International Financial Services, Inc. v. Franz

• Decision Date: 07 July 1995
• Docket Number: No. C5-93-1550,C5-93-1550
• Citation: 534 N.W.2d 261
• Parties: 26 UCC Rep.Serv.2d 1137 INTERNATIONAL FINANCIAL SERVICES, INC., Plaintiff, v. Allen J. FRANZ, et al., defendants and third-party plaintiffs, Respondent, v. GERBER SCIENTIFIC INSTRUMENT CO., third-party defendant, petitioner, Appellant.
• Court: Minnesota Supreme Court

Page 261

534 N.W.2d 261

26 UCC Rep.Serv.2d 1137

INTERNATIONAL FINANCIAL SERVICES, INC., Plaintiff, v. Allen J. FRANZ, et al., defendants and third-party plaintiffs, Respondent, v. GERBER SCIENTIFIC INSTRUMENT CO., third-party defendant,

petitioner, Appellant.

No. C5-93-1550.

Supreme Court of Minnesota.

July 7, 1995.

Syllabus by the Court

Sufficient circumstantial evidence existed for the jury to conclude that seller breached its implied warranty of merchantability and that seller's limited remedy of repair and/or replacement prescribed in its contract with buyer failed of its essential purpose.

Where the parties to a contract are merchants of relatively equal bargaining power, a limited remedy of repair and/or replacement and a consequential damage exclusion are treated as discrete and independent contractual provisions.

Jeffrey W. Lambert, Lee R. Bissonette, Lambert & Boeder, Wayzata, and David F. Herr, Cooper S. Ashley, Maslon, Edelman, Borman & Brand, Minneapolis, for appellant.

Rodney J. Mason, Chandler and Mason, Ltd., St. Paul, and Thomas B. Olson, Olson, Usset, Agan & Weingarden, Edina, and Eric J. Magnuson, Karen I. Johnson, Rider, Bennett, Egan & Arndel, Minneapolis, for respondent.

Heard, considered, and decided by the court en banc.

OPINION

COYNE, Justice.

In this action for breach of warranty we review a decision of the court of appeals on the petition of third-party defendant The Gerber Scientific Instrument Company. The court of appeals affirmed the jury's determination that the repair or replacement remedy provided in the agreement for the purchase of a Gerber Model 3235 photoplotter system had failed of its essential purpose. International Fin. Serv., Inc. v. Franz, 515 N.W.2d 379 (Minn.App.1994). However, the court of appeals vacated an award of incidental damages, reinstated the claim for consequential damages, and remanded for retrial of the damages claims of the defendants and third-party plaintiffs Allen J. Franz and Franz Engineering Reproductions, Inc., and directed that on remand there was to be a determination of the amount of incidental damages sustained by Franz and whether or to what extent consequential damages should be awarded. Id. at 387-88. We affirm in part and reverse in part.

This action was commenced in January 1987 by International Financial Services Corporation (IFS) to collect the unpaid balance due pursuant to a lease of a New Gerber Model 3235 Photoplotter System and for recovery of the equipment described in the lease agreement. Franz interposed an answer and counterclaim and a third-party complaint against Gerber. IFS was awarded summary judgment in the amount of $391,071.10 and also possession of the leased Gerber Model 3235 Photoplotter System on March 13, 1987.

The IFS judgment was not appealed, and we are here concerned only with the third-party action in which Franz asserts claims of breach of warranty and failure of limited remedies contained in the purchase agreement between Gerber and Franz, seeking consequential and incidental damages as well as damages sustained by reason of the equipment lease agreement with IFS.

In the early 1980s, in response to demand from the computer manufacturing industry, Gerber designed and produced a photoplotting system which produced a negative for use in the manufacture of circuit boards. In the late fall of 1984 John Daniels, a Gerber sales representative, called on Allen Franz, the president and sole shareholder of Franz Engineering Reproductions, Inc., a company engaged in the reproduction of circuit boards.

Franz did not then purchase a Gerber system, but a few months later, in March 1985, Daniels submitted a proposal which provided profit projections as well as cost figures for and other information about two models of the Gerber photoplotting system. The proposal also included performance specifications and installation considerations applicable to the two models. Model 3241 produced photoplots to a tolerance of plus or minus .001 inch. Model 3235 was designed to meet much more stringent accuracy requirements--with variances limited to plus or minus .0002 inch. The proposal set the price of Model 3241 at $89,370 with a 12-month service contract at an additional $11,360. The Model 3235 was much more expensive: $299,165 plus a 1-year service contract at $25,200. The performance specifications contained in the proposal included the information that the performance specifications of Model 3235 were based on an ambient temperature of 68 degrees Fahrenheit and a relative humidity of 50 percent; the amount of error resulting from the thermal variation per Fahrenheit degree was also given. The installation considerations included in the proposal stated that Model 3235 was designed to operate continuously in an environment maintained at a constant temperature set between 60 and 80 degrees Fahrenheit and relative humidity fixed between 40 and 60 percent.

