MICHAEL H. SIMON, District Judge.
Tokyo Ohka Kogyo America, Inc. ("TOK") asserts a claim for breach of contract against Huntsman Propylene Oxide LLC ("Huntsman"). TOK purchased a chemical manufactured by Huntsman and alleges that Huntsman breached its agreement to notify TOK in a timely fashion if Huntsman changed its chemical manufacturing process. The parties agreed to litigate this case in phases and further agreed that "Phase 1" of the litigation would encompass only whether the limitation of liability clause contained in Huntsman's general terms and conditions of sale that were attached to the Credit Application that TOK executed with Huntsman applies to limit TOK's potential damages in this action. The parties cross-move for summary judgment on this Phase 1 question. For the reasons stated below, the Court finds that the limitation of liability clause is not enforceable under Uniform Commercial Code ("UCC") Section 2-719 and thus does not limit TOK's damages in this lawsuit. Accordingly, TOK's motion for partial summary judgment is GRANTED, and Huntsman's motion for partial summary judgment is DENIED.
A party is entitled to summary judgment if the "movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party has the burden of establishing the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The court must view the evidence in the light most favorable to the non-movant and draw all reasonable inferences in the non-movant's favor. Clicks Billiards Inc. v. Sixshooters Inc., 251 F.3d 1252, 1257 (9th Cir.2001). Although "[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge ... ruling on a motion for summary judgment," the "mere existence of a scintilla of evidence in support of the plaintiff's position [is] insufficient..." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)."Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citation and quotation marks omitted).
Where parties file cross-motions for summary judgment, the court "evaluate[s] each motion separately, giving the non-moving party in each instance the benefit of all reasonable inferences." A.C.L.U. of Nev. v. City of Las Vegas, 466 F.3d 784, 790-91 (9th Cir. 2006) (quotation marks and citation omitted); see also Pintos v. Pac. Creditors Ass'n, 605 F.3d 665, 674 (9th Cir.2010) ("Cross-motions for summary judgment are evaluated separately under [the] same standard."). In evaluating the motions, "the court must consider each party's evidence, regardless under which motion the evidence is offered." Las Vegas Sands, LLC v. Nehme, 632 F.3d 526, 532 (9th Cir.2011). "Where the non-moving party bears the burden of proof at trial, the moving party need only prove that there is an absence of evidence to support the non-moving party's case." In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir.2010). Thereafter, the non-moving party bears the burden of designating "specific facts demonstrating the existence of genuine issues for trial." Id. "This burden is not a light one." Id. The Supreme Court has directed that in such a
The parties stipulated to many facts for purposes of the pending cross-motions for partial summary judgment. Additional background facts are taken from the record.
TOK is in the business of sourcing, qualifying, mixing, manufacturing, selling, and delivering chemicals for use in the semiconductor manufacturing process. Huntsman makes and supplies certain chemicals. In 2008, TOK was purchasing propylene glycol ("PG"), a chemical that TOK combined with other chemicals to create a mixture that TOK then sold to its semiconductor manufacturing customer ("Customer"). The Customer was engaged in a pilot test to determine if it wished regularly to use the chemical mixture that included PG.
TOK originally sourced PG from a supplier who purchased it from Huntsman. TOK then wished to explore purchasing PG directly from Huntsman. On or about June 5, 2008, Huntsman requested that TOK sign a Credit Application with Huntsman, and TOK did so. TOK's Vice President, Michael Lindsay, and Deputy General Manager-Operations, Chris Carlson, signed Huntsman's Credit Application on behalf of TOK. Lindsay and Carlson had authority to do so.
A one-page document entitled "Huntsman General Terms and Conditions of Sale" ("Huntsman General Terms") was attached to the Credit Application signed by TOK. Immediately above the line for TOK's signature, the Credit Application stated:
(capitalization in original). The attached Huntsman General Terms include a limitation of liability clause ("Limitation Clause"), stating, in relevant part:
(capitalization in original).
When Lindsay and Carlson signed the Credit Application, they believed that the Credit Application and its reference to general terms and conditions related to TOK's financial responsibility; they did not believe that the referenced general terms and conditions created any limitations of liability or other contractual terms governing sales that may occur at some point in the future and they did not read the Huntsman General Terms attached to the Credit Application. Carlson and Lindsay reviewed TOK's responses on the Credit Application to make sure that TOK's financial and other information as stated on the completed form was accurate, and they then signed the form. No one at Huntsman discussed with Carlson or Lindsay the Huntsman General Terms generally or the Limitation Clause specifically until after this litigation commenced.
The Credit Application was not itself a contract for the purchase or sale of PG. Although Lindsay and Carlson had the authority to sign a credit application, at the time that they signed the Credit Application, neither of them had the authority to execute a sales contract. The Huntsman General Terms were not separately signed by Lindsay or Carlson.
