Tokyo Ohka Kogyo America, Inc. v. Huntsman Propylene Oxide LLC
84 U.C.C. Rep. Serv. 2d (West) 307, 2014 WL 3893031, 35 F.Supp. 3d 1316 (2014)
Rule of Law:
Under UCC § 2-719, a contractual limitation of liability is unenforceable if it fails of its essential purpose by depriving a party of the substantial value of their bargain, or if it operates in an unconscionable manner by shifting the risk of latent defects caused by a seller's failure to disclose information solely within their control.
Facts:
- In June 2008, TOK signed a Credit Application with Huntsman to purchase propylene glycol (PG), which included an attached 'General Terms' sheet limiting Huntsman's liability to the purchase price and expressly excluding consequential damages.
- Following the credit application, the parties spent two years testing samples and negotiating technical requirements, eventually signing a 'Procurement Specification' in 2011.
- The 2011 Procurement Specification explicitly required Huntsman to provide TOK with 12 months' advance notice of any changes to the PG manufacturing process.
- Huntsman changed its manufacturing process regarding temperature and pressure conditions but failed to notify TOK, violating the notice provision of the 2011 agreement.
- This undisclosed process change caused a latent chemical defect in the PG that passed TOK's internal quality tests but was chemically distinct.
- TOK used the defective PG to create chemical mixtures for a customer, whose semiconductor wafers subsequently failed due to the PG.
- TOK incurred significant consequential damages, including the costs of transporting and disposing of the hazardous defective chemical mixture, which vastly exceeded the original purchase price of the PG.
Procedural Posture:
- TOK filed a breach of contract lawsuit against Huntsman in the U.S. District Court for the District of Oregon.
- The parties stipulated to bifurcate the litigation, agreeing to first litigate 'Phase 1' regarding the applicability of the limitation of liability clause.
- TOK filed a motion for partial summary judgment arguing the limitation clause was unenforceable.
- Huntsman filed a cross-motion for partial summary judgment arguing the limitation clause was binding.
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Issue:
Is a limitation of liability clause attached to a preliminary credit application enforceable under UCC § 2-719 when the seller subsequently breaches a specific contractual obligation to notify the buyer of manufacturing changes, resulting in a latent defect and damages far exceeding the product's purchase price?
Opinions:
Majority - Judge Michael H. Simon
No, the limitation of liability clause is unenforceable because it fails of its essential purpose and is unconscionable under the specific circumstances of this breach. The court reasoned that under UCC § 2-719(2), a limited remedy fails of its essential purpose if it deprives a party of the 'substantial value of the bargain.' Here, the parties bargained for Huntsman to notify TOK of process changes—a risk only Huntsman could control. By failing to notify TOK, Huntsman caused a latent defect that TOK could not detect. A refund remedy is wholly inadequate where the defect is latent and causes damages (such as hazardous waste disposal) that far exceed the product cost. Furthermore, under UCC § 2-719(3), the limitation is unconscionable. Procedurally, the clause was boilerplate on a credit app and never discussed during the later, detailed negotiations. Substantively, it is unconscionable to shift the risk to the buyer for a harm that only the seller had the knowledge and ability to prevent.
Analysis:
This decision reinforces the protective boundaries of UCC § 2-719, particularly in commercial contexts involving latent defects. It establishes that even sophisticated commercial parties cannot rely on boilerplate liability limitations when they breach specific, negotiated obligations regarding process changes and notification. The ruling suggests that 'good faith' and the specific allocation of risk are central to enforcing liability caps; a seller cannot contractually limit liability for damages caused by their own failure to disclose information that was solely within their control. It serves as a warning to suppliers that failure to adhere to change-notification clauses may void standard liability protections.
