Rendering Consequential and Incidental Damage Limitations

Rendering Consequential and
Incidental Damage Limitations and Exclusions Contained in Warranty Provisions Void
Pursuant to the Uniform Commercial Code in Certain Instances for Commercial
Cases

[Presented
to and Published by the NorthEastAcademy of Legal Studies in
Business]

By Mitchell J. Kassoff, Esq.[1]

 franchiselawyer@verizon.net

www.franatty.cnc.net

(973) 762-1776

 

This article examines the situation in which a non-consumer purchases a product from a manufacturer who has explicitly stated that no consequential and incidental damages will be paid if there is any defect or other problem with its product.The article posits that the purchaser has or is considering suing the manufacturer for his damages.

Standard for the Granting of Summary Judgment

   It is assumed that the manufacturer will make a motion for summary judgment to dispose of a lawsuit instituted by a purchaser for damages.  It must be noted that such damage limitations are specifically permitted by the Uniform Commercial Code.^[2] The first tactic that the manufacturer might take is that its exclusion entitles it to prevail on a motion for Summary Judgment.

As the U.S. Supreme Court clearly stated in H. J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 106 L. Ed. 2d 195, 1989 U.S. LEXIS 3239, 109 S. Ct. 2893, 57 U.S.L.W. 4951 (1989):

Indeed it may appear on the face of the pleadings that a recovery is very remote and unlikely but that is not the test. . . .‘In appraising the sufficiency of the complaint we follow, of course, the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.’  [Citations omitted].  [Emphasis added]).  492 U.S. at 249-250.

In Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568 (2^nd Cir. 1993) the Second Circuit held that:

Extensive jurisprudence developed in the Supreme Court and in our Circuit provides well-established standards governing review of a Rule 56 motion for summary judgment. A party moving for summary judgment bears the burden of establishing that no genuine issue of material fact remains for trial. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970); Eastman Mach. Co. v. United States, 841 F.2d 469, 473 (2d Cir. 1988).

The district court’s role — and our role on appeal — requires the court not to resolve disputed issues of fact itself, but rather to see if there are issues of fact to be resolved by the factfinder at trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). That is to say, when examining the record before it to see if there are any genuine issues of material fact, the court’s focus is  on issue-finding, not on issue-resolution. In making its assessment, the trial court must view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor. See United States v. Diebold, 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962) (per curiam).  [Emphasis added].  996 F.2d at 572.

In Donahue v. Windsor Locks Bd. of Fire Comm’rs, 834 F.2d 54 (2^nd Cir. 1987) the Second Circuit held that:

 

The Roman philosopher Plautus warned us that there is no smoke without fire but, if this were always true, federal courts would not be able to distinguish between meritless and meritorious suits. Here, however, Plautus’s advice is most appropriate. Although Donahue’s complaint raises mostly smoke, it also reveals a flame that should have precluded summary judgment against him.

Although the basic principles for granting summary judgment are well-settled, the frequency of cases in which it is granted improvidently persuades us that these tenets bear repetition. Fed. R. Civ. P. 56(c) provides, in part, that summary judgment shall be rendered only when a review of the entire record demonstrates “that there is no genuine issue as to any material fact.” The burden falls on the moving party to establish that no relevant facts are in dispute.  Heyman v. Commerce & Industry Ins. Co., 524 F.2d 1317, 1319-20 (2d Cir. 1975); accord, Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S. Ct. 1598, 26 L. Ed. 2d 142 (1970). Moreover, in determining whether a genuine issue has been raised, a court must resolve all ambiguities and draw all reasonable inferences against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 8 L. Ed. 2d 176 (1962) (per curiam); Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir. 1980). Therefore, not only must there be no genuine issue as to the evidentiary facts, but there must also be no controversy regarding the inferences to be drawn from them.  Schwabenbauer v. Bd. of Educ., 667 F.2d 305, 313 (2d Cir. 1981), accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986).

