Lead Opinion
ON PETITION TO TRANSFER
Phelps expended considerable sums repairing Rheem furnaces that Phelps had sold and installed. We hold that the language of the UCC precludes Phelps from recovering consequential damages from Rheem for breach of express warranty and that the language of the express warranty at issue precludes Phelps from recovering for labor expenses. However, Phelps may still have valid claims for indemnity and breach of implied warranty.
Background
We will briefly explain the background of this case; for a complete discussion, see the Court of Appeals opinion in Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc.,
Rheem Manufacturing Company ("Rheem") makes furnaces for use in homes and offices. During the late 1980s and early 1990s, Rheem sold its furnaces through a distributor, Federated Supply Corporation ("Federated"). Federated in turn sold Rheem furnaces to Phelps Heating and Cooling ("Phelps"), a central Indiana contractor.
The box in which every furnace was shipped contained the following warranty:
Manufacturer, RHEEM AIR CONDITIONING DIVISION, warrants ANY PART of this furnace against failure under normal use and service within the applicable periods specified below, in accordance with the terms of this warranty.
(R. at 105.) This express warranty was limited by three clauses that are at the heart of this appeal. First, Rheem limited the remedies available for breach of the warranty to replacement of parts:
Under this Warranty, RHEEM will furnish a replacement part that will be warranted for only the unexpired portion of the original warranty....
(Id.)
ANY CLAIMS FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES ARE EXPRESSLY EXCLUDED.
(Id.) Finally, Rheem disclaimed any liability for the cost of servicing the furnaces:
This Warranty does not cover any labor expenses for service, nor for removing or reinstalling parts. All such expenses are your responsibility unless a service labor agreement exists between you and your contractor.
(Id.)
During the early 1990s, several types of Rheem furnaces malfunctioned after Phelps installed them. A Phelps executive testified that from "late 1989 until 1993, Rheem had virtually no high efficiency furnaces on the market that were not experiencing reliability problems ...." (R. at 326.) While Rheem issued numerous "technical service bulletins" offering in
Phelps executives met with a Rheem service representative on May 11, 1994. At this meeting, Phelps requested between $40,000 and $65,000 to compensate it for the cost involved in servicing the furnaces. Rheem rejected this request.
Phelps brought suit against Rheem and Federated on August 8, 1994, claiming that Rheem breached its express and implied warranties and was negligent in its manufacture of the furnaces. Underlying all of these claims is Phelрs's assertion that the furnaces "shut down and were not operational after installation. Among other things, the pilot assemblies, hot surface ignitors, flame sensors and ignition controls failed." (R. at 26.) The complaint first contended that Rheem breached the implied warranty of fitness for a particular purpose because Rheem and Federated "knew that Phelps intended to use the furnaces and install them in properties serviced by Phelps" (R. at 21) but the furnaces were "defective, and after they had been installed ... they failed to function properly." (Id.) Similarly, Phelps sought damages for breach of the implied warranty of merchantability, contending that Rheem and Federated were merchants but that the defects in the furnaces made them "unsuitable and posed a risk of personal injury and property damages to customers serviced by Phelps ...." (R. at 28.) Phelps also asserted a claim under the express wаrranty, arguing that it "incurred substantial expenses and other damages in remedying the problems caused by the defective furnaces." (R. at 25.) Finally, Phelps claimed that "Rheem and Federated Supply were negligent and careless in their design and sale of the furnaces by failing to manufacture and provide furnaces which were operational and in reasonable working order." 26.) (R. at
Phelps described its damages as including "but not limited to, lost eustomers, lost profits, and the additional cost of servicing the defective furnaces and remedying the defects therein." (R. at 22.) In answers to interrogatories, Phelps listed its warranty damages as "lost service charges," "lost labor charges," "lost profits" from two customers who would no longer do business with Phelps, and the "approximate value of office time spent ... com-putling] damages." (R. at 225.)
Rheem moved for summary judgment on all of these claims. Rheem's brief in support of its motion asserted that the damages Phelps sought on the warranty theories were precluded by the limitations in the express warranty and by lack of privity on the implied warranties. Rheem also argued that Phelps could not claim tort damages for the purely economic injuries that resulted from the failure of the furnaces to operate as intended. The trial court granted Rheem's motion for summary judgment in regards to negligence, but denied it as to the warranties.
