Salt River Project Agr. Imp. and Power Dist. v. Westinghouse Elec. Corp.

Decision Date27 December 1984
Docket NumberNo. 17233-PR,17233-PR
Citation694 P.2d 198,143 Ariz. 368
Parties, 53 USLW 2350, 40 UCC Rep.Serv. 418 SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, Plaintiff- Appellant, v. WESTINGHOUSE ELECTRIC CORPORATION, a Pennsylvania corporation, Defendant- Appellee.
CourtArizona Supreme Court

Black, Robertshaw & Copple by Richard A. Black, Philip C. Thorpe, Phoenix, for appellant.

Lewis & Roca, by Douglas L. Irish, Paul G. Ulrich, Edward M. Lewis, Phoenix, for appellee.

Jaron B. Norberg, Phoenix, for amicus curiae.

FELDMAN, Justice.

Salt River Project (SRP) petitions this court to review the opinion of the court of appeals (Salt River Project v. Westinghouse Electric Corp., 143 Ariz. 437, 694 P.2d 267 (1983)), which affirmed a partial summary judgment in favor of Westinghouse Electric Corporation (Westinghouse). We have jurisdiction, Ariz. Const., art. 6 § 5(3), and granted review (Rule 23, Ariz.R.Civ.App.P., 17A A.R.S.) because no Arizona decision controls the important issues raised. These issues involve the scope of the tort liability of a commercial seller to a commercial buyer. We must decide:

1. What is the basis upon which to determine whether tort law or contract law is to govern claims arising from malfunction of a product?

2. Does the doctrine of strict liability in tort apply where the purchaser of the product is a commercial enterprise able to bargain for loss allocation and capable of allocating the risk to its own customers?

3. Under what conditions, if at all, may a buyer and seller contract for a waiver of tort liability?

FACTS

SRP generates over seven billion kilowatt hours of electricity per year, making it Arizona's second largest electric utility company. In 1970 SRP purchased a gas turbine generator unit (model W-501) from Westinghouse to install at the Kyrene Power Plant in Tempe. The unit, known as Kyrene-4, included a Westinghouse "P-50 computer" which automatically started and operated the generator. The unit was designed as a "peak load unit" to provide additional electricity during "peak demand periods." In 1970 there was a great demand for gas units and some competition among suppliers. Westinghouse believed that its model offered a number of advantages; SRP evidently agreed, and Kyrene-4 was purchased and accepted for commercial operation in December 1971.

In April 1972 SRP complained to Westinghouse about a number of problems with the unit, including frequent "computer malfunctions" of the P-50. Westinghouse had received similar complaints from other customers. SRP suggested that "an improvement could be made if there was a means of operating the turbine manually." On January 31, 1973 a Westinghouse special sales representative, Dick T. Quisenberry, wrote to SRP that Westinghouse was developing a device "that would permit manual operation of ... gas turbine plants during maintenance of the [P-50] control computer." The price for the new device was to be $15,000. Interested customers were told that "orders will be accepted with shipment priorities based on order dates" and that information describing the device (later labelled a "Local Maintenance Controller" or LMC) would be forthcoming. On March 2, 1973 SRP sent its standard purchase order to Westinghouse. The back of the purchase order listed SRP's pre-printed "Terms and Conditions of Purchase Order." These included the following:

1. Acceptance of Purchase Order .... Acceptance of this Purchase Order must be made on its exact terms and if additional or different terms are proposed by Seller such response will constitute a counter-offer, and no contract shall come into existence without Buyer's written assent to the counter-offer. Buyer's acceptance or payment for material shipped shall constitute acceptance of such material subject to the provisions herein, only, and shall not constitute acceptance of any counter-offer by Seller not assented to in writing.

On March 15, 1973 Westinghouse assigned a general order (GO) number to SRP's purchase order. The Westinghouse response to SRP's form purchase order was a standardized acceptance form of its own, stating in bold print: "Your order has been entered as our general order (GO) number as shown above." The form referred the recipient to the reverse side for Westinghouse's "terms and conditions" of the sale. The printed language on the reverse side included the following:

TERMS AND CONDITIONS

The conditions stated below shall take precedence over any conditions which may appear on your standard form, and no provisions or condition of such form except as expressly stated herein, shall be binding on Westinghouse. (Emphasis supplied.)