Properly employed, summary judgment allows the court to dispose of meritless claims before becoming entrenched in a frivolous and costly trial.  Knight v. U.S. Fire Ins. Co., 804 F.2d 9 (2d Cir. 1986), cert. denied, 480 U.S. 932, 107 S. Ct. 1570, 94 L. Ed. 2d 762 (1987). It must, however,  be used selectively to avoid trial by affidavit.  Judge v. Buffalo, 524 F.2d 1321 (2d Cir. 1975). Hence, the fundamental maxim remains that on a motion for summary judgment a court “cannot try issues of fact; it can only determine whether there are issues to be tried.” Heyman, 524 F.2d at 1319-20. As long as the plaintiff has adduced sufficient facts to substantiate the elements of his claim, summary judgment is inappropriate. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986).  [Emphasis added].  834 F.2d at 57- 58.

 

In Bickhardt v. Ratner, 871 F. Supp. 613, Fed. Sec. L. Rep. (CCH) ¶98780 (S.D.N.Y. 1994) the Court held that:

Summary judgment may be granted if, upon reviewing the evidence in the light most favorable to the non-movant, the court determines that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law.” Richardson v. Selsky, 5 F.3d 616, 621 (2d Cir. 1993). In deciding the motion, “the court is required to draw all factual inferences in favor of the party against whom summary judgment is sought.” Balderman v. U.S. Veterans Administration, 870 F.2d 57, 60 (2d Cir. 1989). “Only when no reasonable trier of fact could find in favor of the nonmoving party should summary judgment be granted.” Cruden v. Bank of New York, 957 F.2d 961, 975 (2d Cir. 1992); accord Taggart v. Time, Inc., 924 F.2d 43, 46 (2d Cir. 1991).  [Emphasis added].  871 F. Supp. at 616.

In PC Com v. Proteon, Inc., 946 F.Supp. 1125, 32 U.C.C. Rep. Serv. 2d (Callaghan) 663 (S.D.N.Y. 1996)  the Court held that:

Summary judgment is appropriate if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” FED. R. CIV. P. 56(d). A court may grant summary judgment “only if the evidence, viewed in the light most favorable to the party opposing the motion, presents no genuine issue of material fact.” Cable Science Corp. v. Rochdale Village, Inc., 920 F.2d 147, 151 (2d Cir. 1990). On a motion for summary judgment, all evidence must be viewed and all inferences must be drawn in the light most favorable to the nonmoving party.  United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962); City of Yonkers v. Otis Elevator Co., 844 F.2d 42, 45 (2d Cir. 1988).  946 F.Supp. at 1129.

In Pactel Finance v D.C. Marine Service Corp., 136 Misc.2d 194, 518 N.Y.S.2d 317, 4 U.C.C. Rep. Serv. 2d (CBC) 665 (1987) the Court held in an action for breach of contract to supply both goods and services, there was sufficient potential unconscionability to preclude summary judgment for seller where contract purported to exclude warranties and obligated buyer to make payment even where bargained-for services were not provided; U.C.C. §2-302 provides that where reliance is placed on alleged unconscionability of contract provision, parties shall be afforded reasonable opportunity to present relevant evidence, and statute applies to warranty exclusions.

The Provisions Of The Uniform Commercial Code Permit The Recovery Of Damages

  The first method of obtaining damages is to show that the alleged limitation of damages were not properly prepared or documented by a manufacturer or accepted or agreed to by a purchaser.

To do this the agreement in question must be examined.  Since this agreement will virtually always be prepared by the manufacturer, all ambiguities must be construed against manufacturer.  Many time the Terms and Conditions section provides for a signature by the purchaser agreeing to its terms.  Quite frequently the purchaser will not have signed this section nor agreed to its terms.  This would make a strong case for denying the limitation of damages stated therein.

 

The case of Nassau Suffolk White Trucks, Inc. v Twin County Transit Mix Corp., 62 A.D.2d 982, 403 N.Y.S.2d 322, 24 UCCRS 84 (2^nd Dep’t 1978) held that the requirement of UCC §2-316(2) and §1-201(10) that language in a warranty disclaimer be conspicuous was not satisfied where provisions of disclaimer were printed in type which was no larger than any other type on the entire page and actually was smaller than some of such other type.  The case of Minikes v. Admiral Corp., 48 Misc.2d 1012, 266 N.Y.S.2d 461, 3 UCCRS 169 (1966) also held that a disclaimer of implied warranties printed in smaller type than the rest of the purchase order was ineffective.

