South Carolina Electric and Gas Co. v. Combustion Engineering, Inc.
322 S.E.2d 453 (1984)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A warranty disclaimer that fails the conspicuousness requirement of UCC § 2-316(2) may still be effective under UCC § 2-316(3) between sophisticated commercial parties if the circumstances, such as extensive negotiations over the clause, show the buyer had actual knowledge of and bargained for the disclaimer. Additionally, an exculpatory clause limiting liability for negligence must be strictly construed and explicitly state the type of conduct being excused, such as 'design,' to be effective.
Facts:
- South Carolina Electric and Gas Company (SCE&G) contracted with Combustion Engineering, Inc. (Combustion) to purchase a large steam generating boiler unit for over $12 million.
- The 22-page, single-spaced contract contained a 'WARRANTY' section on page 17, which included an express one-year warranty and a disclaimer stating, 'There are no other warranties, whether expressed or implied, other than title.'
- The disclaimer was not in a contrasting type or color and the section heading was 'WARRANTY,' not 'Disclaimer of Warranty.'
- Prior to signing the contract, SCE&G and Combustion exchanged correspondence over several months specifically negotiating the warranty and disclaimer provisions.
- SCE&G initially insisted that Combustion be bound by warranties implied by state law, but Combustion refused and insisted on its proposed limitations, to which SCE&G ultimately agreed.
- The contract also contained a 'LIMITATIONS OF LIABILITY' clause stating that Combustion's liability for 'manufacture, sale, delivery, use, or resale' of the equipment would terminate after the one-year warranty period.
- On May 19, 1975, more than two years after the boiler became operational, a flexible metal hose ruptured, spraying fuel oil and causing a fire that resulted in over $350,000 in damages.
Procedural Posture:
- South Carolina Electric and Gas Company (SCE&G) filed a lawsuit against Combustion Engineering, Inc. (Combustion) and Daniel International Corporation (Daniel) in the South Carolina circuit court (trial court).
- SCE&G's claims against Combustion included breach of implied warranties and negligent design.
- Combustion and Daniel each filed motions for summary judgment, asking the court to dismiss SCE&G's claims against them.
- The circuit court granted summary judgment in favor of both Combustion and Daniel on all of SCE&G's claims.
- SCE&G, as the appellant, appealed the trial court's grant of summary judgment to the South Carolina Court of Appeals.
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 a warranty disclaimer that fails the formal requirements of UCC § 2-316(2) by not being conspicuous and not mentioning 'merchantability' nevertheless exclude implied warranties when, under the circumstances described in § 2-316(3), the buyer is a sophisticated commercial entity that actively negotiated the disclaimer? Secondly, does a contractual exculpatory clause limiting liability for 'manufacture' also shield the party from liability for negligent 'design'?
Opinions:
Majority - Goolsby, Judge
Regarding the first issue, Yes. Even though the disclaimer fails the technical requirements of Subsection (2) of the UCC—it is not conspicuous and does not mention 'merchantability'—it is still effective under the exception in Subsection (3)(a). The purpose of the conspicuousness requirement is to protect a buyer from unexpected and unbargained-for language. Here, the undisputed evidence of correspondence between the parties shows that SCE&G, a sophisticated commercial entity, was not surprised by the disclaimer. To the contrary, SCE&G actively negotiated the warranty provisions for months and was fully aware of the disclaimer's existence and effect. Because the circumstances clearly show the disclaimer was a bargained-for term between parties of equal bargaining strength, it is effective to exclude the implied warranties of merchantability and fitness for a particular purpose. Regarding the second issue, No. A contractual clause seeking to exculpate a party from its own negligence is disfavored and must be strictly construed against the party relying on it. Such a clause must contain explicit language clearly indicating the parties' intent to exempt the party from liability for negligence. The clause here absolves Combustion of liability arising from 'manufacture,' but it does not explicitly mention liability for 'design.' Since 'manufacture' and 'design' are not synonymous terms, the clause is not explicit enough to shield Combustion from a claim of negligent design. Therefore, SCE&G's negligence claim based on design may proceed. The court also held that the exculpatory clause was not void as against public policy because it was a private contract between two sophisticated corporations of equal bargaining power, not a contract of adhesion involving the public. The court also reversed the summary judgment granted to Daniel International Corporation. It found that a genuine issue of material fact existed as to whether Daniel was negligent in installing the fuel piping and whether the resulting defect was latent, meaning SCE&G's acceptance of the work would not have waived its claim for breach of the warranty of workmanship.
Analysis:
This case illustrates a critical principle in commercial law: while statutory requirements like the UCC's conspicuousness rule are designed to protect buyers, courts may look past technical formalities in disputes between sophisticated, equal-bargaining-power corporations. The decision emphasizes that the ultimate goal of such rules—preventing surprise—is met when evidence shows a term was actually known and negotiated. It reinforces that a 'course of dealing' or negotiation history can override a facial defect in a disclaimer. Conversely, the ruling strongly reaffirms the traditional judicial hostility toward exculpatory clauses, requiring drafters to use explicit, unambiguous language to waive liability for specific types of negligence, thereby preventing parties from escaping liability through broad or vague terms.
