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Limiting Remedies under the UCC

Under the Uniform Commercial Code, the seller of goods can limit certain remedies to reduce its exposure to large damages claims in the event the goods are defective.  A recent case provides excellent guidance on how to limit remedies.

Far East Aluminium Works Co. Ltd. v. Viracon, Inc., No. 21-1875 (8th Cir. 03/09/2022).

Viracon, a glass manufacturer in Minnesota, sold specialty windows to Far East for installation at the Wynn Palace, a resort in Macau.   The windows contained a coating which changed color in the sun.  The Viracon Terms of Sale provided the following paragraph:

13.        Disclaimers.  VIRACON EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE AND ANY OTHER OBLIGATION OR LIABILITY NOT EXPRESSLY SET FORTH IN ITS STANDARD TERMS OF WARRANTY.  VIRACON SHALL NOT BE LIABLE UNDER ANY CIRCUMSTANCES FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND.  Buyer’s rights and obligations regarding any goods supplied by Viracon, and proven to be defective, are limited to those set forth in Viracon’s Limited Warranty provided to Buyer.  Viracon will not accept any charge or expense submitted by Buyer or any third party, including but not limited to any labor costs for modification, removal, inspection, testing or installation of any goods sold by Viracon under an Order or for any replacement goods.

The standard terms of warranty referenced in ¶20 consisted of “Viracon’s Standard Ten-Year Limited Warranty” which warranted certain of its products for ten years from the date of manufacture, subject the following language:

DISCLAIMERS, EXCLUSIONS, LIMITATIONS, AND ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO VIRACON’S LIMITED WARRANTY

In the event that a Viracon product is found and verified by Viracon to be defective under the Limited Warranty, Viracon will replace the product without charge, FOB nearest shipping point to the place of installation or, at Viracon’s option, refund the purchase price of the glass.  In no event will Viracon’s liability exceed the purchase price of the glass.  If Viracon elects to replace the defective glass, Viracon will not be liable for any other expenses, including, but not limited to, removal of the defective unit, installation of replacement units, any labor, materials, and/or any other damages, including incidental, indirect, special, or consequential damages.  Further, the warranty of the replacement glass will be limited to the remainder of the warranty period for the original glass.

The following paragraph lists several exclusions to Viracon’s limited warranty, such as product failure due to improper handling and faulty installation or building construction.  Then the Limited Warranty continues as follows:

The purchaser’s exclusive remedy is limited to the legal remedies described in Viracon’s Limited Warranty.  Viracon will not be liable for any incidental or consequential damages of any kind.  Viracon’s Limited Warranty will be void in the event that full payment is not received for goods and services within the agreed upon terms of sale.  VIRACON MAKES NO OTHER WARRANTY, EITHER EXPRESS OR IMPLIED, REGARDING THE PRODUCT, INCLUDING, BUT NOT LIMITED TO, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.  Viracon’s Limited Warranty may only be modified upon written approval of Viracon’s President or Vice President(s).

The quote dated Feb. 24, 2014, that Viracon presented to Far East contained the following reference to the Terms of Sale on a page entitled Additional Information:

Terms of Sale

The Viracon Terms of Sale document and Viracon’s General Information form previously provided to your company or that you reviewed at www.viracon.com controls this document.  All subsequent documentation for this project will also be subject to the Viracon Term [sic] of Sale and Viracon’s General Information Guidelines.

The Purchase Contract that Far East sent to Viracon accepted and incorporated Viracon’s quotation of Feb. 24, 2014.  Consequently, the Viracon Terms of Sale became part of the written contract between Far East and Viracon. 

The windows functioned as expected but in time began to fail and needed to be replaced.  Viracon honored its limited warranty and replaced windows but did not pay the additional $8 million Far East claimed as its damages for having to remove the old windows and install new windows. 

Far East filed suit against Viracon for $8 million in federal court in Minnesota.  Viracon was defended by Joe Windler of Winthrop & Weinstine, P.A., who by wonderful coincidence, is an attorney I have worked with on several matters in Minnesota.  Joe’s opening line of his Memorandum of Law in support of Viracon’s Motion to Dismiss is: “Words matter, especially words agreed to in a contract between two sophisticated parties.”  The Honorable David S. Doty, a Reagan appointee now in his 90’s, granted Viracon’s Motion to Dismiss.  Not surprisingly, given the amount at stake, Far East appealed.

The Eighth Circuit Court of Appeals upheld the decision in favor of Viracon in an opinion which reads with every bit of fluidity as Joe Wiindler’s brief in the lower court.  The opinion begins with the following paragraph:

This case serves as a reminder that contractual remedies can be limited, particularly when sophisticated commercial parties are involved.  The issue here is whether a consequential-damages exclusion is enforceable in a contract for sale of goods.  The district court concluded that it was, and we affirm.

The appellate court found the language of the contract to be clear that Viracon is not liable for consequential damages.  To try to circumvent that language, Far East argued that the result was “unconscionable.” To this the court replied that when two merchants of relatively equal bargaining power agree to allocate risk of loss in a contract, the court will not reallocate the risk of loss. 

Next, Far East argued that the limited remedy (refund or replacement) was too limited and failed in its essential purpose, invalidating the consequential damages exclusion.  The court held that in merchant-to-merchant transactions, when the warranted item is highly complex and sophisticated, the validity of the consequential-damages exclusion is discrete and independent from the sufficiency of the remedy specified in the contract.  Thus, even if the refund-or-replace remedy fails of its essential purpose, the consequential-damage exclusion remains valid and enforceable.

My Take: The Uniform Commercial Code has been adopted by all 50 states and many U.S. territories.  While there are variations in wording from state to state, the overall state of law remains uniform.  For businesses, this means that in transactions involving the sale of goods, there is a good degree of predictability as to the responsibilities of sellers and the remedies of buyers.  It is good to see opinions, like this, where the UCC is followed and enforced. 

I outlined the various documents Viracon utilized in its transaction with Far East to obtain the result of having an enforceable consequential-damage exclusion for a couple reasons.  Certainly, it is good language that has withstood challenge and it is available for all to use.  But the trick is not just having good language, it is getting that good language into the final contract.  This involves the ongoing coordination of the inclusion of that language in the multiple documents involved in a commercial transaction.  Viracon accomplished this and it may have saved Viracon $8 million. 

Viracon provided Joe Windler with the tools needed to defend Viracon, and he, and others at Winthrop & Weinstine, did so well.  Congratulations, Joe!

May you find joy in what you do and who you are with.