Here is the third and final post in my series on damages and disclaimers in consumer product warranty actions. (Parts 1 and 2 are here and here.)
Incidental and Consequential Damages
U.C.C. § 2-719 governs incidental and consequential damages exclusions and provides:
Contractual Modification or Limitation of Remedy.
(1) Subject to the provisions of subsections (2) and (3) … and of the preceding section on liquidation and limitation of damages,
(a) the agreement of the parties may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable …, as by limiting the buyer’s remedies . . . to repair and replacement of non-conforming good or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act…
(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable . . .
Relying on § 2-719(2), warranty plaintiffs generally contend that, if a limited warranty fails of its essential purpose, they are entitled to recover incidental and consequential damages. The courts are split on the issue of the proper interplay between subsections (2) and (3) of § 2-719. The majority trend is to construe § 2-719 in a manner consistent with its express terms and underlying policies and purposes. Under § 2-719(3), a damages exclusion is enforceable so long as it is not unconscionable.
In Rheem Mfg. v. Phelps Heating & Air Conditioning, the Indiana Supreme Court recognized that two lines of interpretation had developed under § 2-719. One line holds that the enforceability of a consequential damages exclusion is “dependent on whether a limited remedy fails of its essential purpose.” The second line takes “an ‘independent’ view and reason[s] that because § 2-719(2) and (3) are separate subsections with separate language and separate standards, the failure of a limited remedy has no effect on an exclusion of consequential damages.” Rheem Mfg. holds that the “independent” view is the correct one.
The Rheem Mfg. court based its holding on several factors. First, it noted that the U.C.C.’s drafters inserted different legal standards into §§ 2-719(2) and (3). While a limited remedy clause is unenforceable when the remedy fails of its essential purpose, an incidental and consequential damages exclusion is enforceable so long as it is not unconscionable. Second, it observed that while the jury determines whether a limited remedy has failed of its essential purpose, the court determines, as a matter of law, whether a damage exclusion is unconscionable. Theses differences, the court concluded, demonstrate “a legislative intent that the provisions should function independently of one another.”
Third, the court applied the well-established principle of statutory contraction that a court must interpret a statute such that every word is given meaning, and no part is rendered meaningless. It found that “[t]he ‘dependent’ view renders § 2-719(3) inoperative by deleting an exclusion of consequential damages without any analysis of unconscionability,” while “the ‘independent’ view allows both provisions to operate …” The court explained that the “independent” construction:
… harmonizes the language in § 2-719(2) that “remedy may be had as provided in [the U.C.C.]” with the unconscionability test imposed by § 2-719(3).” The “remedy” clause in § 2-719(2), which is crucial to the dependent argument, must be taken in its fullest sense. [Citation omitted.] On its face, the phrase refers to all of the UCC, not merely its remedy provisions. [Footnote omitted.] Therefore, “remedy may be had” under subsection (2) only to the extent that it is not limited by subsection (3), which is part of [the Code].
Fourth, the court considered § 2-719 in light of the Code’s underlying purposes to simplify, clarify, and modernize the law governing commercial transactions; to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and, to encourage uniformity. The “independent” view, the court held, serves the Code’s purposes because it: “supplies simplicity and clarity by allowing a clearly expressed agreement to control a transaction;” “aids sound commercial practice by allowing the parties to anticipate clearly the results of their transaction, while the dependent view retains the specter of unknown damages for the seller despite the parties’ explicit understanding;” and, as the majority view and modern trend, promotes uniformity. An additional factor relied upon by the Court was that one of the U.C.C.’s “paramount concerns is enabling contracting parties to control their own relationships.”
The Code’s policies, not a mechanical application of its damages provisions, should be utilized in actions claiming breach of a warranty to repair or replace. The courts should fashion a measure of damages that produces a result that (1) is consistent with the U.C.C.’s aim of placing the aggrieved party in as good a position as he would have been in but for the breach, and (2) comports with the warranty promise. Because it is a promise to repair that has been breached, these aims are met by measuring damages in terms of repair cost. And consistent with the Code’s policy of allowing the parties to shape their contractual relationship, the courts should enforce damages limitations and disclaimers unless unconscionable. Applying an appropriate measure of damages and enforcing proper damages disclaimers will promote fairness and efficiency. Damages awards will more accurately reflect the economic harm sustained, and will be more predictable. This in turn will facilitate prompt dispute resolution.
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