United States District Court, Central District of Illinois, Springfield Division
February 9, 1988
COLE ENERGY DEVELOPMENT COMPANY, A CORPORATION, PLAINTIFF,
INGERSOLL-RAND COMPANY, A CORPORATION, DEFENDANT.
The opinion of the court was delivered by: Mills, District Judge:
Partial summary judgment allowed.
Here are the facts.
Cole Energy Development Company ("Cole Energy") leased two gas
compressor units from Ingersoll-Rand Company ("Ingersoll-Rand")
for use in its business of developing gas fields and in the
pumping, selling, and distribution of natural gas. A lease
agreement for an ESH gas compressor was entered into by the
parties on December 5, 1983, and a lease agreement for a KOA gas
compressor was entered into by the parties on August 11, 1984.
The terms and conditions of both agreements are identical.
(Hence, when we refer to the agreement in the singular, it is
applicable to both leases.) Ingersoll-Rand's motion for partial
summary judgment concerns the enforceability of certain terms of
the lease agreement.
Paragraph 18 of the lease agreement states inter alia:
The liability of lessor under this agreement shall be
limited to the amount of payments made under this
agreement. In no event shall any special, indirect,
or consequential damages be allowed to lessee because
of actions or default by the Lessor through
negligence or malfunction of the equipment . . .
Paragraph 17 states:
WARRANTIES. Lessor will deliver to lessee the factory
warranty for each new unit manufactured by
Ingersoll-Rand Company to enable lessee to obtain
customary warranty service furnished on such units.
Other than delivering said factory warranty, Lessor
makes no other representations, promises, statements
or warranties, expressed or implied, AND THERE ARE NO
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE CONTAINED HEREIN.
Ingersoll-Rand asks this Court to find as a matter of law that
these provisions are enforceable. If the provisions are
enforceable, Cole Energy's maximum recovery under the agreement
would be limited to the amounts paid under the lease. No
consequential damages would be recoverable and the count alleging
a breach of the implied warranty would be dismissed. We now
address these questions.
Under Rule 56(c), summary judgment should enter "if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). Unquestionably, in determining whether a
genuine issue of material fact exists, the evidence is to be
taken in the light most favorable to the nonmoving party. Adickes
v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 1609,
26 L.Ed.2d 142 (1970). Nevertheless, the rule is also well
established that the mere existence of some factual dispute will
not frustrate an otherwise proper summary judgment. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2510, 91
L.Ed.2d 202 (1986). Thus, the "preliminary question for the judge
[is] not whether there is literally no evidence, but whether
there is any upon which a jury could properly proceed to find a
verdict for the party producing it, upon whom the onus of proof
is imposed." Id. 106 S.Ct. at 2511, quoting Improvement Co. v.
Munson, 14 Wall. 442, 448, 20 L.Ed. 867 (1872); see also Celotex
Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2553, 91 L.Ed.2d
265 (1986). In other words, the Court must consider the evidence
"through the prism of the substantive evidentiary burden" in
motion. Anderson, 106 S.Ct. at 2513; Carson v. Allied News Co.,
529 F.2d 206, 210 (7th Cir. 1976). Applying this standard, the
Court now turns to the case at bar.*fn1
Law and Analysis
I. Consequential Damages
The parties have virtually left unaddressed the issue of choice
of law in this case. Ingersoll-Rand points out that the contract
provides that Oklahoma law is to govern. Ingersoll-Rand, however,
proceeds to argue the case alternatively under Illinois and
Oklahoma law. Cole Energy's argument essentially addresses
Illinois law. Although the contract would indicate that Oklahoma
law is to govern, the parties can within certain bounds stipulate
to the proper rule of decision. City of Clinton v. Moffitt,
812 F.2d 341, 342 (7th Cir. 1987). The argument made under Illinois
law could be taken as an informal stipulation that Illinois
substantive law should govern.
In any event, the Uniform Commercial Code provisions at issue
in this case are identical in Oklahoma and Illinois. On the
particular question raised, neither state supreme court has had
occasion to issue a definitive holding. Hence, we are required to
predict how the Court would decide if presented with the
question. Our prediction in this case is based on cases from
other jurisdictions and our own view of what is the most tenable
position. We do not believe the choice between Oklahoma and
Illinois law affects the bottom line decision in this case.
Hence, we accept the arguments made under Illinois law as a
stipulation that Illinois law is the rule of decision.