Later that spring another Gerber sales representative, Marla Giordano, called on Mr. Franz. Like Daniels, Giordano recommended the purchase of Model 3235, and she characterized as realistic Daniels' projected net profitability of Model 3235 at about $17,000 per month. On June 3, 1985 Giordano submitted a new proposal for Model 3235 at a lower price: $290,780 plus a 12-month service contract at $24,785.

Franz declined to purchase the system at that time, but he conducted a market survey over the next several months from a list of potential customers provided by Giordano. On August 2, 1985 Franz entered into an agreement to purchase a Model 3235 photoplotter system; the purchase price was $276,241 plus a 12-month service contract at $24,785. Toward the end of August Franz received Gerber's facility planning guide which provided information concerning the temperature and humidity requirements and warned of the dangers of power surges. There was a specific notation in the guide that although the photoplotter would operate at any fixed temperature between 60 and 80 degrees Fahrenheit, the stringent tolerance specifications were developed with equipment operated in an environment continuously maintained at 68 degrees Fahrenheit. In order to provide the controlled environment required for high accuracy photoplotting, Franz contracted with Clean Air Systems for the construction of a "clean room."

During the negotiations for the purchase of the photoplotter, Giordano had told Franz that it could take up to 6 months for delivery, but by letter dated August 26, Gerber informed Franz that its Model 3235 was scheduled for shipment on October 30. Because construction of the clean room was not completed, Franz asked that shipment be delayed until November 14, 1985. Gerber acceded to the request, and when the equipment arrived in Minneapolis in November, it was stored in a warehouse. On January 21, 1986 the Model 3235 was taken out of storage and placed in the still unfinished clean room.

It was close to the end of February when the clean room was completed, and during the week of March 3, 1986 Gerber employee David Levesque began the installation of the Model 3235. His initial inspection of the equipment disclosed two tripped impactographs, which indicated that the 3235 system had been dropped or in some other way handled harshly, and he so informed the Franz photoplotter operator. Although the purchase agreement provided that title and all risk of loss and damage passed to the buyer on delivery to a common carrier F.O.B. at Gerber's plant, Mr. Franz professed ignorance of the conditions under which the equipment had been stored from its arrival in Minneapolis to January 21, 1986 when it was placed in the unfinished clean room. By March 6, however, the 3235 system operated according to specifications, so Levesque signed the final acceptance form and left it with the expectation that Mr. Franz would sign and transmit the form to Gerber.

Franz immediately encountered both major and minor shifts in its photoplots. The major shifts ceased when Gerber replaced the photohead of the Model 3235, but the minor shifts continued to plague Franz. On March 31 Gerber sent Ron Larsen, the project manager of the Model 3235 system, to Franz to determine the reason for the minor shifts in Franz' photoplots. His inspection revealed that the table of the Model 3235 was expanding and contracting with temperature variations. During Larsen's 5-day stay at Franz, the air conditioning unit serving the clean room froze. According to Larsen the air conditioner repairman considered the air conditioning system inadequate and he predicted periodic freezing up because of fluctuations in the outdoor temperature. Larsen was of the opinion that temperature variations were the cause of the minor shifts, but he said that the machine was plotting accurately when he left Franz.

Franz never could achieve the high-accuracy photoplots promised by the tolerance specifications for Model 3235 and, therefore, could not attract a clientele requiring extremely accurate photoplotting. Franz obtained only less profitable work which permitted a broader tolerance.

Although Gerber continued to respond to Franz' request for service, the Model 3235 was occasionally out of service. Because the system did not produce photoplots of the anticipated high degree of accuracy and because of the down time, the Model 3235 did not generate enough revenue to cover the expense of operation, and Franz fell behind in its lease payments. In December 1986 Gerber refused to take back the Model 3235 or to refund the purchase price. As a result of Franz' default IFS accelerated the balance of the lease, demanded return of the leased equipment, and early in January 1987 sued both Franz Engineering, the lessee, and Allen Franz, who had personally guaranteed the lease.

While the main action was quickly disposed of by summary judgment, the third-party action was tried to a jury. Prior to trial the trial judge ruled that both Franz and Gerber...