Rheem sought an interlocutory appeal on the warranty claims and the trial court certified its order. The Court of Appeals affirmed the denial of summary judgment. Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc.,
Discussion
When reviewing an entry of summary judgment, we stand in the shoes of the trial court. Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Ind. Trial Rule 56(C). We do not reweigh the evidence, but will consider the facts in the light most favorable to the nonmoving party. See City of Gary v. Indiana Bell Telephone Co.,
Rheem's appeal raises three issues which require us to analyze the operation of express and implied warranties under Indiana's version of the Uniform Commercial Code ("the UCC").
I
Rheem first argues that the trial court should have granted summаry judgment as to Phelps's claim for lost profits under the express warranty because the warranty excluded consequential damages.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in IC 26-1.
(8) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, but limitation of damages where the loss is commercial is not.3
Rheem and Phelps present conflicting constructions of these subsections. Both parties appear to accept that the remedy provided by Rheem failed of its essential purpose and that Phelps is entitled to the benefits of the express warranty.
These arguments pose the question of whether an exelusion of consequential damages survives when a separate contract provision limiting a buyer's remedies has failed of its essential purpose. The courts that have faced this issue have fallen into two camps that are divided along the lines of the parties' arguments in this case. One group takes what is known as the "dependent" view and reads § 2-719(2)'s reference to remedies "provided in [the UCCI" as overriding a contract's consequential damage exclusion. See, e.g. Middletown Concrete Prod. v. Black Clawson Co.,
The Court of Appeals accepted the independent view. However, the court also grafted onto § 2-719 a requirement of "commercial reasonableness" and affirmed the denial of summary judgment on the ground that a triable issue existed as to whether Rheem's consequential damages exclusion and limited remedy were commercially reasonable.
We hold that Indiana Code § 26-1-2-719(2) does not categorically invalidate an exelusion of consequential damages when a limited remedy fails of its essential purpose. See Schurtz v. BMW of North America, Inc.,
Faced with an ambiguous statute, we turn next to other applicable canons of construction. First, we note that "olur main objective in statutory construction is to determine, effect and implement the intent of the legislature." Melrose v. Capitol City Motor Lodge, Inc.,
Several aspects of Indiana Code §§ 26-1-2-719(2) and (8) point to a legislative intent consistent with the independent view. First, as many independent courts have noted, the drafters of the UCC inserted distinct legal standards into each provision. -A limited remedy will be struck when it fails of its essential purpose; an exclusion of consequential damages fails when it is unconscionable. Moreover, these subsections are distinct in who applies the standards they set out. Whether a limited remedy fails of its essential purpose is an issue of fact that a jury may determine. See, e.g., Delhomme Indus., Inc. v. Houston Beechcraft, Inc.,
Second, the independent view is consistent with the principle of statutory interpretation that "[where possible, we interpret a statute such that every word receives effect and meaning and no part is rendered 'meaningless if it can be reconciled with the rest of the statute.'" Bagnall v. Town of Beverly Shores, 726
Third, the UCC instructs us to construe its provisions with thrеe specific legislative purposes in mind, all of which comport with the independent view:
(1) IC 26-1 shall be liberally construed and applied to promote its underlying purposes and policies.
(2) Underlying purposes and policies of IC 26-1 are:
(a) to simplify, clarify, and modernize the law governing commercial transactions;
(b) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties;
(c) to make uniform the law among the various jurisdictions.
Ind.Code § 26-1-1-102 (19983) (emphasis added) ("Purposes; rules of construction; variation by agreement"). See also id. emt. 1 ("The Act should be construed in accordance with its underlying purposes and policies. The text of each subsection should be read in the light of the purpose and policy of the rule or principle in question, as also of the Act as a whole ...."); Kearney & Trecker Corp. v. Master Engraving Co.,
Finally, the legislature's intent to follоw the independent view is also supported by the UCC's general policy favoring the parties' freedom of contract. The UCC tells us that one of its paramount concerns is enabling contracting parties to control their own relationships. Seq, eg., Ind. Code § 26-1-1-102(8) (1998) ("The effect of provisions of IC 26-1 may be varied by agreement, except as otherwise provided in IC 26-1 ...."); Id. erat. 2 ("Subsection (3) states affirmatively at the outset that freedom of contract is a principle of the [UCC] ...."). Official Comment One to Indiana Code § 26-1-2-719 states that "Tulnder 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." However, the dependent view ignores the intent of the parties and allows a buyer to recover consequential damages despite an explicit contract term excluding them. Thе dependent courts essentially presume that the parties intended the exclusion of consequential damages to depend on the limited remedy. Seq, eg., Kathryn I. Murtagh, Note, UCC Section 2-719: Limited Remedies and Consequential Damage Exclusions, 74 Cornell L.Rev. 359, 369 (1989) ("Dependent courts begin by presuming that the parties intended to link the consequential damage exclusion and limited remedy.").
