Martin v. Joseph Harris Co., Inc.

• Decision Date: 15 July 1985
• Docket Number: No. 84-1416,84-1416
• Citation: 767 F.2d 296
• Parties: , 41 UCC Rep.Serv. 315 Duane MARTIN and Robert Rick, Plaintiffs-Appellees, v. The JOSEPH HARRIS CO., INC., a foreign corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 296

767 F.2d 296

54 USLW 2093, 41 UCC Rep.Serv. 315

Duane MARTIN and Robert Rick, Plaintiffs-Appellees, v. The JOSEPH HARRIS CO., INC., a foreign corporation,

Defendant-Appellant.

No. 84-1416.

United States Court of Appeals, Sixth Circuit.

Argued April 16, 1985.

Decided July 15, 1985.

Kenneth L. Block, Grand Rapids, Mich., William D. Buchanan, Clark C. King, Jr., Lord, Bissell, & Brook, Chicago, Ill., and Keith D. Parr, argued, for defendant-appellant.

Richard A. Kay, argued, and Myra L. Willis, Varnum, Riddering, Schmidt & Howlet, Grand Rapids, Mich., for plaintiffs-appellees.

Before MERRITT and MILBURN, Circuit Judges, and GUY, District Judge. ^*

MILBURN, Circuit Judge.

The defendant, Joseph Harris Co., Inc., brings this appeal following the district court's granting the plaintiffs' motion for a judgment not withstanding the verdict and a second trial in plaintiffs' action for damages as a result of defective seeds. Because we hold that the district court was correct in holding that, under the facts of this case, the disclaimer of warranty and limitation of remedy clause used by the defendant was unconscionable under Michigan law, and because we further hold that the district court properly held that the implied warranty of merchantability was breached as a matter of law, we affirm.

I.

Plaintiffs Duane Martin and Robert Rick ("Martin and Rick") were commercial farmers in Michigan. In August of 1972, Martin and Rick placed independent orders for cabbage seed with the defendant, Joseph Harris Co., Inc. ("Harris Seed"), a national producer and distributor of seed. Plaintiffs had been customers of Harris Seed for several years and, as in earlier transactions, the order form supplied by Harris Seed included a clause disclaiming the implied warranty of merchantability and limiting buyers' remedies to the purchase price of the seed. ¹ A similar clause was also used by Harris Seed's competitors for the same purpose. Neither of the plaintiffs read the clause nor did the salesman make any attempt either to point it out or to explain its purpose.

Three to four months after placing their orders, plaintiffs received Harris Seed's 1973 Commercial Vegetable Growers Catalog. Included in the lower right-hand corner of one page of the catalog was a notification that Harris Seed would no longer "hot water" treat cabbage seed. Hot water treatment had successfully been used since 1947 to eradicate a fungus known as phoma lingam or "black leg," a seed borne disease that causes affected plants to rot before maturing. ²

Plaintiffs planted their cabbage crop in April and May of 1973, using, among other seed, that supplied by Harris Seed. In mid-July, Harris Seed notified plaintiffs that the seed lot used to fill plaintiffs' order was infected with black leg. Although plaintiffs attempted to minimize the effect of the disease, large portions of their cabbage crops were destroyed. However, in marketing their smaller than usual crop, both plaintiffs made a profit equal to or higher than previous years. This unusual profit margin was due to the rise in market price for cabbage in 1973, which in turn was affected in part by the fact that the 1973 black leg epidemic reduced the amount of available cabbage.

On August 5, 1975, plaintiffs brought this action. After a hearing on the enforceability of the disclaimer of warranty and limitation of liability clause, the district court ruled that the clause was unconscionable and, therefore, unenforceable. A jury was impaneled to try plaintiffs' legal liability theories of negligence and breach of implied warranty. Following a six-day trial the jury returned a verdict against plaintiffs on both theories; however, the district court granted the plaintiffs' motion for a j.n.o.v. on the implied warranty issue. A second jury impaneled to hear the issue of damages returned verdicts in favor of Martin in the amount of Thirty-six Thousand ($36,000.00) Dollars and in favor of Rick in the amount of Sixteen Thousand ($16,000.00) Dollars.

II.

Our review of the district court's rulings in this diversity case is controlled by the State of Michigan's version of the Uniform Commercial Code, Mich.Comp.Laws Ann. Sec. 440.1101 et seq. ³ As we have often stated, "[w]hen this court is reviewing a district judge's interpretation of state law, we give 'considerable weight' to the interpretation of the judge." Bagwell v. Canal Insurance Co., 663 F.2d 710, 712 (6th Cir.1981). Accordingly, "if a federal district judge has reached a permissible conclusion upon a question of local law, the Court of Appeals should not reverse even though it may think the law should be otherwise." Insurance Co. of North America v. Federated Mutual Insurance Co., 518 F.2d 101, 106 n. 3 (6th Cir.1975) (quoting Rudd-Melikian, Inc. v. Merritt, 282 F.2d 924, 929 (6th Cir.1960)).

