Office Supply Co., Inc. v. Basic/Four Corporation
538 F. Supp. 776 (1982)
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Rule of Law:
A warranty disclaimer that is not conspicuous as required by the Uniform Commercial Code (UCC) may still be enforceable if the buyer had actual knowledge of the disclaimer's terms before entering into the contract. In commercial transactions, a contractual limitation on consequential damages is valid unless proven to be unconscionable.
Facts:
- Office Supply Co., Inc. ('Office Supply'), through its president James F. Bruno, negotiated for the purchase of a computer system from Basic/Four Corporation ('Basic/Four').
- Before the sale, Bruno spent approximately two months comparing computer systems from various manufacturers and drew up a written comparison, which noted Basic/Four's 90-day warranty versus a competitor's one-year warranty.
- Bruno read the entire Basic/Four contract, including the reverse sides which contained warranty disclaimers and remedy limitations.
- Bruno discussed the warranty provisions with Basic/Four and attempted to have them modified, but was unsuccessful.
- On January 31, 1975, Bruno signed the contract, which disclaimed implied warranties and excluded liability for consequential damages in italicized print on the reverse pages.
- The hardware was installed on April 1, 1975, and on October 6, 1975, Bruno sent a letter to Basic/Four stating that the system's applications were complete and appeared satisfactory, which commenced the 90-day software warranty period.
- In November 1975, Office Supply began experiencing problems with the accounts receivable application.
- After the warranty period expired on January 6, 1976, Office Supply hired its own programmers who made modifications to the software provided by Basic/Four.
Procedural Posture:
- Office Supply Co., Inc. filed a lawsuit against Basic/Four Corporation in the U.S. District Court for the Eastern District of Wisconsin.
- The complaint alleged breach of contract and negligence, seeking $186,000 in damages.
- Basic/Four filed a motion for summary judgment, arguing the claims were barred by the statute of limitations and the contract's valid warranty disclaimers and damage limitations.
- Office Supply filed a cross-motion for partial summary judgment, arguing the disclaimers were invalid, and a motion to compel discovery.
- The U.S. District Court is now ruling on the pending motions.
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Issue:
Is a warranty disclaimer in a commercial sales contract enforceable, even if it is not conspicuous as required by the UCC, when the buyer had actual knowledge of the disclaimer and its terms before signing the contract?
Opinions:
Majority - Reynolds, Chief Judge
Yes. A warranty disclaimer is enforceable if the buyer had actual knowledge of it, even if the disclaimer is not technically conspicuous. The court first found that the disclaimers in the contract, set in only slightly contrasting italic print on the reverse sides of the agreement, were not conspicuous under the UCC standard. However, the purpose of the conspicuousness requirement is to protect a buyer from unexpected and unbargained-for terms. Citing the trend in California law, the court held that this purpose is fulfilled if the buyer had actual knowledge of the disclaimer. The deposition testimony of Office Supply's president, James Bruno, established that he read the contract, was aware of the warranty limitations, questioned them, attempted to negotiate different terms, and signed the contract with full knowledge of the disclaimers. A later affidavit from Bruno contradicting this testimony was disregarded as a 'sham issue of fact' intended to defeat summary judgment. Therefore, because Office Supply was not surprised by the provisions, the disclaimers were effective. The court also upheld the clause excluding consequential damages, finding it was not unconscionable in a commercial setting where the parties negotiated at arm's length.
Analysis:
This case establishes that a buyer's actual knowledge can cure a procedurally defective warranty disclaimer under the UCC. It shifts the legal analysis from a strict, objective assessment of a term's 'conspicuousness' to a subjective inquiry into the buyer's awareness. This prevents sophisticated commercial parties from using a technical drafting flaw to escape contractual terms they knowingly and willingly accepted. The decision reinforces the principle of freedom of contract in business-to-business transactions and affirms the general validity of clauses that allocate risk, such as limitations on consequential damages, absent a showing of unconscionability.