This freedom to set contract terms is especially important in the context of a commercial transaction. Sophisticated commercial actors should be free to allocate risks as they see fit, and courts
In general we favor the [independent] line of cases. Those cases seem most true to the Code's general notion that the parties should be free to contract as they please. When the state intervenes to allocate the risk of consequential loss, we think it more likely that the loss will fall on the party who cannot avoid it at the lowest cost. This is particularly true when a knowledgeable buyer is using an expensive machine in a business setting. It is the buyer who operates the machine, adjusts it, and understands the consequences of its failure. Sometimes flaws in such machines are inherent and attributable to the seller's faulty design or manufacture. But the fault may also lie in buyer neglect, in inadequate training and supervision of the operators or even in intentional use in ways forbidden by the seller. Believing the parties to know their own interests best, we would leave the risk allocation to the parties.
White & Summers, Uniform Commercial Code § 12-10, at 605 (3rd ed.1988) (hereinafter "White & Summers"). See also S.M. Wilson & Co. v. Smith Intern., Inc.,
Phelps attempts to eseape this conclusion by arguing that the furnace sales were not a sophisticated commercial transaction worthy of such deference. Appel-lee's Br. in Opposition to Transfer at 8. Phelps notes that the warranties were simply found inside of thе furnace box and were not the product of detailed negations. Cf. American Electric Power Co. v. Westinghouse Elec. Corp.,
The Court of Appeals applied the independent view, but found a genuine issue of material fact as to whether "the cumulative effect of Rheem's actions was commercially reasonable." Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc.,
II
Rheem next argues that the trial court erred by denying summary judg
The first step in determining whether a limited remedy failed of its essential purpose is to parse out exactly what purpose the remedy was to serve. See Martin Rispens & Son v. Hall Farms, Inc.,
These facts demonstrate that the limited remedy was intended to maintain a reasonable division of responsibilities between the manufacturer and the contractor when customers experienced problems. Rheem's parts-only warranty worked in tandem with Phelps's labor warranties to let customers know that they had to seek repair service from the local contractor, not the distant manufacturer. Phelps benefited from this relationship by marketing extended warranties on top of its one-year service warranty. If the warranty held Rheem liable for repairs, Rheem would naturally skip over Phelps and sell extended service warranties directly to the customer. For its part, the limited remedy gave Rheem the reassurance that it would not be liable for repairs on its furnaces at distant locations around the country. With this limitation in place, customers could rely on local repair service, Phelps could market extended warranties, and Rheem could be sure it would not be obligated to make repairs. Thus the apparent purpose of this limited remedy was to facilitate the manufacturer/contractor distinction for the benefit of all parties.
We must next determine whether cireumstances caused the remedy to fail of this purpose. We set out the basic framework for analyzing the failure of essential purpose in Martin Rispens:
Commentators have suggested that § 2-719, as it relates to failure of essential purpose, is not concerned with arrange-tents which were oppressive at the inception which is a question of unconscio-nability, but with the application of an agreement to "novel cireumstances not contemplated by the parties." White & Summers, § 10-12. In addition, they have suggested that this provision should be triggered when the remedy fails of its essential purpose, not the essential purpose of the UCC, contract law, or of equity. Id. One author suggests that the method used to decide whether a particular limitation fails of its essential purpose is tо identify the purpose underlying the provision and determine whether application of the remedy in the particular cireumstances will further that purpose. If not, then, and only then, is there a failure of essential purpose. Jonathan A. Eddy, On The "Essential" Purposes of Limited Remedies: The Metaphysics of UCC § 2-719(82), 65 CalL.Rev. 28, 36-40 (1978).
Using this analysis, we hold that the remedy served its purpose. Rheem, as the manufacturer, had technical expertise in the functioning of its product. It was reasonable for Phelps to expect Rheem to use this expertise to supply replacement parts and technical guidance in the event of malfunctions.