After Huntsman approved TOK's creditworthiness, the parties engaged in discussions regarding TOK's potential purchase of PG from Huntsman. TOK informed Huntsman that the PG that TOK was purchasing would be mixed with other chemicals and that the final mixture would be sold to the Customer for use in making semiconductors. TOK also informed Huntsman that any potential purchase of PG from Huntsman would depend on Huntsman and the PG meeting TOK and the Customer's approval process, which included reaching an agreement on product and process specifications and inspection and approval of the Huntsman plant. In approximately August 2008, TOK made its first purchase of a sample lot of PG from Huntsman. Between August 2008 and July 2010, TOK purchased four additional sample lots to test the efficacy of the PG in the chemical mixture.
Every time that TOK purchased PG from Huntsman, TOK sent a purchase order that stated that all purchases were subject to TOK's terms and conditions. Each time that Huntsman shipped PG to TOK, Huntsman included a sales invoice that specified the quantities and prices for the PG being shipped and attached the Huntsman General Terms. These two sets of documents contain different terms, but for purposes of the pending motions, Huntsman does not contend that the Huntsman General Terms attached to the invoices sent to TOK are binding or enforceable.
Because of the precise and demanding nature of the Customer's manufacturing needs and processes, the Customer insisted on the right to approve all suppliers, vendors, chemicals, and components involved in its supply chain. TOK and Huntsman engaged in lengthy negotiations regarding the specifications of the PG, and TOK worked with the Customer to get Huntsman approved as a vendor. In May or June 2010, TOK inspected and audited Huntsman's manufacturing facility. In August 2010, TOK and Huntsman agreed to an initial written procurement specification for the manufacture and sale of PG
On or about September 23, 2011, TOK and Huntsman agreed to the written Procurement Specification for E-Grade Propylene Glycol (the "2011 Procurement Specification"). The 2011 Procurement Specification contains a "Process Change Notification" clause stating:
The 2011 Procurement Specification also contains a "Non-conforming Materials" clause that states that if an abnormality is discovered in the quality of the PG during its use, TOK and Huntsman shall consult together to determine appropriate actions and that product shipped to TOK that is out of specification will be returned to Huntsman and replaced. This clause was later modified by an addendum stating:
The 2011 Procurement Specification was not in itself a contract for the purchase or sale of PG.
TOK tested every shipment of PG upon arrival from Huntsman in order to identify any PG that did not meet the agreed-upon specifications before TOK mixed it with other chemicals. Additionally, the chemical mixture was tested to ensure that it was within the specifications demanded by the Customer, and the Customer engaged in additional quality control and sampling throughout its semiconductor manufacturing process.
On or about October 9, 2012, the Customer reported to TOK that semiconductor wafers were demonstrating defects well above acceptable levels. The Customer, TOK, and Huntsman then worked together to identify the specific issue and concluded that the PG was the problem. It was then discovered by TOK that an undisclosed processing change made by Huntsman modifying temperature and pressure conditions caused an unidentifiable chemical change during the manufacture of the PG. Accordingly, although the PG met the technical specifications set forth in the 2011 Procurement Specification and was able to pass TOK's own tests, the PG used in the mixture sent by TOK to the Customer caused defects to appear in the Customer's semiconductor manufacturing process. For purposes of the pending cross-motions only, Huntsman concedes that it changed its manufacturing process and failed to comply with the Process Change
As soon as the problem was identified to TOK, it stopped mixing the Huntsman-supplied PG with other chemicals and stopped ordering PG from Huntsman. By that time, however, TOK already had made a significant amount of the chemical mixture containing the defective PG and had additional, unmixed PG still in its possession. The unmixed PG was sold, and the proceeds are in Huntsman's counsel's trust account. The mixed chemicals, however, required hazardous waste disposal. TOK spent significant sums transporting the defective PG and defective chemical mixture to and from various locations, purchasing chemicals that were mixed with the defective PG and thereby rendered unusable, mixing the defective PG with other chemicals, and hiring hazardous waste disposal companies to dispose of the defective chemical mixture.
TOK makes several arguments as to why Huntsman's Limitation Clause is unenforceable in this case: (a) it fails of its essential purpose and is unenforceable under UCC Section 2-719(2); (b) it is unconscionable and unenforceable under UCC Section 2-719(3); (c) it is inconspicuous; (d) it is an invalid contractual provision because it was not bargained-for, there was no meeting of the minds, and it is ambiguous; and (e) it does not apply to the 2011 Procurement Specification, which is the specific contract that was allegedly breached. Because the Court finds that the Limitation Clause fails of its essential purpose and is unconscionable under UCC Section 2-719, the Court does not address TOK's remaining arguments.
