Canal Elec. Co. v. Westinghouse Elec. Corp.

• Decision Date: 09 January 1990
• Parties: , 10 UCC Rep.Serv.2d 664 CANAL ELECTRIC COMPANY et. al. v. WESTINGHOUSE ELECTRIC CORPORATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 182

548 N.E.2d 182

406 Mass. 369, 10 UCC Rep.Serv.2d 664

CANAL ELECTRIC COMPANY et. al. v. WESTINGHOUSE ELECTRIC CORPORATION.

Supreme Judicial Court of Massachusetts Suffolk.

Argued Nov. 8, 1989.

Decided Jan. 9, 1990.

Mindy J. Spector, New York, & Edward P. Leibensperger (Jacqueline Prescott, New York, & James H. Cohen with them) for defendant.

Sander A. Rikleen (Wendy B. Millman, New York with him), for Canal Elec. Co. & others.

Jeffrey N. Stevens, for Boston Edison Co., was present but did not argue.

John J. Kuzinevich & Ralph E. Loomis, for New England Power Co., were present but did not argue.

Before LIACOS, C.J., and WILKINS, ABRAMS, O'CONNOR and GREANEY, JJ.

ABRAMS, Justice.

Pursuant to S.J.C. Rule 1:03, as appearing in 382 Mass. 700 (1981), a judge of the United States District Court for the District of Massachusetts has certified to us two questions of Massachusetts law concerning consequential damages under Article 2 of the Uniform Commercial Code in circumstances in which a limited contractual remedy has failed of its essential purpose. See G.L. c. 106, § 2-719 (1988 ed.). The questions certified are: "1. Assuming that the Westinghouse exclusive remedy failed of its essential purpose, is the provision entitled Limitation of Liability enforceable under the circumstances alleged in this case? 2. Assuming that the provision entitled Limitation of Liability is enforceable even if the Westinghouse exclusive remedy failed of its essential purpose, is such provision enforceable so as to bar remedies against Westinghouse under Mass.G.L. c. 93A?" We answer both questions in the affirmative.

The plaintiffs are electric utility companies ¹ that allege that they incurred substantial losses as a result of the failure of certain components of an electric generator manufactured by the defendant, Westinghouse Electric Corporation (Westinghouse). The record before us includes a statement of undisputed facts, an amended complaint and answer, and several other documents. For the reasons stated below, we answer the questions exclusively on the basis of the undisputed facts, which are substantially as follows.

In March, 1983, one of the plaintiffs, Canal Electric Company (Canal), purchased from Westinghouse a set of rotating blades for use in a steam turbine generator, and related services. Westinghouse shipped the blades to Canal on March 19, 1983, and installed them in the turbine generator.

The contract governing the sale was one of two Westinghouse selling policies, either Selling Policy 1701 or Selling Policy 1270. The parties are in disagreement concerning which selling policy governs the sale; however, the two selling policies are virtually indistinguishable for purposes of our answer to the certified questions. Both selling policies contained exclusive warranty provisions, exclusive (i.e., limited) repair or replacement remedies, and clauses limiting total liability to the contract or order price of the goods and related services. These "Limitation of Liability" clauses specifically excluded indirect, special, incidental, and consequential damages. Canal does not assert that the contract terms were unconscionable.

Westinghouse sent Canal an invoice for the price of the blades on April 19, 1983. During an inspection on July 20, 1983, cracks were discovered in one or more of the blades. On August 8, 1983, Westinghouse issued to Canal a full credit for the price of the blades that had failed. The turbine generator returned to service on November 21, 1983, with replacement blades designed, manufactured, and installed by Westinghouse.

The case comes to us after a hearing in Federal court on Westinghouse's motion for summary judgment. In addition to the statement of undisputed facts, the Federal judge has transmitted to us several other documents, including affidavits, exhibits, and an amended complaint, which in substance alleges wilful dilatoriness and repudiation of warranty obligations.

Because the certified questions come to us on the defendant's motion for summary judgment, Canal asserts that in our answers we should resolve all factual disputes in its favor. The questions were certified to us pursuant to S.J.C. rule 1:03, supra, which provides that a certification order shall set forth "a statement of all facts relevant to the questions certified and showing fully the nature of the controversy in which the questions arose." Id. at § 3(2). The record before us is not fully developed on issues raised by Canal, as required by our rule, and those issues raise factual disputes that are not resolved. Nevertheless, we conclude that we can answer the certified questions if we confine our answers to the undisputed facts. We add that if, in the future, the "questions certified to us ... are not accompanied by sufficient nonhypothetical, evidentiary facts to allow us to adequately determine" the answers, we may decline to answer such questions. See Schlieter v. Carlos, 108 N.M. 507, 775 P.2d 709, 711 (1989). In this case, we confine our answers to the undisputed facts.