The major legal issue raised on the partial summary judgment
motion is whether the failure of a limited remedy to repair or
replace defective parts negates a separate contractual exclusion
of consequential damages.
Initially, we must determine if the Uniform Commercial Code as
adopted in Illinois is applicable to the equipment lease at issue
here. Illinois courts have applied the UCC to equipment leases by
way of analogy. Dillman Assoc., Inc. v. Capitol Leasing Co.,
110 Ill. App.3d 335, 342, 66 Ill.Dec. 39, 44, 442 N.E.2d 311, 316 (4th
Dist. 1982). The Code will be applied by analogy when the lease
involves provisions that implicate relevant sections of the Code
and nothing about the transaction would lead the Court to reject
an analogy to the Code. Id. The contract terms at issue here are
commonly found in sales contracts and are commonly interpreted
under the Code. We see no reason to reject the analogy and hence
we apply the UCC to this lease transaction.
Here, the express warranty given ("the factory warranty") is
limited to repair and replacement of defective parts. The
question of whether a limited remedy of repair and replacement
fails its essential purpose is a question of fact which is
inappropriate for determination on summary judgment.
However, for purposes of deciding this motion, we will assume
that the remedy did fail. Then, the question becomes whether the
consequential damages exclusion and the limitation of damages to
the payments made under the lease stand independent of the
failure of the limited remedy.
Ill.Rev.Stat. ch. 26, ¶ 2-719 provides:
(1) Subject to the provisions of subsections (2) and
(3) of this section and of the preceding section on
liquidation and limitation of damages, (a) the
agreement may provide for remedies in addition to or
in substitution for those provided in this Article
and may limit or alter the measure of damages
recoverable under this Article, as by limiting the
buyer's remedies to return of the goods and repayment
of the price or to repair and replacement of
non-conforming 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.
(2) Where circumstances cause an exclusive or limited
remedy to fail of its essential purpose, remedy may
be had as provided in this act.
(3) Consequential damages may be limited or excluded
unless 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. Ill.Rev.Stat. ch. 26,
¶ 2-719 (1985).
As the Code language explains, once a limited remedy fails of
its essential purpose a buyer may resort to any other remedy in
the Code. Ill.Rev.Stat. ch. 26, ¶ 2-719(2) (1985). This includes
the availability of consequential damages. However, the Code also
provides that consequential damages can be excluded as long as
the exclusion is not unconscionable.
Some courts have read these two Code provisions as being
dependent upon one another. In other words, once the limited
remedy falls, the exclusion of consequential damages necessarily
falls right along with it. R.W. Murray Co. v. Shatterproof Glass
Corp., 758 F.2d 266 (8th Cir. 1985); Soo Line Railroad Co. v.
Fruehauf Corp., 547 F.2d 1365 (8th Cir. 1977); Caterpillar
Tractor Co. v. Waterson, 13 Ark. App. 77, 679 S.W.2d 814 (1984);
Clark v. International Harvester Co., 99 Idaho 326, 581 P.2d 784
(1978). These courts adopt the position that once a seller fails
to make good on his warranty obligations, he should no longer be
able to seek refuge behind the favorable provisions of the
contract which exclude the other remedies available under the
Code. Clark, 581 P.2d at 800. This, it is argued, would leave the
buyer without a minimum adequate remedy which is the "essence of
a sales contract." Ill.Rev.Stat. ch. 26, ¶ 2-719 comment 1
On the other hand, courts have accepted the interpretation that
a consequential damages exclusion survives independently of the
failure of a separate limited remedy provision. V-M Corp. v.
Bernard Distributing Co., 447 F.2d 864 (7th Cir. 1971); Chatlos
Systems, Inc. v. National Cash Register Corp., 635 F.2d 1081 (3d
Cir. 1980); Lewis Refrigeration Co. v. Sawyer Fruit, Vegetable &
Cold Storage Co., 709 F.2d 427 (6th Cir. 1983); Kearney & Trecker
Corp. v. Master Engraving, Inc., 107 N.J. 584, 527 A.2d 429
(1987); American Electric Power Co. v. Westinghouse Electric
Corp., 418 F. Supp. 435 (S.D.N.Y. 1976). When the exclusion on
consequential damages stands independent of the failure of the
limited remedy, it is still subject to being stricken if
unconscionable. This view is supported by the policy embodied
within the Code which recognizes that parties should remain free
to contractually allocate risks and benefits as they see fit.
