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Fidelity and Deposit Co. v. Krebs Engineers

decided: October 5, 1988.


Appeals from the United States District Court for the Eastern District of Wisconsin. No. 78 C 788 - Terence T. Evans, Judge.

Cummings, Wood, Jr., and Manion, Circuit Judges.

Author: Manion

MANION, Circuit Judge.

In the early 1970's, two Wisconsin towns hired Scotty Smith Construction Company ("Scotty") to build an incinerator to burn their garbage.

That action spawned a series of events that eventually resulted in a lawsuit that now has been in the federal courts for almost ten years. This is the suit's second appearance before this court. See Fidelity & Deposit Co. of Maryland v. Sheboygan Falls, 713 F.2d 1261 (7th Cir. 1983). Unfortunately, we are unable to put the suit to rest.


When the towns hired Scotty to build the incinerator, they required Scotty to post a performance bond for $710,000, the amount of the contract price. Fidelity and Deposit Company of Maryland ("Fidelity") was the bond surety. To acquire the bond, Scotty agreed to indemnify Fidelity if Fidelity had to pay on the bond. The indemnity agreement provided, among other things, that Scotty, would pay any litigation expenses, including attorneys fees, that Fidelity incurred in paying the bond.

Scotty subcontracted with Midwesco, Inc. to build the incinerator's pollution-control system. Midwesco had provided Scotty with a bond issued by United States Fidelity and Guarantee Company ("USF&G"). Under that bond, Midwesco agreed to indemnify Scotty for any costs Scotty incurred (including attorneys' fees) that might arise from Midwesco's performance of the subcontract.

Midwesco obtained the scrubber for the pollution-control system from Krebs Engineers and installed it in the system. Unfortunately, the scrubber did not scrub as well as it was supposed to. Emissions from the incinerator exceeded the maximum levels allowed by Wisconsin law, and also exceeded the limits set by the contract between Midwesco and Krebs. Midwesco, Krebs, and Scotty made efforts to get the scrubber to perform up to snuff, but to no avail. The towns had paid all but about $38,000 on the contract with Scotty, and were stuck with an incinerator they could not use.

Understandably perturbed by this turn of events, the towns asserted that the scrubber's failure was a breach of contract by Scotty, and notified Fidelity that it must pay under the bond. A few months after the towns notified Fidelity of their claim, Fidelity filed a declaratory judgment action against the towns, Scotty, Midwesco, Krebs, and several other defendants. The complaint sought a declaration that Scotty had not breached the contract and that Fidelity was thus not liable to the towns on the bond. Alternatively, the complaint sought a declaration that if Fidelity was liable on the bond, Scotty was liable to Fidelity under the indemnity agreement.

Soon after Fidelity filed its complaint, other claims, cross-claims, and counterclaims began to fly amongst a number of parties. We mention only those claims relevant here. The towns sued Scotty, Midwesco, and Krebs for breach of contract. Scotty sued the towns for the $38,000 contract balance, and Midwesco, USF&G, and Krebs for indemnity. Midwesco sued the towns and Scotty for the amounts they owed Midwesco for its work, and also sued Krebs for breach of contract, negligence, and products liability. Finally, Krebs sued Midwesco for the balance due on their contract.

After a trip to this court, where we reversed the district court's grant of summary judgment against the towns, see 713 F.2d at 1268-72, the district court set the case for a jury trial. During the first day of the trial, before any evidence was taken, the parties settled all claims involving the towns. This left Scotty, Midwesco, and Krebs--mainly Midwesco and Krebs--to fight among themselves to determine who would ultimately bear the costs caused by the scrubber's failure. Those issues were tried to the court.

After trial, the district court held that Midwesco had to reimburse Scotty for attorneys' fees that Fidelity had incurred and that Scotty had reimbursed to Fidelity under Scotty's and Fidelity's indemnification agreement. The district court also held, however, that Krebs had breached its contract with Midwesco, as well as certain implied and express warranties. Applying Wisconsin law, the court held that Midwesco was entitled to consequential damages from Krebs, despite a consequential damages disclaimer in the contract. The court awarded Midwesco: 1) the out-of-pocket expenses it incurred in attempting to solve the scrubber problem; 2) Fidelity's attorneys fees that Scotty had reimbursed to Fidelity and that Midwesco had reimbursed to Scotty; and 3) thirty-three percent of Midwesco's own attorneys' fees. Both Midwesco and Krebs have appealed.