Phelps's main argument as to the failure of essential purpose is that the furnaces experienced problems for roughly four years. However, the purpose of the limited remedy was not to guarantee that every furnace would be easily fixed, but to guarantee that the most logical party would be charged with making the repairs. Phelps was that party, and under this limitation it accepted the risk that repairs would be difficult and labor intensive. In Martin Rispens, we stated that a limited remedy fails only in the face of " 'novel cireumstances not contemplated by the parties'"
Even if we were to find that this remedy failed of its essential purpose, Phelps would not be entitled to the damages it seeks under the warranty. The parties characterize these service repair costs as either consequential damages or direct damages. In either event, Phelps is not entitled to recovery under the warranty and summary judgment should be entered.
The parties characterize the service labor as a form of consequential damage because Rheem should have foreseen that its failure to provide functioning furnaces would have caused Rheem to make multiple repairs under its sеrvice warranty. See Ind.Code § 26-1-2-715 (1993). To the extent these repair costs were consequential damages, they are excluded by Rheem's warranty as discussed in Part 1, supra.
The parties also characterize the repair costs as a form of direct damages. A buyer's remedy for breach of warranty is typically the difference between the goods as warranted and the goods as accepted. See Ind.Code § 26-1-2-714(2) (1998). However, the cost of repair may serve as a proxy for direct damages. See, e.g., Jones v. Abriani,
We hold, however, that Phelps is not in a position to claim this form of remedy. Typically, a buyer claiming repair damages is suing its immediate seller. See, e.g., Abriani,
We conclude by noting that, while Phelps, as an intermediate seller, is not entitlеd to these direct warranty damages, it may have a claim sounding in indemnity or subrogation for damages suffered by those with which it shared privity. See, e.g., Black v. Don Schmid Motor, Inc.,
III
We summarily affirm the Court of Appeals as to Phelps's implied warranty claims. See Martin v. Amoco Oil Co.,
Conclusion
Having previously granted transfer, we reverse the order of the trial court on Phelps's express warranty claims and remand this case for proceedings consistent with this opinion.
Notes
. On its face, it is unclear if this remedy is exclusive, but this ambiguity is clarified by a subsequent term: "RHEEM'S SOLE LIABILITY WITH RESPECT TO DEFECTIVE PARTS SHALL BE AS SET FORTH IN THIS WARRANTY ...." (Id.)
. While Phelps seeks both consequential and incidental damages, the same analysis applies to each and we will discuss only consequential damages.
. The first section of the same statute expressly allows such limitations and exclusions:
(1) Subject to the provisions of subsections
(2) and (3) and of IC 26-1-2-718 on liquidation and limitation of damages:
(a) the agreement may provide for remedies in addition to or in substitution for those provided in IC 26-1-2 and may limit or alter the measure of damages recoverable under IC 26-1-2, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
Ind.Code § 26-1-2-719(1) (1993).
. The trial court did not certify the question of whether the remedy actually failed of its essential purpose and Rheem concedes that this issue "is not in debate." Appellant's Reply Br. at 11. See also Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc.,
. Phelps does not argue that the clause at issue was unconscionable. See, eg., Appel-lee's Br. at 25-28.
. The two sections also aim at distinct contractual functions:
A contract may well contain no limitation on breach of warranty damages but specifically exclude consequential damages. Conversely, it is quite conceivable that some limitation might be placed on a breach of warranty award, but consеquential damages would expressly be permitted.
The limited remedy of repair and consequential damages exclusion are two discrete ways of attempting to limit recovery for breach of warranty. The Code, moreover, tests each by a different standard.
... We therefore see no reason to hold, as a general proposition, that the failure of the limited remedy provided in the contract, without more, invalidates a wholly distinct term in the agreement excluding consequential damages. The two are not mutually exclusive.
Chatlos Systems v. National Cash Register Corp.,
. If the drafters of the UCC intended to refer only to buyer's remedies, they would have referred to "IC § 26-1-2-711 et seq." or a similar designation.
. Sound commercial practice may require sellers in certain industries to exclude exposure to possibly expansive consequential damages:
[The potential significance of liability for consequential damages in commercial transactions undoubtedly prompted the Code's drafters, consistent with the Code's endorsement of the principle of freedom of contract, to make express provision for the limitation or exclusion of such damages. For certain sellers, exposure to liability for consequential damages could drastically affect the conduct of their business, causing them to increase their prices or limit their markets. ... In a commercial setting, the seller's right to exclusion of consequential damages is recognized as a beneficial risk-allocation device that reduces the seller's exposure in the event of breach.