A.

The first issue raised by Harris Seed is whether the district court erred in holding the disclaimer and limitation clause unconscionable under U.C.C. Sec. 2-302. The question of the unconscionability of a contract clause is one of law for the court to decide in light of "its commercial setting, purpose and effect." U.C.C. Sec. 2-302. Since the Code does not define unconscionability, the district court reviewed case law to aid it in its resolution of this question.

A threshhold problem in this context is whether under Michigan law warranty disclaimers which comply with U.C.C. Sec. 2-316 are limited by U.C.C. Sec. 2-302. In holding Harris Seed's disclaimer clause unconscionable under the facts of this case, the district court implicitly held that U.C.C. Sec. 2-302 is a limitation on U.C.C. Sec. 2-316. Harris Seed argues that by enacting Sec. 2-316 the Michigan Legislature "unequivocally [authorized the] exclusion or modification of the implied warranty of merchantability by disclaimer." We have been presented with no Michigan cases resolving this issue; however, a number of arguments support the district court's conclusion that Sec. 2-316 is not insulated from review under Sec. 2-302. First, Sec. 2-302 provides that "any clause" of a contract may be found unconscionable. Similarly, "section 2-316 does not state expressly that all disclaimers meeting its requirements are immune from general policing provisions like section 2-302...." J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code, Sec. 12-11, at 476 (2d Ed.1980). Had the drafters of the Uniform Commercial Code or the Michigan Legislature chosen to limit the application of Sec. 2-302, language expressly so stating could easily have been included. Furthermore, as pointed out by Professors White and Summers:

Comment 1 [to Sec. 2-302] lists and describes ten cases which are presumably intended to illustrate the underlying basis of the section: In seven of those cases disclaimers of warranty were denied full effect. It is difficult to reconcile the intent on the part of the draftsman to immunize disclaimers from the effect of 2-302 with the fact that they used cases in which courts struck down disclaimers to illustrate the concept of unconscionability.

Id. (footnotes omitted). Therefore, because this issue is unsettled under Michigan law and according the district court's conclusion "considerable weight," we hold that the district court correctly relied upon Sec. 2-302 as a limitation on Sec. 2-316.

We next turn to a more troublesome subissue; viz., whether within the special facts of this case the disclaimer and exclusionary clause was unconscionable under Michigan law. As has often been stated, commercial contracts will rarely be found unconscionable, see, e.g., A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 186 Cal.Rptr. 114 (1982), Stanley A. Klopp, Inc. v. John Deere Co., 510 F.Supp. 807, 810 (E.D.Pa.1981), aff'd, 676 F.2d 688 (3rd Cir.1982), ⁴ because in the commercial setting the relationship is between business parties and is not so one-sided as to give one party the bargaining power to impose unconscionable terms on the other party.

In making its determination of unconscionability, the district court relied upon Allen v. Michigan Bell Telephone, 18 Mich.App. 632, 171 N.W.2d 689 (1969). ⁵ In Allen an insurance agent contracted with Michigan Bell Telephone Company to place advertisements in the classified telephone directory. When the advertisements were not included, he brought an action for damages. To defend the action, Michigan Bell Telephone Company relied on a limitation of remedies clause which, if upheld, would have limited the plaintiff's recovery to the contract price. In refusing to uphold the limitation, the Michigan court stated "the principle of freedom to contract does not carry a license to insert any provision in an agreement which a party deems advantageous." Id. at 691-92. Rather, the court stated that:

[i]mplicit in the principle of freedom of contract is the concept that at the time of contracting each party has a realistic alternative to acceptance of the terms offered. Where goods and services can only be obtained from one source (or several sources on non-competitive terms) the choices of one who desires to purchase are limited to acceptance of the terms offered or doing without. Depending on the nature of the goods or services and the purchaser's needs, doing without may or may not be a realistic alternative. Where it is not, one who successfully exacts agreement to an unreasonable term cannot insist on the court's enforcing it on the ground that it was "freely" entered into, when it was not....

There are then two inquiries in a case such as this: (1) what is the relative bargaining power of the parties, their relative economic strength, the alternative sources of supply, in a word, what are their options?; (2) is the challenged term substantively reasonable?

Id. at 692.

With reference to the test announced in Allen, Harris Seed argues that the relative bargaining power of the parties is not a proper consideration under Sec. 2-302...