In its cross-appeal, Krebs challenges the damages the district court awarded to Midwesco. Krebs first contends that the district court erred by awarding Midwesco any consequential damages at all. Before deciding that issue, however, we must determine what state's law to apply. The district court applied Wisconsin law; on appeal Krebs argues that California law applies because the contract between it and Midwesco specifically provided that California law would govern the contract.

Wisconsin courts have recognized the general rule that parties to a contract may select the law governing their contract. See Bush v. National School Studios, Inc., 139 Wis. 2d 635, 407 N.W.2d 883, 886 (Wis. 1987) (citing cases); see generally Restatement (Second) of Conflicts of Laws §§ 186 & 187 (1971); E. Scoles & P. Hay, Conflict of Laws § 18.1 (1984). But Krebs has waived any dependence on California law. In arguing the consequential damages issue in the district court, Midwesco relied solely on Wisconsin law. Krebs' briefs below did not assert that California law controlled or cite any California cases. The only time Krebs mentioned California law was in noting that Wisconsin and California law were substantially the same, so that the district court's choice between Wisconsin or California law was "immaterial." Krebs cannot blame the district court for not digging up the California law it failed to cite, particularly after telling the court that the choice of law was "immaterial." It is not the trial judge's job to do the parties' work for them. See International Administrators v. Life Ins. Co., 753 F.2d 1373, 1377 n.4 (7th Cir. 1985). Krebs took the risk that in applying the Wisconsin law the parties did cite, the district court would reach a different result than it might have had it applied California law. For better or worse, Krebs must live with the district court's choice of Wisconsin law. Cf. Muslin v. Frelinghuysen Livestock Managers, 777 F.2d 1230, 1231 n.1 (7th Cir. 1985).

The contract between Krebs and Midwesco provided that Midwesco's exclusive remedy for any breach by Krebs was repair or replacement of defective parts. The contract also specifically provided that Krebs would not be liable for any consequential damages. The Uniform Commercial Code, as adopted in Wisconsin, allows parties to limit a buyer's remedies and exclude consequential damages. Wis. Stat. Ann. § 402.719 (West 1964 & Supp. 1987); see Murray v. Holiday Rambler Corp., 83 Wis. 2d 406, 265 N.W.2d 513, 517, 519-20 (Wis. 1978). But "[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in [the UCC]." Wis. Stat. Ann. § 402.719(2). The district court held that since replacing any parts, or even the entire scrubber, could not cure the scrubber problem, the exclusive repair or replace remedy failed of its essential purpose. Therefore, the court disregarded the limitations of remedies in the contract and awarded Midwesco consequential damages.

Krebs does not contest the district court's finding that the exclusive contract remedy failed of its essential purpose. Krebs does argue, though, that the district court erred by refusing to give effect to the consequential damages disclaimer. According to Krebs, a consequential damages disclaimer should be considered separately from a clause limiting remedies to repair or replacement. Even if the limited remedy fails of its essential purpose, the consequential damages exclusion should remain in effect unless no other effective remedy (for example, incidental damages, Wis. Stat. Ann. § 402.715(1) or difference-in-value damages, Wis. Stat. Ann. § 402.714(2)) remains.

Other courts have given effect to consequential damages disclaimers even when exclusive remedies failed of their essential purposes. E.g., Chatlos Systems v. National Cash Register Corp., 635 F.2d 1081, 1085-86 (3d Cir. 1980); S.M. Wilson & Co. v. Smith International Inc., 587 F.2d 1363, 1374-76 (9th Cir. 1978). But whatever the merits of Krebs' argument as an original matter, it is not Wisconsin law. In Murray v. Holiday Rambler Corp., supra, the Wisconsin Supreme Court held:

Where the exclusive limited remedy of the contract fails of its essential purpose . . . the buyer is entitled to invoke any of the remedies available under the UCC. This includes the right to recover consequential damages under sec. 402.715.

Thus, although an express warranty excludes consequential damages, when the exclusive contractual remedy fails, the buyer may recover consequential damages . . . ...

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