RHEEM MANUFACTURING COMPANY, Appellant (Defendant below), v. PHELPS HEATING & AIR CONDITIONING, INC., Appellee (Plaintiff below).
No. 49S02-0003-CV-219.
Supreme Court of Indiana.
May 9, 2001.
746 N.E.2d 941
Robert A. Garelick, Bryan S. Redding, Cohen, Garelick & Glazier, Indianapolis, IN, Attorneys for Appellee.
ON PETITION TO TRANSFER
SULLIVAN, Justice.
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., 714 N.E.2d 1218 (Ind.Ct.App.1999).
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.)1 Second, Rheem disclaimed consequential and incidental damages:
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 rеquest.
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 Phelps‘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 Fеderated 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 23.) Phelps also asserted a claim under the express warranty, 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.” (R. at 26.)
Phelps described its damages as including “but not limited to, lost customers, 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 ... comput[ing] 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 Apрeals affirmed the denial of summary judgment. Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218 (Ind.Ct.App.1999). As for the express warranties, the Court of Appeals found a genuine issue of material fact as to “whether the cumulative effect of Rheem‘s actions was commercially reasonable.” Id. at 1228 (emphasis in original). On the implied warranty claims, the court stated that the evidence establishing privity was “slight.” The court nevertheless held that “perfect vertical privity is not necessary in this case” and then found a genuine issue of material fact as to whether Rheem breach-
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
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 summary judgment as to Phelps‘s claim for lost profits under the express warranty because the warranty excluded consequential damages.2 This argument requires us to examine the interplay between
(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 .(3) 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.4 But Phelps contends that, under
These arguments pose the question of whether an exclusion 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
The Court of Appeals accepted the independent view. However, the court also grafted onto
We hold that
Faced with an ambiguous statute, we turn next to other applicable canons of construction. First, we note that “[o]ur main objective in statutory construction is to determine, effect and implement the intent of the legislature.” Melrose v. Capitol City Motor Lodge, Inc., 705 N.E.2d 985, 989 (Ind.1998). See also Seifert v. Bland, 587 N.E.2d 1317, 1319 (Ind. 1992), reh‘g denied. In ascertaining this intent, we “presume that the legislature did not enact a useless provision” such that “[w]here statutory provisions are in conflict, no part of a statute should be rendered meaningless but should be reconciled with the rest of the statute.” Robinson v. Wroblewski, 704 N.E.2d 467, 474-75 (Ind.1998). See also Spaulding v. International Bakers Services, Inc., 550 N.E.2d 307, 309 (Ind.1990) (“Where possible, every word must be given effect and meaning, and no part is to be held meaningless if it can be reconciled with the rest of the statute.“).
Several aspects of
Second, the independent view is consistent with the principle of statutory interpretation that “[w]here 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 three specific legislative purposes in mind, all of which comport with the independent view:
(1) IC 26-1 shall be liberally construed and apрlied 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.
Finally, the legislature‘s intent to follow 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 rеlationships. See, e.g.,
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 courts8 should not interfere simply because such risks have materialized. This is the view shared by Professors White and Summers:
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., 587 F.2d 1363, 1375 (9th Cir.1978) (“Risk-shifting is socially expensive and should not be undertaken in the absence of a good reason. An even better reason is required when to so shift is contrary to a contract freely negotiated.“); Polycon Indus., Inc. v. Hercules, Inc., 471 F.Supp. 1316, 1325 (E.D.Wis.1979) (“[T]he exclusion of consequential and special damages was an allocation of risks agreed to between two commercial parties of equal strength and should be given effect.“).
Phelps attempts to escape this conclusion by arguing that the furnace sales were not a sophisticated commercial trans-
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., 714 N.E.2d 1218, 1228 (Ind.Ct.App.1999). The court pointed to no statutory authority that requires these exclusions or limitations to be “commercially reasonable,” nor did it define this term.10 The court did make some passing references to Official Comment One to
Rheem next argues that the trial court erred by denying summary judgment on Phelps‘s claims for labor expenses incurred in fixing its customers’ furnaces. The record shows that Phelps lost nearly $100,000 by servicing Rheem furnaces under a service labor warranty that Phelps gave to its customers.13 Rheem argues that a “service labor exclusion” found in the express warranty prevents Phelps from claiming damages in this form: “This Warranty does not cover any labor expenses for service, nor for removing or reinstalling parts. All such expenses are your responsibility unless a sеrvice labor agreement exists between you and your contractor.” (R. at 105.) Phelps counters by arguing that this remedy clause failed of its essential purpose and therefore Phelps could claim all UCC damages.14
The first step in determining whether a limited remedy failed of its essential purpose is to parse out exactly what purpose
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 circumstances 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 arrangements which were oppressive at the inception which is a question of unconscionability, but with the application of an agreement to “novel circumstances 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 to identify the purpose underlying the provision and determine whether application of the remedy in the particulаr circumstances 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(2), 65 Cal.L.Rev. 28, 36-40 (1978).
621 N.E.2d at 1086. See also Indiana Comment to
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.16 Phelps, as the contractor, had the manpower and facilities to implement
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 circumstances not contemplated by the parties.‘” 621 N.E.2d at 1085 (citation omitted). As Comment One to
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 service warranty. See
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
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, 350 N.E.2d at 646. Recovering the repair cost replicates the typical warranty damages—value of goods as warranted minus value of goods as delivered—by awarding the amount spent to put the goods in the warranted condition. See White and Summers, § 10-2 at 504. This measure of damages reflects the fact that a properly functioning market would deduct from the price of the item the cost of repairs a purchaser would have to make. The repair costs that Phelps seeks to recoup serve no such purpose because Phelps is not in possession of the goods.
We conclude by noting that, while Phelps, as an intermediate seller, is not entitled to these direct warranty damagеs, 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., 232 Kan. 458, 657 P.2d 517, 529 (1983) (“A right of indemnity exists where a party is compelled to pay damages that rightfully should have been paid by another party. 41 Am.Jur.2d, Indemnity, § 20. Thus, a seller that is liable for damages to a purchaser of defective goods may seek indemnity from the manufacturer where the damages were the proximate result of the manufacturer‘s breach of warranty.“). Whether or not Phelps can recover on an indemnity theory is an issue to be decided on remand.
III
We summarily affirm the Court of Appeals as to Phelps‘s implied warranty claims. See Martin v. Amoco Oil Co., 696 N.E.2d 383, 386 n. 4 (Ind.), cert. denied, Zrnchik v. Amoco Oil Co., 525 U.S. 1049, 119 S.Ct. 608, 142 L.Ed.2d 548 (1998).
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.
SHEPARD, C.J., and BOEHM, J., concur.
RUCKER, J., not participating.
DICKSON, J., dissents with separate opinion.
DICKSON, Justice, dissenting.
I am persuaded that
Notes
(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 underIC 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.
Chatlos Systems v. National Cash Register Corp., 635 F.2d 1081, 1086 (3rd Cir.1980).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 consequential 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.
Kearney, 527 A.2d at 433. A Rheem executive testified that such exclusions of consequential damages are standard in the gas-powered furnace industry. (R. at 102.)[T]he 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.
Id. at 397. The contract also stated that “[s]hould the above-named stallion hereafter become injured or disabled through accident or disease ... this warranty shall be null and void and all obligations incurred by me herein shall be considered fulfilled and ended.” Id. at 400. These clauses arguably limited the damages Powell could 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: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 gеt 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 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.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 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.
123 N.M. 439, 941 P.2d 978, 981 (Ct.App. 1997).[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.