Soo Line R. Co. v. Fruehauf Corp.

• Decision Date: 25 January 1977
• Docket Number: No. 76-1161,76-1161
• Citation: 547 F.2d 1365
• Parties: 20 UCC Rep.Serv. 1181, 1 Fed. R. Evid. Serv. 1298 SOO LINE RAILROAD COMPANY et al., Appellees, v. FRUEHAUF CORPORATION, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1365

547 F.2d 1365

20 UCC Rep.Serv. 1181, 1 Fed. R. Evid. Serv. 1298

SOO LINE RAILROAD COMPANY et al., Appellees, v. FRUEHAUF CORPORATION, Appellant.

No. 76-1161.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 7, 1976.

Decided Jan. 25, 1977.

Henry Halladay (argued), Bernard G. Heinzen and Jay L. Bennett, Minneapolis, Minn., on brief, for appellant.

James S. Simonson (argued), and Jeffrey R. Brooke, Minneapolis, Minn., on brief, for appellees.

Before GIBSON, Chief Judge, and LAY and STEPHENSON, Circuit Judges.

STEPHENSON, Circuit Judge.

This appeal concerns a contract in which Fruehauf Corporation (Magor) ¹ agreed to the manufacture, sale and delivery of 500 railroad hopper cars to Soo Line Railroad Company ² for the approximate price of $9,750,000. Soo Line, in this diversity action initiated against Magor, claims breach of contract and negligence in the manufacture of the railcars, and the district court ³ entered judgment based upon a jury verdict for Soo Line in the amount of $1,238,754.82. Magor appeals contending in general that the trial court erred in failing to construe certain provisions in the contract as barring recovery of damages and in allowing testimony by expert witnesses with respect to defective manufacture and resultant damages. For the reasons stated below, we affirm.

Magor and Soo Line in 1967 created the contract which provided for Magor to manufacture and deliver 500 covered hopper freight railroad cars at approximately $19,500 per car according to an agreed design and detailed written specifications. The contract incorporated by reference specifications established by the Association of American Railroads (AAR), an organization of railroads operating in the United States and Canada which adopts minimum uniform standards for the design and construction of railroad cars, including hopper cars.

The agreement was also governed by a document entitled "Terms and Conditions of Sale" which inter alia provided that acceptance of the cars was contingent upon inspection by Soo Line and included a warranty provision guaranteeing for one year that the railcars would be free from defects in material and workmanship and in full conformity with the specifications. In general, the warranty provision limited Magor's express obligation to the repair or replacement of any defective parts and provided that the warranty was in lieu of all other express or implied warranties and barred liability for indirect or consequential damages arising from defects in material or workmanship.

Soo Line, a corporation that owns and operates substantial railroad lines and railroad cars, purchased the cars and utilized them pursuant to a long term net lease for public service in hauling grain and other dry bulk commodities. The cars were delivered in early 1968. It is undisputed that, despite an estimated 40-year useful life, the underframes developed serious and widespread cracks in the steel structure and welds within a few months of delivery. Following both unilateral and mutual inspection of the railcars by the parties, Soo Line concluded that the cracks resulted from structural and welding defects and accordingly requested that Magor perform its obligation to repair pursuant to the warranty. However, Magor's management, claiming that the cracking derived from construction specifications required by Soo Line, insisted it had no such responsibility. After Magor refused to repair the cars, Soo Line implemented its own remedial operation. The cost of repairs was $506,862.78, slightly more than $1,000 per car. Soo Line has contended, and the jury verdict reflects, that this expenditure did not fully restore the cars to totally acceptable operating condition.

On July 30, 1971, Soo Line filed its complaint claiming breach of express and implied warranties and negligence based on the structural failure of the railroad cars and Magor's refusal to accept responsibility for repair. Magor in its answer denied liability contending that: the railcars met contract specifications; Soo Line's failure to inspect the cars during manufacture barred recovery; damages were limited by the contract; and contributory negligence obviated liability with respect to the negligence count.