TOK argues that the Huntsman General Terms do not apply to this case and that TOK's general terms apply; thus, TOK argues that Oregon law applies as set forth in TOK's general terms. Huntsman argues that the Huntsman General Terms do apply and, thus, that Texas law applies as set forth in the Huntsman General Terms. Both parties agree, however, that the choice of law does not matter because both jurisdictions have adopted the relevant sections of the UCC and there are no material differences between how Oregon law and Texas law interpret those provisions. The Court also notes that both Oregon and Texas law look to the decisions of other jurisdictions when interpreting the UCC. See, e.g., Peace River Seed Coop., Ltd. v. Proseeds Mktg., Inc., 355 Or. 44, 53, 322 P.3d 531 (2014) ("In addition, `the legislative intent to make the UCC a uniform code makes relevant the decisions of other courts that have examined these questions and the discussions of the questions by scholars in the field, especially those scholars who participated in drafting the UCC.'" (quoting Sec. Bank v. Chiapuzio, 304 Or. 438, 445 n. 6, 747 P.2d 335 (1987))); 1/2 Price Checks Cashed v. United Auto. Ins. Co., 344 S.W.3d 378, 391 (Tex.2011) (relying on the decisions of other jurisdictions and noting that "[t]he UCC should be construed to promote uniformity with other jurisdictions").
The Court resolves the pending cross-motions for partial summary judgment under UCC Section 2-719.
Section 2-719 of the UCC establishes that parties may agree to limit the measure of damages available for a breach of contract and may limit the available remedies, subject to certain conditions. This section provides:
U.C.C. § 2-719. The official comments to this provision further clarify the ability of parties to limit remedies and the check on that ability created by Section 2-719(2)-(3), stating:
In addition, courts have explained Section 2-719(2) in the following terms:
Viking Yacht Co. v. Composites One LLC, 2007 WL 2746713, at *5 (D.N.J. Sept. 18, 2007) ("Viking I"), aff'd, 385 Fed.Appx. 195 (3d Cir.2010) ("Viking II") (quoting BOC Group v. Chevron Chem. Co., 359 N.J.Super. 135, 147, 819 A.2d 431 (N.J.Super.Ct.App.Div.2003)); see also Mercedes-Benz of N. Am., Inc. v. Dickenson, 720 S.W.2d 844, 854 (Tex.App.1986) (noting that "where an apparently fair and reasonable limitation because of circumstances fails in its purpose or operates to deprive a party of the substantial value of the bargain, the limited remedy must give way to the general remedy provisions of the code").
Courts struggle with defining what it means for a limited remedy to "fail of its essential purpose." Conceptually, cases invoking Section 2-719(2) are more easily analyzed when they involve a repair-or-replace remedy for a specific product, because it can more readily be determined that the product is not as promised, has not been sufficiently repaired or replaced, and thus the remedy has failed of its purpose. The analysis is more nuanced when a refund remedy is at issue, although courts have found that a refund remedy can also fail of its essential purpose, such as when a seller conceals relevant facts or there is a latent defect. See Arias/Root Eng'g v. Cincinnati Milacron Mktg. Co., 1991 WL 190114, at *5 (9th Cir.1991) (listing cases).
Comment 1 to Section 2-719 offers guidance on how to analyze whether a remedy limitation fails in its essential purpose. Understanding that the word "its" refers to the remedy limitation, Comment 1 instructs that when a limitation "fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions
The determination under Section 7-219(2) of whether "circumstances [have] cause[d] an exclusive or limited remedy to fail of its essential purpose" or whether the limitation has "operate[d] to deprive[] either party of the substantial benefit of the bargain" requires consideration of the bargain made at the time the contract was entered into and whether, after breach and based on the circumstances of the breach, the limitation is operating to deprive either party of that bargain. A court should attempt to discern the essential purpose of the exclusive or limited remedy when it was first agreed-upon by the parties — the bargain of the parties with respect to their allocation of risks and remedies. See Held v. Mitsubishi Aircraft Int'l, 672 F.Supp. 369, 382 (D.Minn.1987) (noting that a court should "first determine what the bargain was before deciding whether any party has been deprived of it") (citing Jonathan A. Eddy, On the "Essential" Purposes of Limited Remedies: The Metaphysics of UCC Section 2-719(2), 65 Cal. L.Rev. 28, 33 (1977) (hereinafter "Eddy, Metaphysics")). The Court should not concern itself, at least under Section 7-219(2), with whether the agreed-upon limitation on remedy was wise, fair, or oppressive at the time of contract formation, but simply ask what was the limitation's essential purpose at that time.
A court must also focus on the circumstances surrounding the alleged breach of contract and resulting harm to discern whether the harm is one caused by novel circumstances not contemplated by the parties and involved a risk not allocated by the parties. See Milgard Tempering, Inc. v. Selas Corp. of Am., 902 F.2d 703, 709 (9th Cir.1990) ("The task before the district court was to examine the remedy provisions and determine whether Selas's default caused a loss which was not part of the bargained-for allocation of risk."); Viking I, 2007 WL 2746713, at *5 ("The exclusive remedy provision 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."); James J. White & Robert S.