Based upon the holdings of Nassau Suffolk White Trucks and Minikes the placement and size of the type of the Terms and Conditions section is also important to this analysis.  These cases and virtually all other authority state that for a disclaimer to have effect it must be very obvious.  Other items that are required that it be bold or larger type.

Argument Can Be Made That A Large Number Of Defects That Had To Be Remedied And Manufacturer’s Failure To Do So In A Timely Manner Voided Any Possible Damage Limitation That Might Have Existed Since Purchaser’s Exclusive Remedy Failed Of Its Essential Purpose

The Oklahoma Supreme Court has discussed this issue.  In the case of Osburn v. Bendix Home Systems, Inc., 1980 OK 86, 613 P.2d 445, CCH Prod.Liab. Rep. ¶8732, 29 U.C.C. Rep. Serv. (Callaghan) 119 (1980) the Court stated in its overview:

 

The buyers of a new mobile home manufactured by the manufacturer brought suit pursuant to § 2-105 of the Uniform Commercial Code (Code), 12A O.S. § 2-105 (1971), after deficiencies in parts and materials were not corrected on a timely basis.  The manufacturer appealed the judgment of the trial court finding breach of express warranty and argued that the buyers’ recovery was limited by the warranty which restricted the right of recovery for breach to repair or replacement of defective parts. On appeal, the court affirmed the judgment of the trial court.  The court held that when the home was not made to conform to the warranty within a reasonable time, the buyer, left without the substantial value of his bargain, was relieved by the Code of the warranty-imposed limitation and hence was able to seek broader recovery.

Uniform Commercial Code Section 2-719(3) states that “[c]onsequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.  [Emphasis added].  Uniform Commercial Code Section 2-316(1) states that “[w]ords or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence (Section 2-202) negation or limitation is inoperative to the extent that such construction is unreasonable.  [Emphasis added].  It would be the contention of purchaser that to allow manufacturer to limit the damages that it caused would be unconscionable.

The case of Perlmutter v. Don’s Ford, Inc., 96 Misc.2d 719, 409 N.Y.S.2d 628, 25 UCCRS 675 (1978) dealt with facts that are analogous to this issue.  The Court held that manufacturer auto dealer, which improperly applied a manufacturer’s rust proofing material to purchaser’s automobile resulting in rust damage, was liable to the purchaser for consequential damages, i.e., the cost of repairing his car, since the application of the rust proofing material was a contract between the purchaser and manufacturer which the manufacturer breached by improper application and inadequate inspection and the manufacturer cannot claim as a defense the terms of section 2-719 of the Uniform Commercial Code that limits a buyer’s remedies to the return of the goods and repayment of the price since the contract is for services.

Consolidated Data Terminals v. Applied Digital Data Sys., 708 F.2d 385, 36 UCCRS 59 (9^th Cir. 1983) (among conflicting authorities noted in Employers Ins. v. Suwannee River Spa Lines, 866 F.2d 752, 1990 AMC 447, 8 UCCRS2d 659 (5^th Cir. 1989) in applying the New York Uniform Commercial code in a breach of warranty action for damages by distributor-buyer of computer terminals against manufacturer-seller death with a similar issue.  The Court held (1) that manufacturer had breached its warranty concerning terminals sold to purchaser; (2) that under UCC § 2-316(1), manufacturer’s disclaimer of all warranties, express or implied–except for limited warranty of repair and replacement of defective parts–would not be permitted to override highly particularized warranty created by terminals’ operating specifications; (3) that since purchaser’s sole remedy of repair and replacement of defective parts had failed in its essential purpose under UCC § 2-719(2), purchaser could resort to all breach-of-contract remedies available under Uniform Commercial Code; (4) that terms of parties’ contract did not bar purchaser from recovering consequential damages; (5) that purchaser was not entitled to direct damages under UCC § 2-714(2) for difference between terminals’ value as warranted and as delivered, since purchaser had not been forced to make price concessions to any of its customers who had purchased terminals manufactured by manufacturer; (6) that purchaser could recover consequential damages under UCC § 2-715(2)(a) for customer-service calls necessitated by terminals’ defects and (7) that purchaser could not recover consequential damages for profits allegedly lost as result of purchaser’s voluntary termination of its computer-terminal-distributorship contract with manufacturer, since purchaser had not in fact lost any such profits as result of manufacturer’s breach of warranty.

