Far East Aluminium Works Co. v. Viracon, Inc.
29 F.4th 984 (8th Cir. 2022) (2022)
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Rule of Law:
Under Minnesota law, a contract's express exclusion of consequential damages between sophisticated commercial parties is generally enforceable, even if a limited exclusive remedy fails of its essential purpose, provided the exclusion itself is not unconscionable.
Facts:
- Far East Aluminium Works Co. Ltd. (Far East) purchased specialized color-changing windows (lites) from Viracon, Inc. (Viracon) for the Wynn Palace resort under construction in Macau.
- The parties' contract included a clause, stated in capital letters, explicitly excluding Viracon's liability for 'INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND.'
- The contract also disclaimed implied warranties and limited Far East's exclusive remedies for defective lites to either a refund of the purchase price or replacement of the lites without charge, making Far East responsible for any additional repairs.
- Initially, the lites performed as expected, but over time, they began to fail.
- The project's general contractor demanded over $5.2 million in additional payments from Far East related to the replacement of the defective lites.
- Far East incurred over $2.8 million in costs for removing the defective lites and installing replacements.
Procedural Posture:
- Far East Aluminium Works Co. Ltd. sued Viracon, Inc. in United States District Court for the District of Minnesota, seeking over $8 million in damages.
- Viracon, Inc. filed a motion to dismiss Far East's complaint under Federal Rule of Civil Procedure 12(b)(6).
- The District Court for the District of Minnesota granted Viracon's motion to dismiss, holding that the contract's consequential-damages exclusion barred Far East's requested remedy and did not allow Far East to amend its complaint before dismissal with prejudice.
- Far East Aluminium Works Co. Ltd. (Plaintiff - Appellant) appealed the District Court's dismissal to the United States Court of Appeals for the Eighth Circuit, with Viracon, Inc. as the Defendant - Appellee.
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Issue:
Does a contract's express exclusion of consequential damages remain enforceable between sophisticated commercial parties under Minnesota law, even if the contract's exclusive limited remedy for defective goods fails of its essential purpose, and the exclusion is alleged to be unconscionable?
Opinions:
Majority - Stras, Circuit Judge
Yes, an express exclusion of consequential damages in a contract between sophisticated commercial parties is enforceable under Minnesota law, even if the limited exclusive remedy fails of its essential purpose, and the exclusion itself is not unconscionable. The court first determined that the damages Far East sought (costs for removal, replacement, and general contractor demands) were indeed consequential damages under Minnesota Statutes § 336.2-715(2)(a)–(b), as they were 'the consequence of special circumstances known to or reasonably supposed to have been contemplated by the parties when the contract was made,' rather than direct damages. The court then addressed Far East's argument that the exclusion was 'unconscionable,' citing Int’l Fin. Servs., Inc. v. Franz and Transp. Corp. of Am. v. Int’l Bus. Machines Corp., holding that when two merchants of relatively equal bargaining power allocate risk, courts will not shift that risk. Therefore, the exclusion was conscionable as a matter of law. Finally, the court rejected the argument that the consequential-damages exclusion became unenforceable because the exclusive remedy (refund or replacement) 'failed of its essential purpose' under Minn. Stat. § 336.2-719(2). Relying on Int’l Fin. Servs., Inc. v. Franz, the court reiterated that in merchant-to-merchant transactions involving highly complex goods, the validity of a consequential-damages exclusion is 'discrete and independent' from the sufficiency of the contract's specified remedy. Thus, even if the refund-or-replace remedy failed, the exclusion remained valid and enforceable. The court also dismissed Far East's indemnity claim for lack of express contractual obligation and affirmed the district court's denial of leave to amend the complaint due to Far East's failure to follow local procedural rules.
Analysis:
This case reinforces the principle of contractual freedom and risk allocation between sophisticated commercial parties under the Uniform Commercial Code, particularly in Minnesota. It clarifies that a consequential damages exclusion can stand independently from a limited remedy's failure of its essential purpose, a point of divergence among jurisdictions that Minnesota law, as interpreted here, decisively resolves for sophisticated parties. The decision limits avenues for buyers to recover unforeseen damages when they have contractually agreed to such limitations, highlighting the importance of negotiating precise terms for risk distribution in complex commercial transactions.