This case involves a latent defect that was not discoverable upon reasonable inspection.
Huntsman argues that the presence of the boilerplate Limitation Clause in the Huntsman General Terms that was attached to the Credit Application signed by TOK is evidence that the parties intended to allocate all risks to TOK, including the risk of an undiscoverable defect caused by an undisclosed change in the manufacturing process, notwithstanding Huntsman's contractual obligation timely to disclose any such changes. Huntsman's argument is without merit.
The generic Limitation Clause was attached to a Credit Application that was signed more than two years before the parties entered into a significant commercial relationship and signed their first specification contract.
After this lengthy process, the parties then signed specification contracts that more specifically defined the parties' obligations and their allocation of risk. Only then did TOK begin to make larger volume
There is no evidence that in June 2008, when TOK signed the Credit Application, incorporating by reference the Huntsman General Terms, the parties consciously intended that the Limitation Clause would allocate the risk to TOK of an undiscoverable defect caused by Huntsman's breach of its obligation timely to notify TOK of any change in Huntsman's manufacturing process. To the contrary, this type of allocation could not possibly have been intended at that time because Huntsman's obligation to notify TOK of any change in the manufacturing process did not even arise until the 2010 specification contract. Additionally, during the two years that the parties engaged in testing and incremental orders and during the negotiations for the 2010 and 2011 specification contracts, the Limitation Clause was never mentioned. Notably, when Huntsman limited TOK's remedy for nonconforming goods in the 2011 Procurement Specification to only the amount for which Huntsman could resell the PG, thereby amending the Limitation Clause, Huntsman still failed to call TOK's attention to the fact that Huntsman believed the parties' relationship was governed by the Limitation Clause, that the Limitation Clause was being only partially amended, or that Huntsman believed the Limitation Clause remained otherwise in effect for any breach by Huntsman other than selling PG to TOK that did not meet TOK's technical specifications.
The facts here are on point with the "extreme case of imbalance between the parties' relative ability to avoid the specific risk in issue" discussed at length in Eddy, Metaphysics, supra, at 52-57, in addressing the Neville Chemical case. TOK, like Neville Chemical, "very conscious of bearing [the] risk [of nonconforming goods], appropriately limited its exposure by a slow process of testing and incremental orders. Only after the completion of a thorough risk assessment did" TOK agree to larger volume purchases. Eddy, Metaphysics, supra at 55. Additionally, as in Neville Chemical, if the PG, "with no change in its composition, later proved defective, [TOK] alone would have borne the risk." Id. The Court agrees with Professor Eddy's conclusion that "[t]he risk that the contract did not place upon [purchaser], however, was that [seller] would change its production process without notice, potentially rendering [purchaser's] extensive testing useless." Id. at 56. Notably, the facts in this case are more compelling than those in Neville Chemical analyzed by Eddy, because Eddy only inferred from the contract in that case that Union Carbide should have provided notice to Neville Chemical if it changed its manufacturing process, whereas in this case there is an express contractual provision requiring Huntsman to notify TOK if Huntsman changes its manufacturing process.
The parties stipulate that they have entered into multiple agreements and that there are multiple documents that relate to the manufacture and sale of the PG by Huntsman to TOK, including the Credit Application, purchase orders sent by TOK, invoices sent by Huntsman, and the 2010 and 2011 technical specification contracts.
There is a debate both in the case law and in the academic commentary about whether a seller's "good faith" is relevant to the analysis under Section 2-719(2). Many courts have concluded that a seller's good faith and due care will not be sufficient to save a limitation on remedy that otherwise fails of its essential purpose. Few courts, however, ask whether a seller's "bad faith" is relevant to this analysis. In comparison, however, some courts have held that a buyer's misbehavior, such as conduct that deprives the seller of the chance to repair or replace a nonconforming product or conduct in which a buyer has made unauthorized modifications to a product before asking the seller to make repair, is relevant to whether a limited remedy fails of its essential purpose. By the same reasoning, it would not be inappropriate to consider a seller's misbehavior in deciding whether a limited remedy fails of its essential purpose. Here, TOK was willing to assume certain inherent risks in accepting Huntsman's PG, and the parties did not agree that Huntsman would be a guarantor for the success of TOK's efforts. There is no indication, however, that TOK was willing to assume the risk of Huntsman's misbehavior, (indeed, Huntsman's arguable "bad faith") in intentionally failing to comply with its contractual obligation timely to inform TOK of changes in Huntsman's manufacturing process, of which only Huntsman could be aware and control.
