Warranty 101: Seventh Circuit Affirms Wisconsin Interpretation of UCC §2-719

Courts across the country disagree about parties’ ability to contract around the UCC’s warranty remedy and damages provisions; the Seventh Circuit just ruled that Wisconsin’s limitations on UCC §2-719 remain in place, despite national trends in the opposite direction.

Consequential damages remain out of reach in Wisconsin when a limited warranty fails in its essential purpose.

On Tuesday, the Seventh Circuit released its decision in Sanchelma International, Inc. v. Walker Stainless Equipment Co., affirming Wisconsin’s “dependent” interpretation of Subsections 2 and 3 of Wisconsin’s adoption of UCC §2-719 and declining to bring the Badger State in line with the rising number of states that instead see these subsections as operating independently of one another.

Many consumer manufacturers include “limited warranties” in their sales agreements, meant to provide an alternative remedy to the UCC’s §2-714(2) damages calculation.  Rather than provide a monetary sum to an unhappy consumer as recompence, these manufacturers modify and limit the consumer’s recourse to seeking repairs, or sometimes replacing the unsatisfying product through §2-719(1).  In the event a manufacturer’s limited warranty “fails of its essential purpose,” the UCC provides that a consumer may fall back on the UCC’s damages provisions as a remedy, typically §2-714(2).  Manufacturers can likewise limit the damages a consumer may seek, such as consequential or incidental damages stemming from loss of use; for instance, if a trucking firm is unable to move cargo due to a breach of the implied warranty of merchantability on a fleet of new trucks, the truck manufacturer can use §2-719(3) to protect itself from a claim for damages arising out of the consumer’s lost business, provided that limitation is not unconscionable.

Courts around the country have struggled in deciding how these two warranty limitations, one as to remedies and one as to damages, have interacted.  Some courts have ruled that they operate independently—whether a manufacturer fails to repair or replace its product should have no bearing on whether consequential damages are limited. Regardless of whether the consumer is entitled to §2-714(2)’s damages calculation does not affect the fact that the consumer agreed to exclude consequential damages from its claims.  Other courts have found that the two are intrinsically linked—if a manufacturer cannot provide remedy it agreed to, any limitation on its damages becomes automatically unconscionable, as the limitation was an inducement to the limited remedy.

In Sanchelma, the Seventh Circuit declined to overturn the standing Wisconsin precedent of Murray v. Holiday Rambler, Inc., which held the two subsections as being dependent on one another; in Wisconsin, if a limited warranty fails of its essential purpose, a related waiver of consequential or incidental damages likewise fails as being per se unconscionable. While the Seventh Circuit was compelled to follow the Wisconsin precedent set out in Murray, that precedent substantially limits parties’ freedom of contract.

At the outset, the plain language of §2-719 would suggest an alternate result. Section 2-719(2) provides parties the means for determining available remedies in the event of a breach, while §2-719(3) gives parties the ability to assess the damages available in the event of a breach. Apart from their proximity in the Code, these two provisions are entirely distinct and pertain to separate areas of legal inquiry; whether a limitation on remedies has failed in its essential purpose is a question of fact, while whether a limitation on damages is unconscionable is a question of law.  Facially, neither subsection refers to or relies on the other.

Beyond the language of §2-719 is the simple insight that §2-719(2) defines the contours of when a breach of warranty has occurred, while §2-719(3) assumes the breach has already occurred.  By drafting a damages limitation in addition to a limited warranty provision, the parties to an agreement have negotiated the buyer’s recourse in the event the limited warranty were to fail.  Reading any breach of a limited warranty to automatically invalidate the damages limitation acts to prevent the parties from being able to negotiate the very situation the damages limitation is drafted to address.  By addressing this disconnect head on and pointing out the trending interpretation of §2-719 over the intervening decades since Murray, Wisconsin courts might take note of an issue that is ripe for reconsideration.

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