Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 24

FACTS Construction Associates (CA) was the successful bidder to construct a water supply line for the city of Breckenridge, Minnesota. CA purchased a large amount of polyvinyl chloride pipe manufactured by the Johns-Manville Sales Corporation (J-M) to construct the pipeline. CA, however, did not have any direct contact with J-M; instead, it purchased the pipe through a supply company (Fargo Water Equipment). J-M shipped the pipe directly to the work site, and included with each shipment an installation guide written for those who actually directed the installation of the pipe. On page three of the installation guide, JM expressly warranted the pipe to be free from defects in workmanship and materials. In addition, J-M set forth a limitation of liability clause, which stated there would be no liability except for breach of the express warranty, and that J-M would be responsible only for resupplying a like quantity of nondefective pipe. J-M stated that it would not be liable for any incidental, consequential, or other damages.
Eventually the Breckenridge pipeline developed more than seventy leaks. The only way these leaks could be repaired was to remove the defective joints and replace them with stainless steel sleeves. After incurring more than $140,000 in repairs to the pipeline, CA sued J-M and Fargo. CA won a jury award of more than $140,000 in damages from J-M. J-M appealed, claiming that the limitation of liability clause should be enforced.
DECISION Judgment for CA affirmed.
OPINION Ericksted, J. [UCC § 2-719] specifically allows the parties to an agreement to limit the remedies available upon breach and to exclude consequential damages:
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By its terms § 2-302 [unconscionable contract or clause] applies to any clause of the contract. Courts thus have construed §§ 2-302 and 2-719 together in holding that a general limitation of remedies clause, including those limiting liability to repair or replacement, may be subject to unconscionability analysis under the Code. [Citations.]
The determination whether a particular contractual provision is unconscionable is a question of law for the court. [Citations.] The court is to look at the contract from the perspective of the time it was entered into, without the benefit of hindsight. ***
Courts and commentators have generally viewed the Code's unconscionability provisions within a two-pronged framework: procedural unconscionability, which encompasses factors relating to unfair surprise, oppression, and inequality of bargaining power, and substantive unconscionability, which focuses upon the harshness or onesidedness of the contractual provision in question. [Citations.]
PROCEDURAL UNCONSCIONABILITY We initially note that this case presents a commercial, rather than a consumer, transaction. Although courts have generally been more reluctant to find unconscionability in purely commercial settings, [citation], under appropriate circumstances a contractual provision may be found unconscionable even in a commercial setting. [Citations.]
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The circumstances presented in this case demonstrate a substantial inequality in bargaining power between J-M and Construction Associates. Construction Associates is a relatively small local construction firm, while J-M is part of an enormous, highly diversified, international conglomerate. The limitation of remedies and exclusion of damages were part of a pre-printed installation guide included with all shipments of J-M Pipe. J-M has continually stressed on appeal that those limitations and exclusions are included in all of its brochures and guides. It is obvious that there is no room for bargaining or negotiation as to the warranty provisions.
We also note that the facts in this case demonstrate an actual lack of negotiation coupled with elements of unfair surprise. ***
The limitations and exclusions clause in this case can hardly be described as ''bargained for.'' The clauses were included on page three of a pre-printed installation guide expressly directed to the worker in the field, rather than to officers of Construction Associates. Construction Associates was not apprised at the time of contracting that their remedies under the Code were being limited or excluded. It would be within J-M's control to do so by, for example, requiring its dealers to accept orders for pipe only upon a J-M form which included the limitations and exclusions and which required the purchaser's signature. Clearly an element of procedural unconscionability is present where through a pre-printed guide which was not provided to Construction Associates (and then only to field workers) until long after the sales contract had been finalized.
SUBSTANTIVE UNCONSCIONABILITY
Substantive unconscionability focuses upon the harshness of the particular contractual terms:
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The clause at issue here would limit Construction Associates' remedy for J-M's breach to a like quantity of replacement pipe, with no recovery of consequential damages. Construction Associates argues, with support in the evidence, that replacement pipe is not used when making repairs to leaking joints on a completed underground water pipeline. Because the accepted method of repair is to cut out the leaking joint and repair it with a stainless steel sleeve, Construction Associates argues, the replacement pipe would be useless in effecting repairs upon the line. The trial court determined that J-M's limited remedy ''amount[ed] to nothing whatsoever.'' ***
Numerous courts, in a variety of commercial and consumer contexts, have held limitations and exclusions unconscionable when they leave the non-breaching party with no effective remedy. [Citations.] This is particularly true where the defect in the product is latent, so that the buyer is unable to discover the defect until additional damages are incurred. [Citations.]. In this case, Construction Associates did not discover the defects until the pipe was assembled and placed underground.
INTERPRETATION A court can override a term of a contract if it finds that term to be unconscionable or the result of an unconscionable negotiation process.
ETHICAL QUESTION Is unconscionable conduct always unethical? Explain.
CRITICAL THINKING QUESTION How active should courts be in finding contracts or clauses to be unconscionable? Explain.