FIRE SUPPLY & SERVICE, INC., Plaintiff and Appellant, v. chico hot springs,
defendant and Respondent
Supreme Court of Montana; 196 Mont. 435; 639 P.2d 1160; 1982 Mont. LEXIS
719--August 20, 1981, Submitted on Briefs
February 3, 1982, Decided
PRIOR HISTORY: Appeal from the District Court of Park County. Sixth Judicial
District. Hon. Jack D. Shanstrom, Judge presiding.
PROCEDURAL POSTURE: Appellant seller sought review of a decision of the
District Court of Park County, Sixth Judicial District (Montana), which
entered judgment for respondent purchaser in an action against the purchaser
to receive delinquent payments under the terms of a lease the parties made
for the installation and maintenance of a fire alarm system at the
OVERVIEW: The parties entered into a lease agreement providing that the
purchaser would lease a fire alarm system from the seller for a five-year
term. Upon expiration of the term, the purchaser had the option to renew the
lease or to purchase the system for one dollar, in which the seller's duty
to service the system was terminated. A fire destroyed one of the hotel's
guest rooms and the system did not sound an alarm. Subsequently the seller
unsuccessfully filed an action to recover payments due it under the
agreement, contending that the purchaser breached the agreement by not
making the required monthly payments. On appeal, the court affirmed the
decision. The court stated that the lease was really an installment sales
contract because the purchaser had an option to purchase the system at the
end of the contract. As a result, the court found that the purchaser's
payment schedule, although at variance with the contract, constituted a
course of performance acquiesced by the seller, which modified the contract.
Therefore, the court held that the purchaser was not in breach of the
contract and the seller owed the purchaser damages for breach of warranty.
OUTCOME: The court affirmed the decision to award the purchaser damages
resulting from the fire system's failure to operate as warranted.
COUNSEL: McKinley Anderson, Berg, Coil, Stokes & Tollefsen, Bozeman, for
plaintiff and appellant.
Huppert & Swindlehurst, Livingston, for defendant and respondent.
JUDGES: Mr. Justice Shea delivered the opinion of the Court. Chief Justice
Haswell and Justices Harrison, Sheehy and Weber concur.
OPINION: [*437] [**1161] On July 24, 1979, the plaintiff, Fire Supply &
Service, Inc., filed an action against the defendant, Chico Hot Springs, in
Park County District Court to recover delinquent payments under the terms of
a lease the parties had made for the installation and maintenance of a fire
alarm system at the Chico Hot Springs resort hotel. Chico Hot Springs
counterclaimed for the return of all monies paid under the lease, arguing
that Fire Supply had installed a system which failed to meet all expressed
and implied warranties. Chico Hot Springs also sought damages resulting from
the system's alleged failure to operate as warranted. Trial without jury was
held December 15, 1980, and judgment was entered for Chico Hot Springs in
[***2] the amount of $ 5,776. Fire Supply appeals.
In 1976, Chico Hot Springs, through its president, Michael Art, approached
Fire Supply for the purchase of a fire alarm system for the Chico Hot
Springs resort hotel, and relied upon Fire Supply's expertise in
recommending an affordable system that would provide reliable protection for
the hotel's property and guests. Near the end of November 1976, Fire Supply
installed an automatic fire alarm system consisting of several heat
detection devices wired to a large and complicated control panel. Fire
Supply also installed manual "pull" alarm stations throughout the hotel. On
November 26, 1976, the parties signed a "Lease Agreement" which provided
that Chico Hot Springs would lease the system for $ 178.25 per month for a
five-year term. [**1162] Fire Supply was obligated to inspect the system
at least once every six months. Upon expiration of the five-year term, Chico
Hot Springs had the option to either renew the lease for another five-year
term or to purchase the system for one dollar, in which event Fire Supply's
duty to service the system was terminatd.
