Chatlos Systems, Inc. v. National Cash Register Corp.
670 F.2d 1304 (1982)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under Uniform Commercial Code § 2-714(2), the measure of damages for breach of warranty is the difference between the value of the goods accepted and the fair market value of goods that would have performed as warranted. This 'value as warranted' is not limited to the original contract price and can be established by evidence of the market value of a different, more expensive product that possesses the warranted capabilities.
Facts:
- In July 1974, Chatlos Systems, Inc. (Chatlos) acquired an NCR 399/656 computer system from National Cash Register Corp. (NCR) for a contract price of $46,020.
- NCR warranted that the system, including its specific software programs, would perform six distinct accounting and inventory functions for Chatlos's business.
- NCR delivered the computer hardware in December 1974.
- Over the next 20 months, NCR was unable to make several of the key warranted functions, such as order entry and inventory deletion, operational.
- An NCR programmer informed his superiors that the delivered software was insufficient and a different, more advanced system would be needed to fulfill the promises made to Chatlos.
- On September 1, 1976, after continued failures, Chatlos demanded that NCR remove the system.
Procedural Posture:
- Chatlos Systems, Inc. initially filed suit against National Cash Register Corp. in the Superior Court of New Jersey.
- NCR removed the action to the United States District Court for the District of New Jersey.
- Following a non-jury trial, the district court found NCR liable for breach of warranty and awarded Chatlos direct and consequential damages.
- NCR, as appellant, appealed to the U.S. Court of Appeals for the Third Circuit.
- The Third Circuit affirmed the finding of liability but reversed the award of consequential damages and remanded the case to the district court for a recalculation of direct damages.
- On remand, the district court calculated damages at $201,826.50, plus pre-judgment interest.
- NCR, as appellant, again appealed the district court's decision on the amount of damages to the U.S. Court of Appeals for the Third Circuit, with Chatlos as the appellee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the 'benefit of the bargain' measure of damages for breach of warranty under N.J.Stat.Ann. § 12A:2-714(2) limit the 'value of the goods as warranted' to the contract price, or can it be based on the higher fair market value of a system with the warranted capabilities?
Opinions:
Majority - Per Curiam
No. The measure of damages under N.J.Stat.Ann. § 12A:2-714(2) is not limited by the contract price. The correct measure is the difference between the value of the goods accepted and the fair market value they would have had if they had been as warranted, which entitles the buyer to the 'benefit of the bargain.' Chatlos was promised a computer system with specified capabilities, not just a particular model of machine. Therefore, the value 'as warranted' is the value of a system that could perform those capabilities. While evidence of the contract price is relevant, it is not controlling. The district court properly credited the testimony of Chatlos's expert regarding the value of a computer system that would perform all the warranted functions, even though that value ($207,826.50) was substantially higher than the contract price. NCR chose not to submit expert testimony to the contrary and relied solely on the contract price, which the court was not bound to accept. The district court's factual determination of value was not clearly erroneous.
Dissenting - Rosenn, J.
Yes. The district court's award of damages, amounting to almost five times the purchase price, constitutes a windfall and is not supported by probative evidence. The statute, § 2-714(2), focuses on the difference in value of 'the goods accepted,' not some hypothetical, technologically superior system that the buyer did not purchase. Chatlos's expert improperly based his valuation on a concocted system drawing from more expensive IBM and Burroughs components, which is not a valid measure of the value of the NCR 399 had it worked. The contract price, negotiated between two sophisticated parties, is the best evidence of the value of the system as warranted. The purpose of contract damages is to compensate the buyer for their loss, not to put them in a better position by awarding them the value of a superior computer they never bargained for.
Dissenting - Adams, J.
This opinion does not directly answer the substantive issue but dissents from the court's denial of a petition for rehearing in banc. The majority's interpretation of the Uniform Commercial Code is a significant departure that could create large and unpredictable monetary risks in a wide range of commercial transactions, particularly in the computer industry. Given the national importance of the UCC and the considerable force of Judge Rosenn's dissenting opinion, the full court should have reviewed the panel's decision before it became final.
Analysis:
This decision significantly expands the potential liability of sellers for breach of warranty under the UCC. It establishes that the 'benefit of the bargain' for a buyer is not tied to the price paid but to the value of the seller's promise. By allowing damages to be measured by the cost of a higher-priced, alternative product that meets the warranted capabilities, the ruling creates a substantial risk for sellers who promise high-level performance from lower-cost goods. This precedent may deter sellers from making ambitious performance warranties and encourages buyers in breach of warranty cases to present expert testimony on the value of ideal, hypothetical replacement systems rather than focusing on the value of the actual goods purchased.
Unlock the full brief for Chatlos Systems, Inc. v. National Cash Register Corp.