Because the Court finds that TOK and Huntsman did not allocate to TOK the risk of an unknown, latent defect caused by Huntsman's breach of its obligation timely to notify TOK of a change in manufacturing, the Court also finds persuasive the reasoning of cases that find that refund-only remedies fail of their essential purpose when there are latent defects that were only discovered after the defective product was either integrated into something else or was otherwise put to use in a way that rendered it non-returnable, thus resulting in significantly greater damages than the original purchase price. See, e.g., Viking I, 2007 WL 2746713, at *6; Leprino v. Intermountain Brick Co., 759 P.2d 835, 836-37 (Colo.Ct.App.1988). The court in Viking I found that because the product at issue, a gel coat, was "combined into a larger product before use" and the purchaser could not "simply re-purchase gel coat from a different company and use it"
Parties may allocate the risk of an unknown latent defect on a buyer and limit damages, even when the limitation results in an inadequate remedy. See e.g., Global Octanes Tex., L.P. v. BP Exploration & Oil Inc., 154 F.3d 518, 521 (5th Cir.1998) (relying on UCC Section 2-719(1) for the proposition that parties to a contract can limit their damages and that "`it is immaterial whether a limitation of liability is a reasonable estimate of probable damages resulting from a breach'" (quoting Vallance & Co. v. DeAnda, 595 S.W.2d 587, 590 (Tex.App.1980) (a non-UCC case))); Eddy, Metaphysics, 65 Cal. L.Rev. at 47-48 (noting that parties should be able to allocate the risk of loss for both discoverable and undiscoverable defects). Such a limitation is, however, subject to the requirements of UCC Section 2-719 that the remedy not fail of its essential purpose and that the limitation not operate in an unconscionable manner. U.C.C. §§ 2-719(2)-(3).
As discussed above, in this case there is no evidence that TOK and Huntsman intended to allocate the risk to TOK of a latent defect caused by Huntsman's breach of its obligation timely to notify TOK of any manufacturing process change. The evidence is that TOK was not aware of the Limitation Clause and intended and agreed to the limited remedy of a return of the purchase price, or even less than the purchase price, for nonconforming goods because TOK could test the delivered PG to ensure that it conformed to TOK's technical specifications and return nonconforming goods before using them. TOK attempted to reduce the risk of undetectable defects in the PG by taking two years to ensure that the PG and Huntsman's manufacturing process resulted in a workable chemical mixture and by requiring Huntsman timely to notify TOK of any change in Huntsman's manufacturing process. As in Viking I and Leprino, the undetectable defect, caused by information solely in Huntsman's possession and avoidable solely by Huntsman, resulted in significantly greater damages than the purchase price of the PG. These damages include transporting the defective PG and defective chemical mixture, the cost of the chemicals that were mixed with the defective PG and rendered unusable, and the cost of the hazardous waste disposal of the defective chemical mixture. Limiting TOK to damages of only the purchase price of the PG does not provide a "fair quantum of remedy" for Huntsman's breach of its obligation timely to notify TOK of any manufacturing change of which only Huntsman would be aware.
Whether a limitation fails of its essential purpose is generally an issue of fact for the jury. See, e.g., Demorato v. Carver Boat Corp., 304 Fed.Appx. 100, 102 (3d Cir.2008) (noting that whether a remedy failed of its essential purpose is "typically
In addition to limiting TOK's remedies for a breach of contract by Huntsman to only the purchase price of the PG, the Limitation Clause also contains a limitation avoiding consequential and incidental damages. TOK asserts that the limitation barring consequential and incidental damages automatically fails because the exclusive purchase price remedy fails of its essential purpose, and, in the alternative, fails because the damages limitation is unconscionable. Deciding whether a damages limitation is unconscionable is an issue of law for the Court, and the burden of proof is on the party alleging unconscionability. Royston, Rayzor, Vickery & Williams, L.L.P. v. Lopez, 443 S.W.3d 196, 199, 2013 WL 3226847, at *1 (Tex.App. June 27, 2013); Or. Bank v. Nautilus Crane & Equip. Corp., 68 Or.App. 131, 683 P.2d 95, 104 (1984).
