Berwind Corp. v. Litton Industries, Inc.
| Decision Date | 02 April 1976 |
| Docket Number | Nos. 75-1134,75-1135,s. 75-1134 |
| Citation | 532 F.2d 1 |
| Parties | 19 UCC Rep.Serv. 524 BERWIND CORPORATION, a Pennsylvania Corporation, Plaintiff-Appellant, v. LITTON INDUSTRIES, INC., a Delaware Corporation, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Robert A. Downing, Chicago, Ill., for Berwind.
Leo K. Wykell, Chicago, Ill., for Litton Industries.
Before CASTLE, Senior Circuit Judge, SPRECHER, Circuit Judge, and CAMPBELL, Senior District Judge. *
The major issue in this diversity case is whether an exculpatory clause in a commercial contract clearly, explicitly and unequivocally (as required by Illinois law) limited negligence damages.
This action arose out of the purchase by the Komarek-Greaves Division of Berwind Corporation of 16 speed reducers from the Hewitt-Robbins Division of Litton Industries, Inc., for use by the buyer in its compactors manufactured and sold for use in the potash industry.
In August, 1968, the buyer requested the seller to review the design of its previously used speed reducers. After an inspection of one of buyer's installations by one of the seller's field engineers, the seller proposed design changes in a letter to the buyer dated September 9, 1968. On October 14, 1968, the seller submitted a proposal to manufacture 16 speed reducers for buyer in accordance with the design recommended by seller in its September 9 letter at $14,850 each. On October 15, the buyer accepted the offer by means of a purchase order.
The speed reducers designed and manufactured by the seller failed to operate the compactors properly. The buyer was compelled, after attempts to remedy the seller's reducers, to furnish its customers new reducers manufactured by another party.
On July 9, 1971, the buyer filed its complaint alleging negligence (Count I), breach of contract (Count II), breach of warranty for intended use (Count III) and misrepresentation or fraud in the inducement (Count IV). Count III was dismissed by the court on January 14, 1972. The court separated the issues of liability and damages for trial. Liability was tried before a jury and at the close of the buyer's case, the court directed a verdict in favor of the seller on Count IV on July 24, 1973. Consequently, the case was submitted to the jury on amended Counts I (negligence) and II (breach of contract) and upon the seller's amended counterclaim for the balance of the purchase price.
On July 30, 1973, the jury returned three verdicts, finding for the buyer on negligence and for the seller on breach of contract and on the counterclaim.
Both sides waived a jury trial on the issues of damages and all damage issues were tried before the court upon a second trial. On May 24, 1974, the court made preliminary findings and conclusions as to damages and in a judgment order of July 30, 1974, entered final findings and conclusions. The judgment entered was in the amount of $25,672.70 plus costs for the buyer on Count I and in the amount of $82,662.50 plus costs for the seller on its counterclaim. Both parties have appealed but on appeal have only challenged the damages awarded. Consequently, we are circumscribed in our consideration of the case by the three jury verdicts finding that the seller is guilty of negligence but not guilty of any breach of contract and that the buyer is liable on the counterclaim for the balance of the purchase price. Subject to the "clearly erroneous" rule, we are also circumscribed by the trial court's findings of fact on the damage issues.
On the reverse side of the seller's quotation of October 14, 1968 was a printed form containing ten contractual provisions, each being numbered and beginning with a descriptive heading. Included under provision numbered "5." and headed "Warranty" was the following:
Our liability under this contract is limited to the purchase price of the defective item and in no event are we to be liable for any loss of profits or special or consequential damages.
Also under the same number and heading were five paragraphs preceding the above paragraph, each of which dealt in some detail with the express warranties made by the seller.
Prior to the jury trial, the court determined that the above paragraph was part of the written contract between the parties and that it did "not necessarily eliminate the claim for negligence but related directly to the measure of damages." The jury was not asked to determine the effect of this clause.
