Schmaltz v. Nissen
431 N.W.2d 657, 1988 S.D. LEXIS 160, 7 U.C.C. Rep. Serv. 2d (West) 1061 (1988)
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Rule of Law:
A disclaimer of implied warranties and a limitation of consequential damages is unconscionable and unenforceable when a latent defect in a product, such as seed, causes a total loss of the expected crop, as the buyer has no ability to test for the defect and the limited remedy fails to provide substantial recourse.
Facts:
- Crown Quality Seed Company (Crown) processed and marketed 'Big Red # 1' sorghum seed, which it sold to distributors like Farmers Feed & Seed (Farmers Feed) and Abner T. Nissen (Nissen).
- The seed bags contained a label disclaiming all implied warranties of merchantability and fitness and limiting liability to the cost of the seed. A separate label stated the seed was treated to 'ensure stronger stands, superior quality and increased yields.'
- In May 1981, Frank Nible purchased 200 bags of Big Red # 1 from Farmers Feed for the purpose of growing livestock forage.
- Around the same time, Gary Schmaltz purchased 80 bags of Big Red # 1 from Nissen. Neither farmer saw or read the disclaimer language on the bags until after completing their purchases.
- Nible planted the Big Red # 1 seed alongside a different brand of seed (Sugargraze) under identical conditions; the Sugargraze grew into a healthy stand, while the Big Red # 1 failed to emerge.
- Schmaltz planted the Big Red # 1 seed in the same field as another brand (Sweetchow) under identical conditions; the Sweetchow grew, but the Big Red # 1 failed to emerge.
- After the initial crop failure, Schmaltz purchased and replanted more Big Red # 1 seed, which also failed to emerge from the ground.
- An informal test conducted by a County Extension Agent, planting multiple seed varieties side-by-side, showed that Crown's Big Red # 1 seed from both lots had the poorest emergence rates compared to other brands.
Procedural Posture:
- Frank Nible sued Farmers Feed & Seed and Crown Quality Seed Company, Inc. in a South Dakota trial court for breach of warranty.
- Gary Schmaltz filed a separate suit against Abner T. Nissen and Crown Quality Seed Company, Inc. in the same court for breach of warranty.
- The two actions were consolidated for a non-jury trial (bench trial).
- The trial court found for the plaintiffs, holding that the sellers breached express and implied warranties and that the disclaimer of warranties and limitation of damages were unconscionable.
- The trial court entered a judgment of $46,540 for Nible and $43,820 for Schmaltz.
- The sellers, Crown, Farmers Feed, and Nissen, appealed the judgments to this court.
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Issue:
Is a disclaimer of implied warranties and limitation of consequential damages to the purchase price of seed unconscionable and therefore unenforceable when the seed fails to emerge, causing a total loss of the expected crop?
Opinions:
Majority - Tucker, Circuit Judge
Yes, the disclaimer of implied warranties and limitation of consequential damages is unconscionable and unenforceable under these circumstances. Citing precedent from Hanson v. Funk Seeds International, the court found that leaving a farmer with only a refund for the purchase price of seed constitutes no substantial remedy for the catastrophic loss of an entire crop. The court reasoned that farmers are not in a position to bargain for more favorable contract terms or to test seed for latent defects before purchase. Therefore, a one-sided agreement that leaves one party without recourse for another's breach is oppressive and unconscionable. The court also held that no express warranty was created because the farmers did not see the language on the bags until after the sale, meaning it could not have been part of the basis of the bargain, and a salesperson's comment that it was 'good seed' was mere puffery. Finally, the court found that sufficient circumstantial evidence—such as the failure of Big Red #1 when planted next to other successful varieties under identical conditions—proved the seed was defective when it left the sellers' control.
Concurring - Miller, Justice
I concur. This case is distinguishable from my dissent in Hanson v. Funk Seeds because here, the evidence was adequate to support the trial court's finding that the seed was defective and that the defect existed while in the sellers' control.
Concurring - Sabers, Justice
I concur fully. I write separately to emphasize that for disclaimers and limitations to be enforceable, they must be conspicuous and conscionable 'in fact,' not just in technical compliance with the Uniform Commercial Code. The genius of modern product packaging can easily detract from and obscure such clauses, defeating the spirit of the law's requirement for them to be noticeable to the buyer.
Analysis:
This decision solidifies the application of the unconscionability doctrine to agricultural product sales where latent defects can cause catastrophic losses. It affirms that courts will look beyond the formal language of a contract to assess the commercial reality, including disparities in bargaining power and the meaningfulness of the provided remedy. By allowing proof of a product defect through circumstantial evidence (e.g., comparison with functional products under identical conditions), the court provides a viable path for plaintiffs who cannot pinpoint a specific scientific flaw. This precedent strengthens protections for buyers in industries where they cannot reasonably inspect or test goods for hidden defects prior to use.
