Kearney & Trecker Corp. v. Master Engraving Co.
527 A.2d 429, 107 N.J. 584, 3 U.C.C. Rep. Serv. 2d (West) 1684 (1987)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under the Uniform Commercial Code (UCC), a contractual clause excluding consequential damages is treated as an independent provision from a limited remedy clause. The failure of the limited remedy to achieve its essential purpose does not automatically invalidate the consequential damages exclusion, which remains enforceable unless it is unconscionable.
Facts:
- In late 1978, Master Engraving Company, Inc. (Master) began discussions with Kearney & Trecker Corporation (K&T) to purchase an MM-180, a computer-controlled machine tool.
- K&T's sales literature described the machine as having 'amazing low maintenance requirements.'
- In December 1978, Master purchased the MM-180 for $167,000 under a contract that included a limited warranty.
- The warranty limited K&T's liability to repairing or replacing defective parts for 12 months or 4,000 operating hours.
- The contract also contained a separate, explicit clause disclaiming all other warranties and stating, 'UNDER NO CIRCUMSTANCES WILL SELLER BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR FOR ANY OTHER LOSS... INCLUDING LOSS OF PROFITS.'
- The machine was delivered in March 1980.
- Master alleged that the machine frequently malfunctioned during its first year, resulting in 'downtime' of 25% to 50% and causing lost profits.
- K&T disputed the extent of the malfunctions, made numerous service calls, and contended that many problems were caused by Master's improper programming and maintenance.
Procedural Posture:
- Kearney & Trecker (K&T) initiated a lawsuit in the Law Division (a state trial court) against Master Engraving (Master) to recover the cost of two service calls.
- Master filed a counterclaim against K&T, seeking damages for breach of contract, including consequential damages for lost profits.
- At trial, the jury was instructed that it could award consequential damages despite the contractual exclusion if it found K&T had failed to make the machine as warranted.
- The jury returned a verdict in favor of Master for $57,000.
- K&T, as appellant, appealed the judgment to the Appellate Division of the Superior Court (an intermediate appellate court).
- The Appellate Division affirmed the trial court's judgment, holding that the failure of the repair remedy rendered the consequential damages exclusion ineffective.
- The Supreme Court of New Jersey granted K&T's petition for certification to review the Appellate Division's decision.
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 failure of a limited remedy, such as repair or replacement, to achieve its essential purpose automatically invalidate a contract's separate, explicit clause excluding consequential damages under UCC § 2-719?
Opinions:
Majority - Stein, J.
No. The failure of a limited remedy to achieve its essential purpose does not automatically invalidate a distinct contractual clause excluding consequential damages. The court held that under UCC § 2-719, the provision governing failure of essential purpose (§ 2-719(2)) and the provision governing consequential damages exclusion (§ 2-719(3)) are to be treated as separate and independent. The failure of a limited repair warranty is tested by whether it deprives the buyer of the substantial value of the bargain, while an exclusion of consequential damages is tested for unconscionability. In a commercial transaction between sophisticated parties, such an exclusion is presumed valid as a bargained-for allocation of risk. The buyer is not left without a remedy, as they can still recover general damages for breach of warranty under UCC § 2-714(2), typically the difference between the value of the goods as warranted and the value as delivered.
Analysis:
This decision establishes a clear separation between the failure of a limited remedy and the enforceability of a consequential damages waiver in commercial contracts. It reinforces the principle of freedom of contract between sophisticated business entities, allowing them to allocate risks as they see fit. By treating the two clauses independently, the court prevents sellers from being exposed to massive and unforeseeable liability for a buyer's lost profits simply because a repair warranty proved ineffective. This ruling provides greater certainty for manufacturers and sellers in pricing their goods and encourages parties to draft contracts that clearly delineate their respective risks and remedies.
