Opinion ID: 198081
Heading Depth: 3
Heading Rank: 4

Heading: UCC Section 2-719(2): Failure of Essential Purpose

Text: 61 Finally, Judge Hornby held that Chipco had not generated a trialworthy issue relating to its claim that the damages-limitation clause failed of its essential purpose. The only argument advanced by Chipco is that both parties knew that Chipco provided its casino customers with an unconditional guarantee that it would replace any defective chips without cost, so that Chipco's damages in the event Adell breached the sales contracts would far exceed the purchase price of the Adell resin. While this may well be so, Official Comment 1 to § 2-719 makes clear that a failure of essential purpose will be found only if circumstances not within the reasonable expectations of the parties at the time of contract formation frustrate the contemplated remedy. See also UCC § 2-719(2) (Where circumstances cause an exclusive or limited remedy to fail ...). For example, a clause which limits the buyer to the repair or replacement cost of the goods may fail of its essential purpose if the seller becomes unable or unwilling to make reasonably timely repairs after the buyer discovers the defect. Thus, normally a remedy does not fail of its essential purpose merely because one party struck a bad bargain ab initio. See White & Summers § 12-10(a), at 660 ([Section] 2-719 should be triggered when the remedy fails of its essential purpose, not the essential purpose of the Code, contract law, or equity, and the section  'is not concerned with arrangements which were oppressive at their inception, but rather with the application of an agreement to novel circumstances not contemplated by the parties.' ) (citation omitted). 62 Thus, Chipco's reliance on the foreknowledge of the parties cuts against it, as it presumes that no uncontemplated circumstances arose following contract formation. After all, a merchant-buyer like Chipco may acquiesce in the risk inherent in a damages-limitation clause based on its understanding that the seller might ask for a higher sales price if its potential damages were not capped by contract. Clauses which limit the buyer to a refund of the purchase price rarely will fail the § 2-719(2) test merely because contract damages far exceed the purchase price, because absent evidence to the contrary (e.g., unconscionability), it must be presumed that the buyer was not only aware of, but considered, the associated risks at the outset. 63 Especially apropos of this principle is the evidence that Chipco contracted with Adell in an attempt to find a less expensive supplier of resin than General Electric, and that Adell would have to develop a new and untested resin of sufficient quality to replace the General Electric resin. Although Chipco certainly cannot be faulted for its bona fide attempt to cut costs, nevertheless UCC § 2-719(2) rarely is availing as a defense to a buyer who orders such experimental goods, since that [essential] purpose will not be a guarantee that the goods will work as hoped. See id. § 12-10, at 665; see Canal Elec. Co., 973 F.2d at 997. III