United States District Court, D. South Dakota, Western Division
MEMORANDUM OPINION AND ORDER
Lawrence L. Piersol United States District Judge
Plaintiff
Highmark, Inc. moved for reconsideration of the Court's
previous ruling of March 1, 2016. The Court had held that the
warranty limitations were not unconscionable. That
determination is a law question to be determined by the Court
and after previous submissions, arguments, and
reconsideration, that holding will not be changed. Highmark
is a prevailing party and it is entitled to attorney fees,
that part of the previous ruling not, of course, being a part
of the Motion for Reconsideration.
The
contract provisions in question are as follows:
10. WARRANTIES: The goods sold hereunder are subject to
Seller's standard manufacturing variations, tolerances
and classifications. Seller warrants that it has good and
sufficient title to the goods, that the goods are made in a
workmanlike manner and in accordance with the specifications
therefor supplied or agreed to by Contractor, and are made or
packaged pursuant to Seller's customary manufacturing
procedures. Seller assumes no responsibility for the adequacy
of performance of engineering design or specifications
furnished by Contractor or others. Seller's sole
obligation under the foregoing express warranties shall be to
repair, replace or refund the purchase price of, at
Seller's option, any article of goods, or part thereof,
which shall be returned to Seller's plant at
Contractor's cost and proved by Contractor to be other
than as warranted. The remedy hereby provided shall be the
exclusive and sole remedy of Contractor for breach of the
foregoing express warranties. This express warranty will be
for a period of (1) one-year after the date of delivery of
the goods.
THE ABOVE EXPRESS WARRANTIES OF SELLER ARE THE SOLE
WARRANTIES OF SELLER, AND ANY OTHER WARRANTIES, EXPRESSED,
IMPLIED IN LAW OR IN FACT, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE WHICH
EXCEEDS THE FOREGOING EXPRESS WARRANTIES, ARE HEREBY
DISCLAIMED BY SELLER.
11. EXCLUSION OF CONSEQUENTIAL AND INCIDENTAL DAMAGES: No
claim of any kind, whether as to goods delivered or for
non-delivery of goods, shall be greater in amount than the
purchase price of the goods in respect of which such damages
are claimed, and failure to give notice of claim within the
time limits stated in paragraphs 9 and 10 above and shall
constitute a waiver by Contractor of all claims in respect of
such goods. The remedy hereby provided shall be the exclusive
and sole remedy of Contractor, except as otherwise provided
herein. Any right of Contractor to consequential and
incidental damages for the breach by Seller of any term
contained in this sales order, including the warranties
provided in paragraph 10 above, is excluded.
The
question of whether or not the warranty limitations under the
circumstances caused the limited remedy to fail from its
essential purpose is a question for the jury if there is
sufficient evidence on that issue to present a jury question.
Johnson v. John Deere Co., 306 N.W.2d 231 (S.D.
1981); Golden Reward Mining Co. v. Webb Co., 772
F.Supp. 1118 (D.S.D. 1991) (dicta). In considering
whether the circumstances caused the limited remedy to fail
from its essential purpose, the Court must consider the
circumstances in the light most favorable to the Plaintiff,
Highmark, Inc. Highmark and the City did ultimately get pipe
that met the specifications. The Court observed that it is a
close question as to whether or not the repair that took up
to eight (8) months as opposed to the sixty (60) days
provided for repair in the contract caused the limitation of
remedy to fail of its essential purpose under SDCL
57A-2-719(2).
Since
this is a diversity case, South Dakota law determines if it
is a fact or law question as to whether the circumstances
caused an exclusive or limited remedy to fail of its
essential purpose. Johnson v. John Deere Co., supra,
is binding precedent on that question. The Johnson
court at 237 in reversing the trial court determination
stated that "where there is any evidence to support the
claim (of the failure of the warranty to fulfill its
purpose), is a question of fact for the jury;". This
Court was incorrect in deciding that question as a matter of
law as there is some evidence to support that claim. For
another example of submitting failure of the essential
purpose issue to the jury, see Riley v. Ford Motor
Co., 442 F.2d 670 (5th Cir. 1971) (Alabama law). There
are fact issues of whether all of the delay is chargeable to
the Defendant seller, and then the factual question of was
that chargeable delay such that under the circumstances it
caused the exclusive or limited remedy to fail of its
essential purpose. The essential purpose was to deliver pipe
that met the specifications. That was accomplished but only
after substantial delay. Often the failure in question is
unwillingness or inability to perform. However, in the
present case, as in Johnson v. John Deere, there
ultimately was performance, but the delay was substantial.