Courts are divided as to whether a limitation on consequential damages is automatically unenforceable when an exclusive remedy limitation is found to fail of its essential purpose. Many courts find that if the remedy limitation fails of its essential purpose then the buyer may receive any remedy available under the UCC, including consequential damages, notwithstanding that consequential damages also may have been specifically excluded under the contract. See, e.g., Ragen Corp. v. Kearney & Trecker Corp., 912 F.2d 619, 625 (3d Cir.1990) (applying Wisconsin law); Newmar Corp. v. McCrary, ___ Nev. ___, 309 P.3d 1021, 1026 (Nev.2013) (applying Nevada law); Hydronic Energy, Inc. v. Rentzel Pump Mfg., LP, 2013 WL 5797326, at *6 (Neb.Ct.App. Oct. 29, 2013) (applying Nebraska law); Sutphen Towers, Inc. v. PPG Indus., Inc., 2005 WL 3113450, at *13 (Ohio Ct.App. Nov. 22, 2005) (applying Ohio law and relying on Goddard v. Gen. Motors Corp., 60 Ohio St.2d 41, 396 N.E.2d 761 (1979)). Other courts, however, find that a contractual waiver of consequential damages, particularly if it is in a separate clause from the exclusive remedy limitation, survives a remedy limitation failing of its essential purpose and requires a separate analysis of unconscionability. See, e.g., Chatlos Sys., Inc. v. Nat'l Cash Register Corp., 635 F.2d 1081, 1086 (3d Cir.1980) (applying New Jersey law); Razor v. Hyundai Motor Am., 222 Ill.2d 75, 305 Ill.Dec. 15, 854 N.E.2d 607, 618-19 (2006) (applying Illinois law); Schurtz v. BMW of N. Am., Inc., 814 P.2d 1108, 1112-13 (Utah 1991) (applying Utah law). Finally, some courts take a case-by-case approach and look at the circumstances in the particular case "to determine whether the exclusive remedy and damage exclusions are `separable
Neither Oregon nor Texas state courts have addressed the issue of whether when an exclusive remedy provision fails of its essential purpose a consequential damages exclusion also necessarily fails. There are cases in the appellate courts of each state, however, that suggest that those courts may read such clauses dependently, such that if an exclusive remedy fails of its essential purpose, consequential damages may be recovered even if otherwise excluded under the contract. See PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd., 146 S.W.3d 79, 101 (Tex.2004) (holding in a case where an exclusive remedy provision also contained a waiver of consequential damages that where the remedy fails of its essential purpose "all damages provided by the UCC [become] available," without conducting a separate analysis of unconscionability on the limitation of consequential damages); Young v. Hessel Tractor & Equip. Co., 99 Or.App. 262, 782 P.2d 164, 167 (1989) (noting in a case where there was a separate consequential damages limitation that if a buyer could prove that the limited remedy fails of its essential purpose, then all remedies under the UCC would become available); but see Bray Int'l, Inc. v. Computer Assocs. Int'l, Inc., 2005 WL 6792280, at *10 (S.D.Tex. Sept. 30, 2005), rev'd in part on other grounds by 2005 WL 3371875 (S.D.Tex. Dec. 12, 2005) (deciding as an issue of first impression under Texas law that Texas state courts would analyze exclusive remedy provisions and consequential damage waivers independently, without discussing PPG Industries). The Court, however, need not reach the issue of whether Texas or Oregon would find that a consequential damages limitation automatically fails if an exclusive remedy provision fails of its essential purpose because the Court finds that under the circumstances of this case, the consequential damages limitation operates in an unconscionable manner and is unenforceable, even if it survives the exclusive remedy provision failing of its essential purpose and is analyzed independently.
Most cases analyze unconscionability under UCC Section 2-302, which expressly involves unconscionability of a contract "at the time it was made." U.C.C. § 2-302(1). UCC Section 2-719(3), however, does not include the specific language included in Section 2-302 that unconscionability under 2-719(3) be at the time the contract was made. To the contrary, Section 2-719(3) "makes it clear that [clauses limiting consequential damages] may not operate in an unconscionable manner." U.C.C. § 2-719 cmt. 3 (emphasis added). A provision does not "operate" in an unconscionable manner at the time of formation. Thus, for purposes of analyzing unconscionability under Section 2-719(3), the Court is not limited to evaluating the provision at the time the contract was made, but must consider how the provision operated and evaluate the provision after the contract has been breached.
Under both Texas and Oregon law, an agreement may be procedurally or substantively unconscionable. Generally speaking, procedural unconscionability refers to the circumstances surrounding the adoption of the provision at issue and substantive unconscionability concerns the fundamental fairness of the provision itself. See In re Halliburton Co., 80 S.W.3d 566, 571 (Tex.2002); Bagley v. Mt. Bachelor, Inc., 258 Or.App. 390, 310 P.3d 692, 702-04 (2013).
Under Oregon law, procedural unconscionability focuses on the factors of oppression and surprise. Bagley, 310 P.3d at 702. Oregon courts explain these factors as:
Livingston v. Metro. Pediatrics, LLC, 234 Or.App. 137, 227 P.3d 796, 806 (2010) (citation omitted). Procedural unconscionability may also involve deception, compulsion, or genuine lack of consent. Id.
Under Texas law, procedural unconscionability is similarly analyzed, with courts considering factors such as:
U.S. v. Reed, 2014 WL 462620, at *10 n. 18 (N.D.Tex. Feb. 5, 2014). A court must consider all of the circumstances surrounding the formation of the contract with respect to the allegedly unconscionable provision, including the parties' bargaining process, the conspicuousness of the provision, whether the buyer was on notice of the limitation, and whether each party had a reasonable opportunity to understand the language at issue. See Head v. U.S. Inspect DFW, Inc., 159 S.W.3d 731, 748 (Tex.App.2005) (a court "must consider the entire atmosphere in which the agreement was made" and "must look at the bargaining process the parties went through"); Berge Helene Ltd. v. GE Oil & Gas, Inc., 830 F.Supp.2d 235, 271, 274 (S.D.Tex. 2011), superseded in part on other grounds, 896 F.Supp.2d 582 (S.D.Tex.2012) (noting when evaluating the unconscionability of an exclusion on consequential damages that courts "must look to the circumstances surrounding the agreement," that damages limitations are generally upheld "where there is evidence that the buyer was notice of the limitation" and that "courts often consider the degree of conspicuousness or whether a buyer had actual knowledge of a damages limitation in determining whether it is enforceable").