1. Question One. "Assuming that the Westinghouse exclusive remedy failed of its essential purpose, is the provision entitled Limitation of Liability enforceable under the circumstances alleged in this case?" We answer that the exclusion of consequential damages is enforceable on the undisputed facts.

Canal contends that, because the limited repair or replacement remedy failed of its essential purpose (an assumption all parties make for purposes of the certified question), ² it is entitled to all the remedies for breach provided in the Uniform Commercial Code that would otherwise be excluded by the "Limitation of Liability" clauses of the selling policies, including consequential damages. Canal relies on G.L. c. 106, § 2-719(2), which provides: "Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter [i.e., the Code]."

Westinghouse, on the other hand, argues that Canal is barred from recovering consequential damages despite the failure of the limited remedy, relying on G.L. c. 106, § 2-719(3), which provides: "Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable." Westinghouse asserts that the consequential damages disclaimer survives the failure of the limited remedy, because it is not unconscionable. Westinghouse argues that, even if Canal is entitled to direct and incidental damages, the disclaimer of consequential damages must stand because it is an entirely separate contractual provision from the limited remedy clause.

Nothing in § 2-719 or other provisions of the Code explains whether consequential damages may be recovered following the failure of a limited remedy if they are expressly excluded by a contract, as they are in this case. The tension between the two subsections of § 2-719 may be resolved by examining the purposes of the section as set forth in the Official Comment to § 2-719 of the Uniform Commercial Code, 1B U.L.A. (Master ed. 1989). Comment 1 notes that "[u]nder this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect." The comment continues: "However, it is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article, they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract." Thus, § 2-719 was "intended to encourage and facilitate consensual allocations of risks associated with the sale of goods," as long as minimum adequate remedies are available to a party injured by a breach. V-M Corp. v. Bernard Distrib. Co., 447 F.2d 864, 869 (7th Cir.1971). Cf. Board of Directors of Harriman School Dist. v. Southwestern Petroleum Corp., 757 S.W.2d 669 (Tenn.App.1988) (consequential damages disclaimer unenforceable when no minimum adequate remedy available).

Previously we noted that the consensual allocation of risk is not contrary to public policy. Minassian v. Ogden Suffolk Downs, Inc., 400 Mass. 490, 493, 509 N.E.2d 1190 (1987). Recently, we enforced a contract clause excluding the recovery of consequential damages even when those damages exceeded the total contract price, as Canal alleges they do in this case. See Deerskin Trading Post, Inc. v. Spencer Press, Inc., 398 Mass. 118, 495 N.E.2d 303 (1986). "Limiting damages to a refund of the purchase price in the circumstances of this case, where the two parties are sophisticated business entities, and where consequential damages in the event of a problem could be extensive, is a reasonable business practice...." Id. at 124, 495 N.E.2d 303. Like the contractual provisions in Deerskin Trading Post, the consequential damages disclaimer in the Canal-Westinghouse contract was a reasonable accommodation between two commercially sophisticated parties. See American Elec. Power Co. v. Westinghouse Elec. Corp., 418 F.Supp. 435, 458 (S.D.N.Y.1976) ("the contract here in issue is not of the type entered into by the average consumer, but a commercial agreement painstakingly negotiated between industrial giants"). See also Employers Ins. of Wausau v. Suwannee River Spa Lines, Inc., 866 F.2d 752, 780 (5th Cir.), cert. denied sub nom. Employers Ins. of Wausau v. Avondale Shipyards, Inc., 493 U.S. 820, 110 S.Ct. 77, 107 L.Ed.2d 43 (1989).

Here, Canal's assent to the Westinghouse selling policies demonstrates a clear intent to accept the risk of consequential damages. The particular allocation of risk in the Westinghouse selling policies is one that has been recognized as common in the electric power generation industry. See, e.g., Public Serv. Co. of New Hampshire v. Westinghouse Elec. Corp., 685 F.Supp. 1281, 1289 (D.N.H.1988). "Most...