A & M Produce Co. v. FMC Corp.
135 Cal. App. 3d 473, 186 Cal. Rptr. 114 (1982) (1982)
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Rule of Law:
A court may find a warranty disclaimer and a consequential damage limitation clause in a commercial contract unenforceable if, under the totality of the circumstances, it determines the clauses are both procedurally and substantively unconscionable, even if the disclaimer technically complies with statutory requirements for conspicuousness.
Facts:
- A & M Produce Co. (A & M), a farming company owned by C. Alex Abatti, decided to grow tomatoes for the first time and was unfamiliar with the necessary weight-sizing equipment.
- FMC Corporation (FMC) representatives met with A & M and recommended a specific weight-sizing machine, claiming it was so fast that a hydrocooler, which would cost around $25,000, was unnecessary.
- Abatti signed a preliminary "field order" on a standard FMC form and provided a $5,000 deposit.
- FMC then mailed Abatti a final, preprinted form contract, the back of which contained a bolded disclaimer of all warranties and a less conspicuous clause excluding liability for consequential damages.
- Abatti signed the final contract and made an additional down payment without reading the terms on the reverse side; FMC representatives never suggested he do so.
- After installation, the FMC machine failed to perform as represented, causing tomatoes to pile up and suffer damage, which was aggravated by the lack of a hydrocooler.
- A & M's tomato crop was largely ruined because of the machine's failure, forcing the company to close its packing shed for the season.
- A & M offered to return the machine to FMC in exchange for a refund of its payments, but FMC refused and demanded payment of the full remaining balance.
Procedural Posture:
- A & M Produce Co. (plaintiff) sued FMC Corporation (defendant) in a California trial court for breach of express and implied warranties.
- FMC filed a cross-complaint seeking the unpaid balance of the purchase price.
- The case proceeded through two trials; the first resulted in a hung jury, and the court ordered a new trial after the second.
- In the third trial, the judge ruled as a matter of law that FMC's warranty disclaimer and consequential damage limitation clauses were unconscionable and thus inadmissible.
- The jury returned a verdict in favor of A & M, and the trial court awarded A & M damages and attorney's fees.
- FMC (appellant) appealed the judgment to the Court of Appeals of California (appellee is A&M).
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Issue:
Are a warranty disclaimer and a consequential damage limitation clause in a standardized commercial contract unenforceable on the grounds of unconscionability when they are part of a preprinted form signed by a party with unequal bargaining power and the clauses unreasonably allocate the risk of product failure to the buyer?
Opinions:
Majority - Wiener, J.
Yes, such clauses are unenforceable if found to be unconscionable. The court may deny enforcement to a warranty disclaimer or consequential damage limitation if it finds both procedural and substantive unconscionability. Procedural unconscionability focuses on 'oppression' (unequal bargaining power) and 'surprise' (hidden or complex terms). Substantive unconscionability focuses on overly harsh or one-sided results that unreasonably reallocate risk. Here, there was procedural unconscionability due to the vast disparity in bargaining power between FMC and A & M, and the element of surprise from the boilerplate terms on the back of a form contract that were never explained or negotiated. Substantively, the clauses were unconscionable because the warranty disclaimer negated the core purpose of the product, and the consequential damage exclusion shifted the entire, foreseeable risk of crop loss—a risk FMC was in the best position to prevent—to the inexperienced buyer.
Concurring - Staniforth, Acting P.J.
Yes. Substantial evidence supports the trial court's finding of unconscionability. The contract clauses were oppressive, contradicted the oral representations made by FMC to induce the sale, and were unreasonably favorable to FMC, the party with superior bargaining power. It is unreasonable to expect an experienced farmer to purchase expensive equipment that cannot perform its basic function, and it is unfair for a merchant to negate its own performance representations with contractual boilerplate.
Analysis:
This case is significant for extending the doctrine of unconscionability to a commercial transaction between two business entities, rejecting the notion that the doctrine only protects ordinary consumers. It establishes that technical compliance with UCC requirements for warranty disclaimers (like using bold print) does not insulate a clause from an unconscionability challenge. The decision provides a clear, two-part analytical framework (procedural and substantive) that has become influential in California contract law, guiding courts to examine both the process of contract formation and the fairness of its terms. This approach prevents sophisticated parties from using standardized forms to impose unreasonable and non-negotiated risk allocations on less powerful commercial entities.
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