Here, considering the factors relevant to both Oregon and Texas's evaluation of procedural unconscionability, the Limitation Clause is unenforceable under both states' analysis.
This is an unusual, perhaps sui generis case, in which a boilerplate damages limitation is attached to a Credit Application without any bargaining or discussion, without the seller calling the buyer's attention to the clause, and after the execution of which more than two years of sample purchases and extensive testing are conducted, the manufacturing process is inspected and audited by the buyer, additional contracts are extensively negotiated, including another damages limitation clause, and the seller breaches an expressly negotiated clause in a manner that was solely within the seller's knowledge and ability to avoid the resultant harm.
Analogously, where the seller knows of a latent defect and fails to disclose it to the buyer, any limitations may be unconscionable. See Barnext Offshore, Ltd. v. Ferretti Grp. USA, Inc., 2012 WL 1570057, at *10 (S.D.Fla. May 2, 2012). Here, although Huntsman did not know about the specific defect in the PG, Huntsman knew that it had changed its manufacturing process, knew that knowledge of a change in its manufacturing process was essential to TOK, and failed to disclose that manufacturing change to TOK. Under these circumstances, Huntsman's failure to disclose the known manufacturing change renders the Limitation Clause unconscionable.
Huntsman's failure meaningfully to communicate the Limitation Clause to TOK is also fatal to the enforceability of the clause in these circumstances. The Limitation Clause was inconspicuous and unfairly surprising to TOK. This aspect of the pending dispute is similar to the dispute in Berge Helene, in which a seller did not "meaningfully communicate" a damages limitation that was included in a data sheet provided to the buyer. 830 F.Supp.2d at 274. As summarized by the court in the Southern District of Texas:
Id. (denying the seller's motion for summary judgment regarding the damages limitation because there was an issue of fact as to whether the damages limitation was procedurally unconscionable). As in Berge Helene, TOK and Huntsman did not negotiate any of the terms of the Huntsman General Terms, including the Limitation Clause, and Huntsman did not bring the Limitation Clause to TOK's attention.
Although the parties are both commercial entities with roughly equal bargaining power and business acumen, in the circumstances of this case, Huntsman was the party with the knowledge that, if the Limitation Clause is effective, TOK would not receive the benefit of its bargain in the allocation of risk and the requirement that Huntsman timely notify TOK of any manufacturing change. Huntsman also knew that TOK could not protect itself from a breach by Huntsman of its obligation timely to notify TOK of a manufacturing change if the change resulted in a latent defect in the PG. Without such notice by Huntsman and if the PG otherwise passed TOK's tests, TOK did not have the knowledge or ability to avoid the resultant harm. "If there is a type of risk allocation that should be subjected to special scrutiny, it is probably the shifting to one party of a risk that only the other party can avoid." Eddy, Metaphysics, 65 Cal. L.Rev. at 47 (emphasis in original). Under Huntsman's argument, that would be the effect of the Limitation Clause, and such a shifting of risk fails under the scrutiny of procedural unconscionability.
There also was no genuine consent on the part of TOK to the Limitation Clause acting as a damages limitation in the event Huntsman breached its obligation timely to notify TOK of any change in Huntsman's manufacturing process. The parties negotiated that obligation by Huntsman two years after the Credit Application was signed, and in those negotiations the parties agreed to limit Huntsman's liability for nonconforming goods for which TOK could test. There is no evidence of TOK's consent to shift the risk of harm that only Huntsman could avoid — a breach of Huntsman's obligation timely to notify TOK of any manufacturing change and a resultant undiscoverable defect.
If the Limitation Clause were evaluated as of the time the Credit Application was executed, there is little doubt that it would not be substantively unconscionable. Commercial parties regularly limit liability for consequential damages.