After the jury verdict, the court rendered a "Decision on Damages" on December 3, 1973, in which it concluded that "the foregoing clause does not absolve the defendant from liability from its own negligence" but "the clause . . . protects the defendant from liability (and therefore from damages) for (1) loss of profits, (2) special damages, and (3) consequential damages." The court then proceeded, after hearing evidence at a bench trial, to fix damages in accordance with his theory that the three limitations on the seller's liability applied even though the jury had found against the seller on the negligence count. In other words, the court concluded that the exculpatory clause applied to negligence as well as to breach of warranty.
Federal jurisdiction was based on diversity of citizenship, 1 but the contract was made and performed in Illinois and both parties have proceeded on the basis that the law of Illinois governs.
Illinois some time ago recognized that "under proper circumstances" a person may by contract avoid liability for his negligence and that exculpatory contracts will be enforced unless "(1) it would be against the settled public policy of the State to do so, or (2) there is something in the social relationship of the parties militating against upholding the agreement." 2
Under Illinois law three prerequisites must be met before an exculpatory clause 3 will be deemed to defeat a claim:
(1) The exculpatory clause must be strictly construed; 4
(2) With every intendment against the party who seeks immunity from liability; 5 and
(3) The clause must spell out the intention of the parties with the greatest of particularity. 6
Exculpatory contracts or clauses are also subject to the general contract rule that they are construed most strongly against their maker, 7 "and especially so when printed upon the (maker's) form." 8
Despite these strict rules of construction, however, a specific reference to "negligence" or its cognates is not required. 9
Finally, the Illinois Supreme Court recently concluded in interpreting an indemnification provision: 10
We . . . conclude that the contractual provisions involved (in the cases) are so varied that each must stand on its own language and little is to be gained by an attempt to analyze, distinguish or reconcile the decisions. The only guidance afforded is found in the accepted rule of interpretation which requires that the agreement be given a fair and reasonable interpretation based upon a consideration of all of its language and provisions.
A comment to the Restatement of Torts Second section recognizing the validity of express assumptions of risk, 11 states:
In order for the agreement to assume the risk to be effective, it must also appear that its terms were intended by both parties to apply to the particular conduct of the defendant which has caused the harm. Again, where the agreement is drawn by the defendant and the plaintiff passively accepts it, its terms will ordinarily be construed strictly against the defendant. In particular, general clauses exempting the defendant from all liability for loss or damage will not be construed to include loss or damage resulting from his intentional, negligent or reckless misconduct, unless the circumstances clearly indicate that such was the plaintiff's understanding and intention. 12
With these principles of Illinois and general law in mind, we proceed to examine several cases where although the language of exculpation differed from case to case, the basic issue being resolved was substantially the same as the issue confronting us here.
The only highly relevant case involving Illinois law is Gates Rubber Co. v. USM Corp., 508 F.2d 603 (7th Cir. 1975), involving a claim for damages resulting from the failure of a lead extrusion press wherein negligence in the design, manufacture and installation of the press was alleged. Paragraph 7 of the contract provided:
We shall have no liability for any special indirect or consequential damages arising from loss of production or other losses owing to failure of machinery or equipment. (508 F.2d at 616.)
Mr. Justice (then Judge) Stevens concluded at 617:
Paragraph 7 of the USM proposal referred broadly to consequential damages "owing to failure of machinery or equipment." In paragraph 5 of the proposal, USM had specifically limited its liability and remedies for breach of warranty. Paragraph 7 would be superfluous, therefore, if it were read as merely referring to warranty recovery. The most logical interpretation of paragraph 7 is that USM was limiting its liability for consequential damages that might be sought in suits based on theories other than breach of warranty. We hold, therefore, that Gates was properly apprised of the fact that the USM proposal contained a limitation of consequential damage liability that would apply in any subsequent negligence action.
The keystone of Gates the superfluity of paragraph 7 if construed to exclude a limitation on negligence liability does not apply to the present case. In fact, instead of containing a separate breach-of-warranty exculpation, the present contract includes the purportedly general language of exculpation as part of the warranty section. Gates thus supports an interpretation of the present provision which would exclude negligence from its operation.
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