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Schroeder v. Fageol Motors, Inc.

Washington Supreme Court
544 P.2d 20, 86 Wash. 2d 256 (1975)
ELI5:

Rule of Law:

The enforceability of a contractual clause excluding consequential damages in a commercial transaction is not determined by strict requirements of conspicuousness and negotiation, but rather by whether the clause is unconscionable under UCC § 2-302, which requires a factual hearing into the commercial context of the agreement.


Facts:

  • In June 1970, John Schroeder purchased a used truck from Fageol Motors, Inc. for his hauling business.
  • Fageol assured Schroeder that the truck was covered by the remainder of its original 100,000-mile warranty.
  • The warranty terms, including a clause excluding liability for consequential damages printed in normal size type, were located in an “Owner Book” separate from the purchase order.
  • Fageol did not explain the contents of the “Owner Book,” including the exclusionary clause, and simply handed it to Schroeder after he signed the purchase order.
  • In October 1970, the truck's engine exploded due to a manufacturing defect while still under warranty.
  • Repairs were performed under warranty by the engine manufacturer, Cummins Engine Co., Inc., but the truck never functioned properly afterward, experiencing persistent heating and vibration problems.
  • Despite repeated complaints by Schroeder, neither Fageol nor Cummins was able to successfully fix the truck's issues.
  • As a result of the truck's malfunction, Schroeder incurred repair bills and significant lost profits.

Procedural Posture:

  • John Schroeder sued Fageol Motors, Inc. and Cummins Engine Co., Inc. in a Washington state trial court.
  • The trial court found for Schroeder, holding the consequential damages exclusion unenforceable because it was not conspicuous or explicitly negotiated.
  • The defendants, Fageol and Cummins, appealed to the Washington Court of Appeals.
  • The Court of Appeals affirmed the trial court's judgment.
  • The defendants petitioned the Supreme Court of Washington for review, which was granted.

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Issue:

Does the enforceability of a clause excluding consequential damages under UCC § 2-719(3) in a commercial transaction depend on a judicial finding of unconscionability after a factual hearing into the commercial context, rather than on a strict application of the conspicuousness and negotiation requirements applicable to warranty disclaimers?


Opinions:

Majority - Hunter, J.

Yes, the enforceability of a clause excluding consequential damages under UCC § 2-719(3) is governed by the unconscionability standard under UCC § 2-302, which requires a court to hold a factual hearing to consider the commercial setting, purpose, and effect of the clause. The court distinguished between warranty disclaimer clauses (UCC § 2-316), which have strict conspicuousness requirements, and remedy exclusionary clauses (UCC § 2-719(3)), which limit remedies after a breach. The validity of an exclusionary clause hinges solely on whether it is unconscionable. Unconscionability has two aspects: procedural (impropriety in contract formation, like unfair surprise or a lack of meaningful choice) and substantive (overly harsh or one-sided terms). While factors like conspicuousness and negotiation are relevant to the procedural unconscionability analysis, they are not conclusive. In commercial transactions, a court must also consider the general commercial setting, prior course of dealings between the parties, and usage of trade. Because the trial court incorrectly applied the strict rules for warranty disclaimers instead of conducting the required factual hearing on unconscionability, the case must be remanded.



Analysis:

This decision clarifies the analytical framework for evaluating the enforceability of clauses excluding consequential damages in commercial contracts under the UCC. It establishes that such clauses are not per se invalid if they are inconspicuous or not explicitly negotiated. Instead, their validity depends on a case-by-case factual analysis of unconscionability, considering the entire commercial context. This ruling gives courts flexibility but reduces certainty for businesses, as the enforceability of a standard term is subject to a post-dispute hearing on fairness, even in transactions between sophisticated parties.

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