Huntsman argues that for cases involving only economic damages, the Court must evaluate unconscionability for purposes of Section 2-719(3) at the time the contract was formed, and that post-formation facts are only relevant in cases involving personal injury. Huntsman's reading of Section 2-719(3) is misguided. The only difference between economic injury and personal injury in an unconscionability analysis under Section 2-719(3) is that a limitation of consequential damages where there is an injury to the person is prima facie unconscionable, whereas a limitation of damages where the loss is commercial is not prima facie unconscionable. Nothing in the language of Section 2-719(3) or its official comments supports the argument that post-formation facts are only relevant to an unconscionability analysis where there is a personal injury. The analytical difference between personal and economic injury established in Section 2-719(3) involves merely the burden of proving a prima facie case of unconscionability,
Huntsman also argues generally that under Section 2-719(3) a court is constrained to only look to the facts at the time of contract formation. The genesis of Huntsman's argument is a conflation between Section 2-719(3) and Section 2-302(1), which expressly states that unconscionability under that section is considered "at the time [the contract] was made." U.C.C. § 2-302(1). Section 2-302(1) is a broad provision establishing the test for considering whether any clause in a contract is unconscionable. Section 2-719(3), however, is a specific provision applying only to a limitation of consequential damages and does not contain the requirement contained in Section 2-302(1) that the unconscionability analysis be as of the time of the contract's formation. If the requirement that unconscionability for limitations on consequential damages be analyzed at the time of contract formation was intended, the same language used in Section 2-302(1) could easily have been included in Section 2-719(3). The Court gives meaning to the difference in language between the two provisions, and to the official comment explaining that Section 2-719(3) "makes it clear" that clauses limiting or excluding consequential damages "may not operate in an unconscionable manner." U.C.C. § 2-719 cmt. 3. Huntsman's reading of Section 2-719(3) is counter to the official comment and renders meaningless the difference in language between Sections 2-719(3) and 2-302(1) and is rejected by the Court.
Huntsman cites to several cases in support of its argument. These cases either similarly conflate Section 2-719(3) and 2-302(1), or are primarily addressing other issues relating to unconscionability and comment only in dicta the timeframe for an unconscionability analysis.
Huntsman first relies on Lindemann v. Eli Lilly & Co., 816 F.2d 199 (5th Cir. 1987). The Fifth Circuit in Lindemann held that the district court erred in its sua sponte finding on the eve of submitting the case to the jury that the consequential damages limitation was unconscionable because unconscionability was never raised by the plaintiff and no evidence of unconscionability was submitted by the plaintiff. Id. at 203. The Fifth Circuit noted that a court must have evidence of unconscionability before it can support a finding of unconscionability and that a defendant must be given fair notice that a portion of its contract will be challenged as unconscionable. Id. The court then went on to note that the trial court's finding of unconscionability did not comport with UCC Section 2-302(1). Id. The court in Lindemann cited to Section 2-719(3) for the proposition that a prima facie case of unconscionability is automatically found only when there is an injury to the person, and that the district court's ad hoc finding of facial unconscionability where only economic damages were involved was not reconcilable with the provision's distinction between personal and economic injury for facial unconscionability. Notably, the court discussed that the function of a consequential damages limitation was risk allocation, and that the limitation at issue in the case "abundantly" filled that purpose because many of the uncertainties that might cause the plaintiff to suffer damages were "uniquely within the control" of the plaintiff. Id. at 204. The reverse is true in this case, however, because the knowledge and uncertainty causing the risk of harm that occurred here was uniquely in control of Huntsman, the defendant.
Huntsman also cites to Bray, 2005 WL 6792280, at *6. Huntsman reads too much into Bray. Bray analyzed whether there is a separate "bad faith" test for unconscionability
Finally, Huntsman relies on In re Dornier Aviation (N. Am.), Inc., 2005 WL 3783829, at *6 (Bankr.E.D.Va. Dec. 30, 2005). Huntsman quotes Dornier's statement that Section 2-719(c) is retrospective and looks to the time of contract formation. Dornier, however, cites to Section 2-302(1) for that proposition. As in Bray, the court in Dornier relied on Section 2-302(1) without discussing the difference in language between Section 2-302(1) and Section 2-719(3) or the official comment to Section 2-719.
The Court finds that in the context of Section 2-719(3), the Court is instructed by the UCC to consider whether the damages limitation operates in an unconscionable manner, which requires consideration of post-formation facts. Limiting TOK's damages for Huntsman's breach of its obligation timely to notify TOK of any manufacturing changes would operate in such an unconscionable manner.
Because the knowledge and ability to avoid the harm caused by a change by Huntsman in its manufacturing process was solely Huntsman's and the parties did not expressly and consciously allocate that risk to TOK, it is fundamentally unfair to enforce the Limitation Clause. Additionally, because the Court has found that a refund of the purchase price deprives TOK of the substantial value of its bargain and does not provide an adequate remedy under the specific circumstances presented, "the exclusion of incidental and consequential damages renders the available damages unconscionably low." Viking Yacht I, 2007 WL 2746713, at *7. Accordingly, the Limitation Clause, under the specific circumstances of this case, operates in a substantively unconscionable manner.
Under the specific circumstances presented in this case, the Limitation Clause in the Huntsman General Terms fails of its essential purpose and is procedurally and substantively unconscionable; it is, therefore, unenforceable. Accordingly, TOK's motion for partial summary judgment (Dkt. 34) is GRANTED, and Huntsman's motion for partial summary judgment (Dkt. 33) is DENIED.
