Opinion ID: 2024672
Heading Depth: 2
Heading Rank: 2

Heading: Limitation of Liability on Warranty Claims

Text: We next address the validity of the attempts by Petoseed and Rispens to limit the amount recoverable under the warranties that accompanied the sale of the seeds. Petoseed and Rispens assert that they effectively limited Hall Farms' remedy, if any, to the purchase price of the seed. Hall Farms responds that these limitations are unenforceable because they fail in their essential purpose and are unconscionable. We hold that, although such limitations are enforceable generally, there remains a question of fact as to their applicability here. Buyers and sellers may agree on a limitation of remedy. Ind. Code § 26-1-2-719. [3] A limitation of remedy acknowledges the quality commitment of a warranty, but restricts the type or amount of remedy available once a breach has been established. Hahn v. Ford Motor Co. (1982), Ind. App., 434 N.E.2d 943, 952-3. Limitations of remedy are not favored in Indiana and are strictly construed against the seller on the basis of public policy. Id. at 948.
Hall Farms argues that limiting recovery to the cost of the seed fails of its essential purpose because: (1) the presence of the bacteria was a novel circumstance not contemplated by the parties; and (2) Hall Farms bargained for seed which would produce a money crop, it will be deprived of the substantial value of its bargain if the limitation is enforced. We hold that limitation on the measure of damages does not fail of its essential purpose. Commentators have suggested that § 2-719, as it relates to failure of essential purpose, is not concerned with arrangements which were oppressive at the inception which is a question of unconscionability, but with the application of an agreement to novel circumstances not contemplated by the parties. White & Summers, § 10-12. In addition, they have suggested that this provision should be triggered when the remedy fails of its essential purpose, not the essential purpose of the UCC, contract law, or of equity. Id. One author suggests that the method used to decide whether a particular limitation fails of its essential purpose is to identify the purpose underlying the provision and determine whether application of the remedy in the particular circumstances will further that purpose. If not, then, and only then, is there a failure of essential purpose. Jonathan A. Eddy, On The Essential Purposes of Limited Remedies: The Metaphysics of UCC § 2-719(2), 65 Cal.L.Rev. 28, 36-40 (1978). Thus, for example, where the sale of a car was accompanied by the exclusive remedy of repair and replacement of defective parts but attempted repairs were ineffective in correcting the problems, the purchaser was entitled to recover an amount in excess of the cost of repairs. Riley v. Ford Motor Co., 442 F.2d 670 (5th Cir.1971). The exclusive remedy of repair and replacement of defective parts failed of its essential purpose because the car could not be repaired so as to operate free of defects as promised in the express warranty. Id. Petoseed. Here, the label on the Petoseed can stated in pertinent part: 2. LIMITATION OF LIABILITY: Purchaser's exclusive compensation for loss or damage arising from purchase or use of seed from Petoseed Co., Inc., shall be limited to an amount equal to the purchase price of the seed. There shall not be included any amount for incidental or consequential damages, nor for amounts expended in using or growing such seed, nor for harvesting the produce of such seed. This limitation of liability shall be applicable to any claims presented to Petoseed, regardless of the legal theory forming the basis of such claim, and whether such theory involves negligence, contractual liability, or otherwise. This provision clearly states that liability is limited to the purchase price of the seed, and does not allow any amount for incidental or consequential damages such as Hall Farms' lost profits. Obviously, the purpose of the limitation was to limit contract liability to the purchase price of the seed. The contract term has not failed of its essential purpose; rather, enforcement of the limitation will serve precisely the purpose intended. Rispens. Rispens' contract conditions on the reverse side of the invoice provided: Paragraph 10... . In [any] event, however, the seller shall not be liable to the purchaser for any loss or damages in a sum greater than the invoice price of the individual lot of seed which is the cause of the complaint, arbitration or action at law. Paragraph 11... . Our liability, in all instances, is limited to the purchase price of the seed. The intent of this limitation of liability is also clear. Limiting any warranty recovery to the price of the seed serves the intended purpose of the limitation. We do not accept Hall Farms' assertion that the presence of the watermelon fruit blotch was a novel circumstance not contemplated by the parties because the fact that the seeds might not conform to the warranties is a possibility that should occur to both buyer and seller. As to the benefit of the bargain argument, Hall Farms bargained for seed, not, as its argument suggests, for a full-grown crop of watermelons. If Hall Farms deemed recovery of the purchase price inadequate, then it was free to bargain for a more comprehensive remedy. Therefore, the terms limiting Hall Farms' remedy against Petoseed to the purchase price of the seeds have not failed of their essential purpose.