Plaintiff
relies upon Soo Line R. Co. v. Fruehauf Corp., 547
F.2d 1365 (8th Cir. 1977) (Minnesota law). That case is
distinguishable in that Fruehauf as the seller refused to
accept responsibility for the repairs of the underframes of
the 500 railcars. The jury and then the Eighth Circuit
concluded at 1370 "that the remedial limitation
contained within the contract failed of its essential purpose
and is therefore unenforceable." The Eighth Circuit went
on to state at 1371, "Based on this evidence, we
conclude that the contract's limited remedy of repair
failed of its essential purpose, and therefore all available
Uniform Commercial Code remedies apply. See Minn. Stat. Ann.
§ 336.2-719(2) and 336.2-714." Among other damages
affirmed was $182, 444 for revenue lost while the cars were
undergoing repairs. That element of damages is clearly
consequential damages. This 1977 holding allowing
consequential damages despite a contract limitation of any
such damages. A finding of a limited remedy failing of its
essential purpose under Minnesota law as defeating damage
limitations in a contract is not now the law in Minnesota in
a commercial setting. Transport Corp. of America v. IBM,
Inc., 30 F.3d 953, 960 (8th Cir. 1994) "An
exclusion of consequential damages set forth in advance in a
commercial agreement between experienced business parties
represents a bargained-for allocation of risk that is
conscionable as a matter of law."; International
Financial Services, Inc. v. Franz, 534 N.W.2d 261 (Minn.
Supreme Court 1995). (Holding that a consequential damages
limitation survives as between commercial contractors even if
the jury determines that the exclusive or limited remedy
failed of its essential purpose, the damages limitation being
separate from the warranty limitation. The warranty
limitation can be defeated if it fails of its essential
purpose.) The physical separation of the repair and
replacement provision and the consequential damage provision,
as is present here, was relied upon in Franz as well
as in American Elec. Power Co. v. Westinghouse Elec.
Corp., 418 F.Supp. 435 (S.D.N.Y.1976).
Plaintiff
again relies upon Hartzell v. Justus Co., 693 F.2d
770 (8th Cir. 1982). That case is of no assistance as it was
a consumer case and no remedy to the defects in the house was
ever provided by the seller.
Plaintiff
also relies upon Dermalogix Partners, Inc. v. Corwood
Labs., Inc., 2000 WL 760732 (D. Me. 2000)(Maine law).
Plaintiff claims that Dermalogix was on appeal to
the District Court. Instead, the District Court decided the
case on motion for summary judgment. Dermalogix had
a damage cap similar to paragraph 11 of the contract in the
present case. The damage cap was found to not be
unconscionable and the Court also found that the damage cap
did not cause the limitation to fail of its essential
purpose. The agreements did not have an exclusive or limited
remedy provision other than the damage cap, so there was no
consequential damages limitation under consideration. On the
scanty factual record, it was unclear what damages were being
awarded by summary judgment under Maine law.
The
damage cap agreed to in the present case would be applicable,
but the damages to be awarded cannot be consequential
damages. Dermalogix had no consequential or
exclusive or limited remedy other than the damages
cap limitation and the court there applied the damages cap
limitation as it was found to not be unconscionable. In the
present case there is not only a damages cap limitation but
also other limitations including an exclusion on
consequential and incidental damages.
This
Court has determined that the limitation excluding
consequential damages is not unconscionable as between these
commercial contractors. As in Johnson, that
limitation remains even if the jury determines that the
exclusive or limited remedy failed of its essential purpose.
A good discussion of the two views on that issue is in
International Financial Services, Inc. v. Franz,
supra, (holding in accord with Johnson, supra).
These holdings as well as this Order are not applicable to
consumer transactions. The Johnson Court also
observed at 238 that the buyer was "willing to trade off
the remedy for consequential loss for the warranty of
replacement and repair. ... Thus, although the repair and
replacement warranty may have subsequently failed of its
essential purpose, thereby entitling him to general damages
for breach of contract as outlined in the code, the
limitation on remedy was not unconscionable at the time it
was made, either procedurally or substantively, and he would
not be entitled to recover consequential damages."
Johnson
at 239 was remanded "for a new trial on the issue of
failure of a limited remedy under SDCL 57A-2-719(2), and for
determination of such damages, if any, allowable in
conformity with this opinion." The "damages, if
any, " is what was and is concerning this Court. At the
previous hearing, the Court asked the parties what damages
...