When the exclusive remedy under a contract fails of its essential purpose then the exclusion as to consequential and other damages also fails.[3]Manufacturer’s exclusive remedy is usually stated to repair or replacement of the defective materials and parts it manufactured.  Argument can be made that this is inadequate since the time manufacturer took to take this action was commercially unreasonable and ineffective.  When a remedy fails in its purpose, to-wit: replacement of improperly manufactured materials and parts, any limitation of damages also fails[4].

The Court in PC Com, supra, held that:

in order to decide this [summary judgment] motion the court must determine whether (1) whether a minimum adequate remedy exists and (2) whether the limitation of consequential damages is unconscionable. See M.G.L.A. 106 § 2-719; Canal Elec., 548 N.E.2d at 183-85. However, answering those two questions does not complete the analysis. Many courts impose an additional obligation of good faith under U.C.C. § 2-203 upon parties seeking to rely upon favorable contract provisions before they can invoke such provisions to their benefit.  [omitting footnotes] 946 F.Supp. at 1135- 36.

 

Any Contract Terms Limiting Manufacturer’s Liability Must Fail When Agreements Were Presented On A Take It Or Leave It Basis By A Company With Vastly Superior Bargaining Power Making The Exclusion Of Liability Provisions Unenforceable As Contracts Of Adhesion

  Before manufacturer would sell its products to purchaser, purchaser is usually required to execute the various agreements prepared by manufacturer.  The agreements are usually presented on a take it or leave it basis and are not subject to negotiation.

            Argument can be made that purchaser is a much larger company, has vastly superior financial resources, has annual sales greatly in excess of those of purchaser, is one of a limited number of suppliers of the type of product that manufacturer wished to purchase and had greatly superior bargaining ability.  Based on these characteristics, the contracts presented by manufacturer can be claimed to be contracts of adhesion.  If the contracts were contracts of adhesion, manufacturer would not able to hide behind any alleged limitation of damages.

The opinion of the Oklahoma Attorney General (Opinion 01-17) is relevant to this issue.  The opinion states:

You first ask whether the arrangement between a contract grower and an integrator is a contract of adhesion.  The Oklahoma Supreme Court has defined an “adhesion contract” as follows:
The term [adhesion contract] refers to a standardized contract prepared entirely by one party to the transaction for the acceptance of the other; such a contract, due to the disparity in bargaining power between the draftsman and the second party, must be accepted or rejected by the second party on a “take it or leave it” basis, without opportunity for bargaining . . . .  Any ambiguities or uncertainties in the contract will be construed in favor of the party presented with the form contract.  See Dismuke v. Cseh, 830 P.2d 188, 190 (Okla. 1992); Brannon v. Boatmen’s Nat’l Bank, 976 P.2d 1077, 1083 (Okla. Ct. App. 1998). Indeed, even if the terms of the adhesion contract are clear and unambiguous they will not always be enforceable.  As the Supreme Court noted in Rodgers, adhesion contracts reflect an imbalance of bargaining power.  See Rodgers, 756 P.2d at 1226. When this imbalance of bargaining power rises to a sufficient level and is combined with contractual terms which are unreasonably favorable to the other party, the courts will refuse to enforce those terms on the grounds of unconscionability. See Barnes v. Helfenbein, 548 P.2d 1014, 1020 (Okla. 1976).  You have indicated that integrators typically offer to their growers form contracts which the growers must either accept or reject in their entirety. If this is the case, such contracts are contracts of adhesion.  [Emphasis added].

The case of McNally Wellman Co. v. New York State Elec. & Gas Corp., 63 F.3d 1188, 27 U.C.C. Rep. Serv. 2d (CBC) 289 (2^nd Cir. 1995) holds that the court must first make:

an inquiry into any inequities of bargaining power when the parties drafted the contract, a factor NYSEG cannot argue existed here. See American Dredging Co. v. Plaza Petroleum, 799 F.Supp. 1335, 1339 (E.D.N.Y. 1992), vacated in part, 845 F.Supp. 91 (E.D.N.Y. 1993). Further, an assessment of unconscionability “generally requires a showing that the contract was both procedurally and substantively unconscionable when made — i.e., some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.  [Emphasis added].  63 F.3d at 1198.

