Opinion ID: 431911
Heading Depth: 1
Heading Rank: 2

Heading: plaintiff's appeal: limitation of damages

Text: 20 The district court found defendant liable for breach of warranty but held that plaintiff's recovery was limited to the sale price of the seed corn by the limitation of damages provision that was contained in the dealership agreement and printed on both the order and delivery forms and the seed corn bags. In holding that the limitation of damages provision was valid, the court held it not unconscionable under N.D.Cent.Code Sec. 41-02-19 (U.C.C. Sec. 2-302). However, the court did not apply the reasonableness test of N.D.Cent.Code Sec. 41-02-97.1 (U.C.C. Sec. 2-718(1)) to the limitation of damages provision. 21 In his brief plaintiff argues that the district court erred in holding the limitation of damages provision not unconscionable. Plaintiff's only argument on this point is that the district court improperly relied on a general rule that it is the exceptional commercial setting where a claim of unconscionability will be allowed. Plaintiff argues that the court's reliance on this general rule was improper because the rule is derived from Uniform Commercial Code Sec. 2-719(3) (N.D.Cent.Code 41-02-98.3) which applies only to consequential damages. Plaintiff argues that the damages limited in this case were general damages and that the rule that unconscionability is exceptional in commercial settings does not apply where the issue is the unconscionability of limitations on general damages. 22 The general rule that unconscionability is exceptional in commercial settings applies to the unconscionability of any contract provision, including limitations of general damages. See Ray Farmers Union Elevator Co. v. Weyrauch, 238 N.W.2d 47, 50 (N.D.1975); 1 R. Anderson, Uniform Commercial Code, Sec. 2-302:12 & n. 19 (2d ed. 1970 & Supp.1981). Thus plaintiff's argument that the district court improperly relied on the rule is without merit, regardless of whether the damages limited in this case are general or consequential. 23 Further, plaintiff stated at oral argument that he was not arguing that the limitation of damages provision was unconscionable. Therefore, we deem this issue waived. 24 Plaintiff's second argument on the validity of the limitation of damages provision is that the court erred in failing to apply the reasonableness test of N.D.Cent.Code 41-02-97.1 (U.C.C. Sec. 2-718(1)). Section 41-02-97.1 provides: 25 Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. 26 Section 41-02-97.1 is referred to in two other sections of the North Dakota Code: N.D.Cent.Code Secs. 41-02-98 and 41-02-33. Section 41-02-98 provides in part: Subject to ... section 41-02-97 ...: 27 a. The agreement may provide for remedies in addition to or in substitution for those provided in this chapter and may limit or alter the measure of damages recoverable under this chapter, as by limiting the buyer's remedies to return of the goods and repayment of the price .... 28 Section 41-02-33.4 provides that remedies for breach of warranty can be limited in accordance with the provisions of [Secs. 41-02-97 and 41-02-98]. 29 By its terms Sec. 41-02-97.1 applies to liquidated damages provisions. Strictly speaking, the provision in this case is not a liquidated damages provision but a limitation of damages provision. A liquidated damages provision sets a fixed amount that can be recovered upon breach without proof of any damage. A limitation of damages provision limits the damages that may be recovered, but proof of damages is still required in order to recover up to the limit. Western Union Telegraph Co. v. Nester, 309 U.S. 582, 587-88, 60 S.Ct. 769, 771-72, 84 L.Ed. 960 (1940); Black's Law Dictionary 353 (5th ed. 1979). 30 The North Dakota courts have not determined whether the reasonableness test of Sec. 41-02-97.1 applies to limitation of damages provisions. Given an undecided issue of state law, we will defer to a reasonable interpretation by a district court sitting in the state in question. See, e.g., Mitchell v. Minneapolis, 707 F.2d 490, 491 (8th Cir.1983); Southern Farm Bureau Casualty Insurance Co. v. Mitchell, 312 F.2d 485, 496 (8th Cir.1963). 31 In this case the district court apparently concluded that the reasonableness test of Sec. 41-02-97.1 does not apply to limitation of damages provisions. This is certainly a reasonable conclusion from the language of Sec. 41-02-97.1 which refers to liquidated damages provisions, not to limitation of damages provisions. 32 It could reasonably be argued that the scope of Sec. 41-02-97.1 is broadened to include limitation of damages provisions by the references to it in Secs. 41-02-98 and 41-02-33 or by its own title: Liquidation or Limitation of Damages. However, it would also be reasonable to conclude that Sec. 41-02-97 is not broadened by the references to it in the other sections or by its own title. See generally 73 Am.Jur.2d Statutes Sec. 98 (1974) (effect of title on construction of statute). Indeed, we find it more reasonable to conclude that the reasonableness test of Sec. 41-02-97.1 does not apply to limitation of damages provisions. 33 As the last sentence of Sec. 41-02-97.1 suggests, the major concern with liquidated damages provisions is unreasonably large liquidated damages. This is never a concern with limitation of damages provisions since damages must be proved under such provisions. Rather, the concern with limitation of damages provisions is unreasonably small recoveries. The official comments to Uniform Commercial Code Sec. 2-718 (on which N.D.Cent.Code 41-02-97 is based) suggest that where the concern is unreasonably small recoveries the proper test is unconscionability rather than the reasonableness test of U.C.C. Sec. 2-718 and N.D.Cent.Code 41-02-97: 34 A term fixing unreasonably large liquidated damages is expressly made void as a penalty. An unreasonably small amount would be subject to similar criticism and might be stricken under the section on unconscionable contracts or clauses. 35 U.C.C. Sec. 2-718 Comment 1 (1977). 36 Indeed, the reasonableness test of Sec. 41-02-97.1 does not seem to be designed to deal with limitation of damages provisions. As applied to a limitation of damages provision, Sec. 41-02-97.1 would require that the limitation be reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. Limitation of damages provisions are by their nature unreasonable in light of the anticipated or actual harm and are generally used where there is no particular difficulty proving loss or obtaining an adequate remedy. Thus the reasonableness requirement of Sec. 41-02-97.1 would effectively outlaw limitation of damages provisions, at least as they are generally used. Therefore, the reasonableness requirement of Sec. 41-02-97.1 should not be applied to limitation of damages provisions since it would swallow up the general rule of Sec. 41-02-98.1 that limitations of damages provisions are valid: 37 Subject to the provisions of subsections 2 and 3 of this section and of section 41-02-97 on liquidation and limitation of damages: 38 a. The agreement may provide for remedies in addition to or in substitution for those provided in this chapter and may limit or alter the measure of damages recoverable under this chapter, 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; .... 39 Since the district court could reasonably conclude that the reasonableness test of Sec. 41-02-97.1 does not apply to limitation of damages provisions, we will not reverse for the district court's failure to apply that test in this case. 40