Hall Farms also argues that the limitation of liability is substantively unconscionable because farmers will be denied a minimum adequate remedy while giving seed manufacturers and distributors effective immunity from liability in a situation where the defect in the seed was latent. Ind. Code § 26-1-2-719(3) provides that consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Unconscionability is a question of law determined on the basis of circumstances existing at the time the contract was made. Ind. Code § 26-1-2-302(1). The party raising the issue bears the burden of proof. Hahn v. Ford Motor, 434 N.E.2d at 950. Substantive unconscionability refers to oppressively one-sided or harsh terms of a contract, and generally involves cases where courts have determined the price to be unduly excessive or where the terms of the contract unduly limit a buyer's remedies. Hahn, 434 N.E.2d at 951. A substantively unconscionable contract is one that no sensible man would make and such as no honest and fair man would accept. Weaver v. American Oil Co. (1972), 257 Ind. 458, 462, 276 N.E.2d 144, 146. Often there are circumstances which show that there was unequal bargaining power at the time the contract was executed which led the party with lesser power to enter it unwillingly or without knowledge of its terms. Dan Purvis Drugs, Inc. v. Aetna Life Ins. (1981), Ind. App., 412 N.E.2d 129, 131; see also Sho-Pro of Indiana, Inc. v. Brown (1992), Ind. App., 585 N.E.2d 1357, 1360. In keeping with this standard, Indiana courts have rejected claims that contractual limitations of remedy are substantively unconscionable. Carr v. Hoosier Photo Supplies, Inc. (1982), Ind., 441 N.E.2d 450, 454 (film processor's receipt issued to knowledgeable consumer); Hahn, 434 N.E.2d at 952 (automobile warranty issued to consumer); General Bargain Center v. American Alarm Co. (1982), Ind. App., 430 N.E.2d 407, 411 (alarm system contract). Hall Farms argues that the limitation of remedy was substantively unconscionable because the defect in the seed was latent, not being discoverable until the plants began growing. Once discovered, the growing season was too far along for Hall Farms to replant. Thus, Hall Farms asserts that for the loss occasioned by the infected seeds to fall only upon Hall Farms would be unconscionable. Hall Farms cites Martin v. Joseph Harris Co., Inc., 767 F.2d 296 (6th Cir.1985), and Lutz Farms v. Asgrow Seed Co., 948 F.2d 638, 646 (10th Cir.1991), as examples of latent defects rendering a limitation of remedy unconscionable. There are also cases holding that such limitations are not unconscionable. See, e.g., Estate of Arena v. Abbott & Cobb, Inc. (1990), 158 A.D.2d 926, 551 N.Y.S.2d 715 (remedy limited to the purchase price of seed); and Southland Farms, Inc. v. Ciba-Geigy Corp. (1991), Ala., 575 So.2d 1077, 1079-81 (consequential damages limited for agricultural chemical). We are not persuaded that the limitation is unconscionable simply because the defect is latent. Although a seller may not limit liability for a defect which he knows to be nonconforming to warranties without disclosing that knowledge, the evidence is not conclusive that either Petoseed or Rispens was aware that the seeds carried disease. The possibility that a latent defect may exist is one of the risks present at the time the contract is formed. Had the parties contemplated this possibility, Indiana law would have left them free to allocate that risk as they saw fit. It is not unconscionable for the seed producer and distributor to redistribute such risks. Left unanswered, however, is whether the parties in fact agreed to redistribute the risk of a latent defect in the seed. The question is whether there was mutual assent to the limitation of liability contained on the Petoseed can and the Rispens purchase order. Contract formation requires mutual assent on all essential contract terms. Carr v. Hoosier Photo, 441 N.E.2d at 455. Without mutual assent, the limitations are ineffective as a matter of law. Hahn, 434 N.E.2d at 948. Assent to a limitation of liability may be assumed where a knowledgeable party enters into the contract, aware of the limitation and its legal effect, without indicating non-acquiescence to those terms. Carr, at 455. However, the intention of the parties to include a particular term in a contract is usually a factual question determined from all of the circumstances. Sho-Pro, 585 N.E.2d at 1360. Therefore, we must determine if there is a genuine issue of fact about whether Hall Farms assented to the limitation of liability. Petoseed. Petoseed's limitation appeared in the printed material on the label affixed to the side of the seed cans. Mark Hall testified that, although he read the printed material on the top of the can which Hall Farms asserts gave an express warranty, he did not read the material on the side of the can relating to the limitation of liability. Thus, whether there was mutual assent to the limitation of liability is a question of fact precluding summary judgment. Rispens. Rispens' limitation appeared on the reverse side of the purchase order for the seeds. This side of the purchase order did not require Hall's signature and he testified that he did not read it. Therefore, there is a question of fact about whether Hall Farms intended to accept the limitation of liability from Rispens.