The Court in McNally also stated that a breach of a fundamental obligation under a contract occurs where the contract fails in its essence: that is, where ordered goods are “delivered with significant faults rendering them inoperable.”  63 F.3d at 1200.

Manufacturer’s product was designed and built for this one specific project and manufacturer cannot state that it is not liable if its product is not good for the particular purpose for which it was specifically designed nor can it deny its implied warranty of merchantability

 

 Cohen v. Bratt & Doxey Supply Co., 51 A.D.2d 719, 379 N.Y.S.2d 155, 18 UCCRS 651, (2nd Dept 1976), appeal denied, 39 N.Y.2d 706 (1976) involved an action by a homeowner against seller of bricks to recover damages for breach of warranty, (1) implied warranty of fitness for particular purpose attached to sale of bricks under UCC § 2-315, where intended purpose for which they were to be utilized was expressly made known to manufacturer’s salesmen, where purchaser and his brick layer agent relied on judgment of manufacturer’s salesmen in selecting suitable brick for stated purposes, and where salesman had reason to know that there was such reliance, (2) warranty was not excluded by usage of trade under UCC § 2-316(3)(c), and (3) since bricks clearly were not fit for use to which they were put and since purchaser’s loss was proximate result thereof, he was clearly entitled to consequential damages under UCC §2-715(2)(b).

It would be stated that purchaser greatly relied on manufacturer’s expertise in all aspects of the project involved in this action.  Therefore, manufacturer cannot disclaim the implied warranty that their project was fit for a particular purpose since it was custom built for this one and only purpose.

            When a remedy fails in its purpose, to-wit: replacement of improperly manufactured materials and parts, any limitation of damages also fails.[5]

Even If Manufacturer’s Disclaimer Prohibited Damages Under A Theory Of Warranty, Manufacturer’s Fraudulent And Tortuous Conduct Can Be Addressed

 

  Purchaser would state that the number of significant and material errors on the part of manufacturer raises this case from not only a case sounding in contract, but also one also sounding in tort. 

Any limitation of damages that manufacturer might have pursuant to a contract theory of damages would not protect manufacturer from its tortuous conduct.  In no manner of analysis can these actions be deemed contractual in nature.

Sterner Aero Ab v. Page Airmotive, Inc., 499 F.2d 709 (10^th Cir. 1974) held that:

Although a party to a contract may limit or eliminate liability for his own negligence if he is on an equal bargaining footing with the other contracting parties, see Mohawk Drilling Co. v. McCullough Tool Co., 271 F.2d 627 (10th Cir. 1959), at the same time, such contractual provisions are not the favorites of the law and hence are strictly construed.  Standard Ins. Co. of New York v. Ashland Oil and Refining Co., 186 F.2d 44 (10th Cir. 1950); Gulf C. & S. F. Ry. Co. v. Anderson, 120 Okla. 60, 250 P. 500 (1926).  [Emphasis added].  499 F.2d at 713- 14.

IKEA N. Am. Servs. v. Northeast Graphics, Inc., 56 F.Supp.2d 340 (S.D.N.Y. 1999).  In IKEA the Court stated that a claim for fraud can be maintained if purchaser can:

(ii) demonstrate that manufacturer has made a fraudulent misrepresentation collateral or extraneous to the contract, or (iii) demonstrate the plaintiff is entitled to special damages caused by the fraud that are unrecoverable as contract damages.  56 F.Supp.2d at 342.

 

The Court went on to state that:

 

additional duties of special care sounding in tort have been read into contractual relationships in certain circumstances (such as where a party has obtained a position of special confidence or trust with respect to the other, or possesses specialized or unique expertise). . .  56 F.Supp.2d at 343.

 

Based on IKEA the causes of action based upon both fraud and tort can be maintained.  It would be stated that the case is anything but a simple breach of contract.  Purchaser would state that it was induced into entering into the purchase of the product in question specifically upon the representations of manufacturer that it was capable of fulfilling its obligations in a timely and approproate manner.  Purchaser would state that it relied upon manufacturer’s special expertise in assisting in the design and manufacture of the building and represented that it had the experience and expertise upon which purchaser relied.

 CONCLUSION

   There are many ways to negate an attempt by a manufacturer to have its damages limited pursuant to the provisions of the Uniform Commercial Code.