Kearney,
. Phelps argues that the dependent view "more accurately reflects the parties' intent" because it is what a "rational buyer" would expect. Appellee's Br. in Opposition to Transfer at 6. However, this type of "presumed" intent is no substitute for an analysis of the parties' actual expectations.
. The UCC does refer to "reasonable commercial standards" in defining what is "good
. We note, however, that some language in Professors Pratter and Townsend's Indiana Comments to Indiana Code § 26-1-2-719 arguably suggests that the commentators subscribed to the dependant view: "A stаtutory scheme of remedies, if well drafted, should be adequate for a great variety of situations. But the parties' substitute arrangement may fail, in unusual circumstances. If so, the statutory remedies will still be available." Indiana Comment to Ind.Code § 26-1-2-719 (Burns 1974) (emphasis added).
. As a final matter, we note that our holding today is consistent with a pre-UCC Indiana case that arguably gave effect to an exclusion of consequential damages when a limited remedy failed of its essential purpose. Nave v. Powell centered on the sale of a stallion named "Major McKinley."
In the event that the above-named stallion, in perfect health, with proper usage, and the mares to him regularly returned and tried or bred on one full service season's trial does not get with foal 50 [percent] of the producing mares regularly tried and bred to him, then on return of the said stallion to me ... I agree to furnish the above-named purchaser without further charge, another imported or pure bred stallion of equal quality in exchange.
Id. at 397. The contract also stated that "[slhould the above-named stallion hereafter become injured or disabled through accident or disease ... this warranty shall be null and void and of no effect and all obligations incurred by me herein shall be considered fulfilled and ended." Id. at 400. These clauses arguably limited the damages Powell сould claim for breach of the warranty. Unfortunately, Major McKinley died before Powell could return him to Nave and request a replacement, as the warranty required. Id. at 398. Despite the contract's limited remedy and exclusion of damages, Powell sued for the expense of feeding and stabling Major McKinley and the cost of advertising the stallion's services. Powell also sought compensatory damages in the form of the difference in value between the sterile stallion he received and the fair market price of a fertile stallion. Id. The Court of Appeals recognized that contracting parties may limit the remedies available for the breach of warranty:
It must not be forgotten that in contracts of warranty, the same as in all other contracts, the contracting parties have a perfect right to put into such contract all its terms and*953 conditions, and provide all and entire the remedies contemplated and agreed upon by the parties. ... When the parties do agree upon such remedies and their contract by its terms expresses a clear intent and purpose in that respect, they are bound thereby and limited to the remedies, or remedy, so provided.
Id. at 398. The court then held that the warranty limited Powell's remedies to a replacement horse and reversed the trial court's refusal to dismiss the complaint. Id.
. Evidence in the record suggests that the repairs may have been made to help Phelps maintain goodwill with its customers and not to comply with its warranties. Phelps argued in its brief that its warranty did not cover the quality of the furnaces, but merely warranted the quality of the services it provided. Rheem replied that this characterization by Phelps means that the repairs were made gratuitously and Indiana law precludes indemnification for voluntary payments,. See Vernon Fire & Cas. Ins. Co. v. Graham,
. The UCC appliеs to these service labor issues because the "predominant thrust" of the entire transaction was clearly a sale of goods. See Insul-Mark Midwest, Inc. v. Modern Materials, Inc.,
. In fact, the Court of Appeals rendered no holding as to the service labor issues, even though it attempted to set out the arguments involved. See Rheem,
. There is nothing in the record to suggest that Rheem failed to deliver replacement parts.
. The New Mexico Court of Appeals explained this process in Manouchehri v. Heim:
[Although 2-714] sets the measure of direct damages for breach of warranty as the difference between the value of the goods as warranted and the value of the goods as accepted, often that difference can be approximated by the cost to repair the goods so that they conform to the warranty. For example, if it costs $200 to fix [a] machine so that it performed as a 100/100 machine, then one could assume that the unrepaired machine (the "goods accepted") was worth $200 less than the repaired machine (the goods "as warranted"). Thus, the cost of repair is commonly awarded as the direct damages.
Dissenting Opinion
dissenting.
I am persuaded that Indiana Code § 26-1-2-719(2) should be construed to invalidate an exclusion of consequential damages when a limitation of remedy fails of its essential purpose. I further conclude that the trial court properly denied Rheem's motion for summary judgment as to Phelps's claims for labor expenses in