American Electric, 418 F. Supp. at 458.
We hold that for purposes of this case it is unnecessary to
accept either view as a binding proposition of law that will have
to be applied in all cases which implicate these code sections.
The more appropriate path to take is to examine the issue on a
case by case basis. Thus, whether the particular exclusion of
consequential damages should be enforced depends on the
characteristics of the transaction and how the parties sought to
allocate the risks. Waters v. Massey-Ferguson, Inc.,
775 F.2d 587, 592-93 (4th Cir. 1985); Fiorito Bros., Inc. v. Fruehauf
Corp., 747 F.2d 1309, 1315 (9th Cir. 1984).
In one instance, the transaction may involve a consumer sale in
which the warranted goods consist largely of standardized parts.
See, e.g., Waters, 775 F.2d at
592. The exclusion of consequential damages along with the
failure of the limited remedy may also have left the buyer
without any remedy at all. See, e.g., Clark, 581 P.2d at 801. In
addition, the seller may have been wilful or dilatory in living
up to its warranty obligations. See, e.g., Adams v. J.I. Case
Co., 125 Ill.App.2d 388, 261 N.E.2d 1 (4th Dist. 1970).
At the other end of the spectrum, the case may involve two
commercial entities of equal bargaining power. The goods may be
complex and their performance may be dependent upon diverse
factors. See, e.g., Chatlos Systems, 635 F.2d at 1087. Finally,
the contract may provide additional remedies beyond those
specifically excluded. See, e.g., American Electric, 418 F. Supp.
In the former case, a court would be more inclined to strike
the consequential damages exclusion. In the latter situation, the
exclusion would probably be deemed to stand independent of the
failure of the limited remedy. Of course, there exist gradations
between the two paradigmatic examples.
Here, Cole Energy is a sophisticated commercial enterprise of
substantially equal bargaining strength. The lease agreements
provide rights and impose duties on the lessor and lessee. Cole
Energy does not allege that Ingersoll-Rand was wilful or dilatory
in failing to meet its warranty obligations (assuming they did
breach those obligations). Cole Energy is provided with the
back-up remedy of return of payments made under the lease. The
validity of this type of remedy has been held to provide a buyer
with a minimum adequate remedy. Marr Enterprises, Inc. v. Lewis
Refrigeration Co., 556 F.2d 951 (9th Cir. 1977); Garden State
Food Distributors, Inc. v. Sperry Rand Corp., 512 F. Supp. 975
(D.N.J. 1981); American Electric, 418 F. Supp. at 459.
Considering all these factors, the balance tips in favor of
enforcing the contractual terms in the lease. This comports with
the policy of freedom of contract espoused by the Code. As one
Illinois appellate court noted: "Courts should not assume an
overly paternalistic attitude toward the parties to a contract by
relieving one or another of them of the consequences of what is
at worst a bad bargain. . . ." Dillman Assoc., Inc. v. Leasing
Co., 110 Ill.App.3d 335, 343, 66 Ill.Dec. 39, 45, 442 N.E.2d 311,
317 (4th Dist. 1982).
For these reasons, Ingersoll-Rand's motion precluding Cole
Energy from recovering consequential damages and limiting its
recovery to payments made under the lease is allowed.
II. Implied Warranties
Implied warranties for merchantability and fitness may be
disclaimed if the disclaimer is conspicuous and the disclaimer
mentions merchantability. Ill.Rev.Stat. ch. 26, ¶ 2-2-316(2)
Here, the disclaimer clearly mentions merchantability. The
disclaimer is set out in larger type than the rest of the
contract and the section is clearly labeled "WARRANTIES". This
passes the test of conspicuousness under the Code. Ill.Rev.Stat.
ch. 26, ¶ 1-201(10). Bowers Manufacturing Co., Inc. v. Chicago
Machine Tool Co., 117 Ill.App.3d 226, 231-32, 72 Ill.Dec. 756,
762, 453 N.E.2d 61, 67 (2d Dist. 1983).
Consequently, Cole Energy's claim for breach of implied
warranties is dismissed.
Defendant's motion for partial summary judgment is allowed and
Plaintiff's damages are limited to payments made under the lease
agreement. Plaintiff's claims for consequential damages and for
breach of implied warranty are dismissed.
Pursuant to Fed.R.Civ.P. 56(c), this order is interlocutory.
Only Plaintiff's claims based on fraud remain for trial.