Chico Hot Springs contends that after the lease was executed, the parties
agreed [***3] that Chico Hot Springs would make payments during the summer
months only, and not make payments during the winter months when the
resort's business was slow. Fire Supply contends that no such agreement was
made, despite the fact that Chico Hot Springs offered into evidence a
written modification showing that its lease payments were not to begin until
July 1, 1977. In addition, [*438] Fire Supply's records show that on
November 26, 1976, Chico Hot Springs paid $ 2,139 for the system's
installation, and then did not make any monthly payments until July, 1977.
The parties then executed a new lease agreement on July 1, 1977, and
rescinded the first agreement. The new agreement was identical to the first
one except that the five-year lease term began July 1, 1977. Fire Supply's
records show that Chico Hot Springs was $ 1,248 delinquent in its payments
from December 1976 until June 1978, but that this amount was written off
Fire Supply's books when the new lease was executed.
Fire Supply's records also show that Chico Hot Springs paid $ 178.25 per
month beginning on July 1, 1977, but missed the November 1977, February
1978, and May 1978 payments. Chico Hot Springs then paid $ [***4] 356 per
month during June, July, and August, 1978. At the end of August, 1978, Chico
Hot Springs was current on its account and owed Fire Supply nothing. The
records then show that from September 1978 through June 1979, Chico Hot
Springs made only five 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 [***5] guest rooms
and endangered the entire hotel. The system did not sound an alarm, either
automatically or after an employee [*439] 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, contending 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 substantial fire had broken out in the resort's
snack bar, [***6] causing several thousand dollars worth of damage. The
fire detection system failed to activate [**1163] 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 warrantd 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 [*440] Chico [***7]
Hot Springs all monies paid under the agreement ($ 5,526) and awarded $ 250
damages for repairs to the firedamaged 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 "[a]lthough 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
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 thee "lease" term for nominal
consideration, the "lease" is commercially indistinguishable from an
installment sales contract. [***8] 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. In the
event that Chico Hot Springs defaulted by failing to make punctual monthly
payments, the contract provided that Fire Supply had the right to retake
immediate possession of the system, without notice to Chico Hot Springs. The
contract further provided that upon Fire Supply's repossession of the
system, [*441] "this agreement shall thenceforth terminate without
prejudice to any right or claim for arrears of rent . . ."
That contract, however, was later rescinded and an identical [***9] one was
executed, except that the monthly payments were to begin on July 1, 1977,
and run for a period of five years from that date. Chico Hot Springs
contends that the contract was then further modified by an oral agreement to
allow it to make double payments during the summer months and not make some
of the winter months' payments. Fire Supply denies that such an agreement
was made. The trial court found that Fire Supply tolerated this payment
schedule for three years and that there was a tacit agreement supporting
Although this contract and any modifications would ordinarily be subject to
the statute of frauds because they involve goods with a value greater than $
500 (sections [**1164] 30-2-201(1), - 209(3), MCA), there is an applicable
exception under section 30-2-209(4), MCA, in which an attempted oral
modification can operate as a waiver to assert the statute of frauds
defense. In Farmers Elevator Co. of Reserve v. Anderson (1976), 170 Mont.
175, 552 P.2d 63, we held that a defendant's repeated acts of delivery of
grain to an elevator after the date originally agreed constituted a
modification of the delivery terms, and that although the modification
[***10] was unenforceable under the statute of frauds, it operated as a
waiver to assert that defense.
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 [*442]
tolerate this payment schedule, but would begin charging interest on late
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 [***11]
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
effectively 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 [***12] 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
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 [*443] 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 [***13] 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 [**1165]
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 [***14] 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.
[*444] 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(b),
MCA. The judgment is affirmed.
CHIEF JUSTICE HASWELL and JUSTICES HARRISON, SHEEHY and WEBER concur.
FIRE SUPPLY & SERVICE, INC., Plaintiff and Appellant, v. chico hot springs, defendant and Respondent
FIRE SUPPLY & SERVICE, INC., Plaintiff and Appellant, v. chico hot springs,