of performance acquiesced in by Fire
Supply which modified the contract. We have defined a
course of performance as ". . . a sequence of previous
conduct between the parties to a particular transaction
which is fairly to be regarded as establishing a common
basis of understanding for interpreting their expressions
and other conduct." Farmers Elevator Co., supra, 170 Mont.
at 181, 552 P.2d at 66. Under section 30-2-208(1), MCA,
" ... any course of performance accepted or acquiesced in
without objection . . ." is relevant to determine the meaning
of the parties' agreement.
Although the trial court did not specifically find that
Fire Supply had waived its statute of frauds defense, the
findings, taken as a whole, imply Fire Supply's acquiescence
in Chico Hot Springs' repeated acts of nonpayment during
some winter months. It is but a simple matter to conclude
that by not taking any action where Chico Hot Springs
repeatedly failed to pay during some winter months, Fire
Supply has agreed to that arrangement. The parties effect-
ively modified the payment schedule to allow Chico Hot
Springs to miss payments during the winter months and catch
up with them in the summer.
The trial court also concluded that the fire alarm
system failed to meet Fire Supply's express warranty that it
was the "best" system for the hotel, and that it failed to
meet both the implied warranty of merchantability and the
implied warranty of fitness for a particular purpose.
To recover damages for a breach of warranty, the buyer
must plead and prove that he gave the seller notice of the
breach within a reasonable time after it was discovered or
be barred from any remedy. Section 30-2-607(3), MCA. The
trial court accepted Chico Hot Springs' contention that it
advised Fire Supply of the system's failure after the
December 1978 fire in the resort's snack bar. In addition,
the record reveals that from August 1977 through June 1978,
Chico Hot Springs repeatedly notified Fire Supply that the
system's alarm, control panel, and heat detectors weren't
working as they were supposed to. This was sufficient to
inform Fire Supply that the system was troublesome and
should have been watched.
Where the seller is aware that the buyer is relying
upon the seller's judgment to select suitable goods, an
implied warranty that the goods are fit for that particular
purpose arises. Section 30-2-315, MCA. The trial court
found that Fire Supply was aware that Chico Hot Springs was
relying on it to recommend and install a fire alarm system
which would be suitable for use in the large, old, wood-
frame resort. Fire Supply installed a system which was
complicated and difficult to use, and which often required
Fire Supply to service it. The alarm bells frequently
sounded when there was no fire, and did not sound when there
were fires. The control panel did not work properly; its
"trouble" light continually malfunctioned and then burned
out entirely. Fire Supply's own records show that the
system was troublesome to operate.
Because we hold that the trial court correctly found
that Fire Supply breached the parties' agreement by installing
a fire alarm system which failed to meet the implied warranty
of fitness for a particular purpose, we need not consider
whether any other warranty was breached. Under the breach of
warranty, Chico Hot Springs is entitled to recover any loss
in value of the goods because of the breach, plus consequential
and incidental damages, where proper. Section 30-2-714,
MCA. Chico Hot Springs prayed for the return of all monies
it had expended under the agreement ($5,526), and the trial
court awarded it that amount. Fire Supply has not challenged
the validity of that measure of damages.
Because Fire Supply's acquiescence in Chico Hot Springs'
payment schedule constituted a modification of the contract,
Fire Supply had no right to cancel the agreement for the
purported nonpayment. Fire Supply contends that section 30-
2-703(f), MCA, gives it the right to cancel the agreement.
Reliance on that section, however, is in error; that section
deals only with a seller's remedies where a buyer fails to
make a payment due at or before the time the goods are delivered
to the buyer.
The trial court's award of consequential damages for
the fire damage to the hotel's guest room was also proper
under section 30-2-715(2) (b), MCA. The judgment is affirmed.
We Concur:
Chief Justice