Lewis Refrigeration Co. v. Sawyer Fruit, Vegetable and Cold Storage Co.
709 F.2d 427 (1983)
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Rule of Law:
Under UCC § 2-719, a contractual provision excluding consequential damages is not automatically voided when a separate, exclusive remedy fails its essential purpose. The consequential damage exclusion must be analyzed independently for unconscionability as a matter of law by the court.
Facts:
- In 1970, Lewis Refrigeration Co. (Lewis) contracted to sell an individually quick-frozen freezer to Sawyer Fruit, Vegetable and Cold Storage Cooperative Co. (Sawyer).
- The contract warranted the freezer's processing capacity and Freon consumption.
- The contract provided an exclusive remedy clause limiting Sawyer's recourse to repair or replacement of malfunctioning parts, with rescission as the only other available remedy.
- A separate and distinct clause in the printed portion of the contract explicitly excluded Lewis's liability for any consequential damages, such as lost profits.
- The freezer failed to meet the performance warranties, and Lewis was unable to repair it promptly.
- Lewis's delay in testing the freezer prevented Sawyer from making an informed decision about rescission until 1972, by which time Sawyer had made significant business commitments that made rescission financially destructive.
Procedural Posture:
- Lewis Refrigeration Co. initiated a diversity action in federal district court against Sawyer Fruit to collect a balance due on their contract.
- Sawyer filed a counterclaim against Lewis, alleging breach of contract, breach of warranty, and misrepresentation.
- A consent judgment was entered in favor of Lewis on its initial claim for the balance due.
- A trial was held on Sawyer's counterclaim.
- The district court denied Lewis's motions for a directed verdict and for judgment notwithstanding the verdict.
- The jury returned a verdict in favor of Sawyer, awarding damages for lost profits (consequential damages) and excess Freon costs.
- Lewis, as the appellant, appealed the judgment on the counterclaim to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Does the failure of an exclusive or limited remedy's essential purpose under UCC § 2-719(2) automatically invalidate a separate, bargained-for contractual provision that excludes consequential damages?
Opinions:
Majority - Newblatt, J.
No. The failure of an exclusive remedy's essential purpose under UCC § 2-719(2) does not automatically invalidate a separate contractual provision excluding consequential damages; the exclusion clause remains valid unless it is found to be unconscionable under UCC § 2-719(3). Subsections (2) and (3) of UCC § 2-719 are independent provisions that must be analyzed separately. Subsection (2) deals with the failure of a limited remedy's purpose, which is a question of fact, while subsection (3) governs the validity of consequential damage exclusions and hinges on unconscionability, a question of law for the court. The court reasoned that based on principles of statutory construction, the specific provision in subsection (3) governing consequential damages controls over the general language of subsection (2). Furthermore, the policies behind the subsections differ: subsection (2) ensures a party receives the substantial value of the bargain, while subsection (3) allows commercial parties to allocate business risks, a fundamental principle of the UCC. Therefore, even if the jury correctly found that the repair-or-rescind remedy failed its essential purpose, the district court erred by not making a separate judicial determination as to whether the consequential damages exclusion was unconscionable.
Analysis:
This case establishes an influential interpretation of UCC § 2-719, holding that remedy limitation clauses and consequential damage waiver clauses are analytically distinct. The decision clarifies that the failure of one does not necessarily invalidate the other. This preserves the ability of sophisticated commercial parties to freely allocate the risk of consequential damages, even if the primary agreed-upon remedy proves inadequate. The ruling requires a two-step analysis in such cases: first, a factual inquiry into whether the limited remedy failed its essential purpose, and second, a distinct legal inquiry by a judge into the unconscionability of the consequential damages waiver, thereby preventing juries from automatically awarding lost profits.
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