Trial commenced on August 13, 1975, and concluded on October 2, 1975, with a jury verdict in favor of Soo Line. The trial court had submitted to the jury a 24-question special verdict form. In answering these questions, the jury essentially found that the railroad cars did not conform to the contract specifications and that Magor had not performed its obligation to repair or replace defective parts. The jury found that Magor breached its express warranty, implied warranties of merchantability and fitness for a particular purpose, and that Magor's negligence caused certain damages arising from the manufacture of the cars. The jury in its special verdicts awarded: $975,970 for the difference between the value of the cars as accepted and their value if built to conform to the contract specifications; $182,444 for revenue lost while the cars were undergoing repairs; and $10,084.93 for damages sustained in transporting the cars in connection with their repair. ⁴ The trial court adopted the answers in the special verdict and inter alia found that Soo Line had sustained $70,255.89, in damages resulting from spoiled ladings caused by water leakage through defective roofs of the cars. In addition, the district court concluded as a matter of law that the warranty provision in the contract was ineffective in limiting Magor's liability and entered judgment in the total amount of $1,238,754.82. Magor appeals from the denial of its post-trial motions for judgment notwithstanding the verdict or, in the alternative, for a new trial.

I.

The most significant issue in this appeal is whether either the disclaimer of liability, inspection clause or remedial limitation contained within the contract bars recovery of any or all damages arising from defective manufacture of the railroad cars. Appellant contends, alternatively, that it is exonerated from liability because the contract: disclaimed liability for implied warranties and negligent manufacture; barred recovery in the event of Soo Line's failure to inspect the railroad cars during manufacture; and in any event limited Magor's damages to the reasonable cost of necessary repairs (an amount not exceeding $506,862.78). In general, appellee asserts that the agreement does not preclude liability for the reasons that: the disclaimer of implied warranties was ineffective because it did not mention the word "merchantability" and is not conspicuous; the inspection clause does not impair any remedy since it relates only to acceptance; and the limited remedy is unenforceable because it failed of its essential purpose. Appellee also contends that the conditions of sale cannot defeat recovery under the negligence count. We consider initially the remedial limitation upon liability arising from breach of the express warranty.

It is undisputed and the district court found that the document entitled "Terms and Conditions of Sale" is a part of the contract between Soo Line and Magor. The warranty provision appearing in this document specifically states We will warrant to you (except as to items not manufactured by us) for a period of one year after date of acceptance of each of said cars that they will be free from all defects in material and workmanship under normal use and service, and that the cars will be in full conformity with the specifications referred to herein. Our obligation under this warranty shall be limited to repairing or replacing any part which is found to be defective provided we are notified of the fault or defect when it is first discovered and we are afforded an opportunity for verification, said repairs or replacement to be made at our plant or at such other place as may be mutually agreed upon. This warranty is expressly in lieu of all other warranties expressed or implied, and we shall not be liable for indirect or consequential damages resulting from any such defects in material or workmanship. ⁵

The trial court eventually concluded, without articulating a particular reason, that this warranty provision was ineffective to limit Magor's liability.

In this diversity case we are, of course, applying the substantive law of Minnesota. It is clear under Minnesota law that parties to a contract may limit or alter the measure of damages recoverable, as by limiting the buyer's remedies to repair and replacement of nonconforming goods or parts. Minn.Stat.Ann. § 336.2-719(1). See Luick v. Graybar Electric Co., 473 F.2d 1360, 1363 (8th Cir. 1973) (Minnesota law applicable); Kleven v. Geigy Agricultural Chemicals, 303 Minn. 320, 227 N.W.2d 566, 571 (1975). A limited remedy to repair or replace goods which are initially defective but are promptly remedied by the seller will normally be enforceable. Minn.Stat.Ann. § 336.2-719, Comment 1.

Nevertheless, limitations on remedies and damages permissible under section 2-719(1) are subject to section 2-719(2), which states:

Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter. ⁶

The rationale underlying section 2-719(2) is adequately reflected by the court's statement in Jones & McKnight v. Birdsboro Corp., 320 F.Supp. 39, 43-44 (N.D.Ill.1970):

This Court would be in an untenable position if it allowed the defendant to shelter itself behind one segment of the warranty when it has allegedly repudiated and ignored its very limited obligations under another segment of the same warranty, which alleged repudiation has caused the very need for relief which the defendant is attempting to avoid.

In applying section 2-719 to the facts in the instant case, we conclude that the remedial limitation contained within the contract failed of its essential purpose and is therefore...