* * *

* * *

WARRANTY--... Westinghouse warrants that the products sold hereunder shall be of the kind and quality described in this quotation and shall be free of defects in workmanship or materials ... THIS WARRANTY ... IS EXCLUSIVE AND IN LIEU OF ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR PURPOSE, OR OTHER WARRANTY OF QUALITY, WHETHER EXPRESS OR IMPLIED. (Emphasis in original.)

LIMITATION OF LIABILITY--Neither party shall be liable for special, indirect, incidental or consequential damages. The remedies of the Purchaser set forth herein are exclusive, and the liability of Westinghouse with respect to any contract or sale or anything done in connection therewith, whether in contract, in tort, under any warranty or otherwise, shall not, except as expressly provided herein, exceed the price of the product or part on which such liability is based.

SRP received this document on March 20, 1973. On April 20, 1973 Quisenberry sent a letter to SRP stating that the LMCs were scheduled for shipment in late August and that there would be no change in the price.

The SRP version of these negotiations is contained in an affidavit by J.O. Rich, SRP's Assistant General Manager:

2. Kyrene Unit No. 4 was purchased on the 8th day of April, 1970, at a purchase price of $4,517,815.00.

3. Due to repeated and consistent problems with the P-50 computer which was the sole means of starting the Kyrene No. 4 Turbine ..., the Salt River Project was not able to obtain satisfactory performance from said Kyrene No. 4 Unit.

4. Salt River Project complained on several occasions to Westinghouse of the poor performance of the P-50 computer. Due to the extremely technical information needed to design any start-up control unit and the fact that Westinghouse refused and continues to refuse to divulge that technical data to Salt River Project, the Salt River Project could not obtain an alternative to the P-50 computer from any source other than Westinghouse.

* * *

* * *

7. Due to the fact that the Salt River Project had purchased a $4,517,815.00 gas turbine unit Model W-501, which it could not obtain satisfactory benefit from without the purchase of the LMC to correc the all too frequent malfunctions of the P-50 computer, the Salt River Project had no alternative and, thus, had no power to bargain or negotiate with Westinghouse with regard to price or terms relative to the purchase of the LMC. Salt River Project would have, if forced, paid many times the price charged by Westinghouse for the LMC because the Salt River Project in fact had purchased two Model W-501 turbine units, neither of which would function properly without the new LMC. Salt River Project was thus in the position of having $9,035,630 worth of equipment which needed Westinghouse designed and offered improvement.

8. Management of the Salt River Project purchased the LMC for Kyrene Unit # 4 as a result of the offer of Quisenberry of January 31, 1973. ... As far as I have been able to determine, none of the terms of the acknowledgment were negotiated or brought to the attention of the management of the Salt River Project by the salesman Quisenberry or any other person.

The LMC was delivered to and installed in Kyrene-4 during February 1974. Westinghouse employees were involved in the installation and testing of the LMC and its integration into the unit. On May 16, 1976 the rotating blades in sections one through four of the Kyrene-4 gas turbine unit were destroyed in an accident. Damages were ascertained to be in excess of $1.9 million. SRP alleges that the accident was caused by an explosion and fire resulting from a malfunction in the LMC and that the malfunction was due to an unreasonably dangerous defect in the design of the LMC unit. In the alternative, SRP alleges that Westinghouse breached an implied warranty of fitness.

THE UNIFORM COMMERCIAL CODE--BREACH OF WARRANTY

There was some dispute below concerning what constituted the offer and what constituted the acceptance under these facts. We adopt and approve the court of appeals' resolution of this issue. The Quisenberry letter of January 31, 1973 did not constitute a firm offer but merely invited a purchase offer from SRP. About a month later SRP submitted its offer replete with standard form "terms and conditions." Westinghouse's acknowledgment, containing its own standard "terms and conditions," served as the contract once SRP had accepted the LMC device nearly a year later without protesting any of the terms in the Westinghouse boilerplate. See A.R.S. §§ 47-2204, 2206(A), 2207 (5 Ariz.Leg.Serv. 238 (1984)). Westinghouse prevails in this "battle of forms" because, under the UCC, it is recognized that "merchants" may merely exchange forms without engaging in actual negotiations concerning a knowledgeable allocation of risks. See J. White & R. Summers, Uniform Commercial Code § 1-2 (1972).

SRP concedes the effectiveness of these provisions but asserts, nevertheless, that it should be able to avoid the limitations of express and implied warranties delineated in Westinghouse's boilerplate "terms and conditions" because, under the circumstances presented here, these terms are "unconscionable." See A.R.S. § 47-2719(C) (5 Ariz.Leg.Serv. 263 (1984)). 1 The court of appeals aptly summarized ...

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