ON PETITION TO TRANSFER
Phelps expended considerable sums repairing Rheem furnaces that Phelps had sold and installed. We hold that the language of the UCC precludes Phelps from recovering consequential damages from Rheem for breach of express warranty and that the language of the express warranty at issue precludes Phelps from recovering for labor expenses. However, Phelps may still have valid claims for indemnity and breach of implied warranty.
We will briefly explain the background of this case; for a complete discussion, see the Court of Appeals opinion in Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218 (Ind.Ct. App.1999).
Rheem Manufacturing Company ("Rheem") makes furnaces for use in homes and offices. During the late 1980s and early 1990s, Rheem sold its furnaces through a distributor, Federated Supply Corporation ("Federated"). Federated in turn sold Rheem furnaces to Phelps Heating and Cooling ("Phelps"), a central Indiana contractor.
The box in which every furnace was shipped contained the following warranty:
(R. at 105.) This express warranty was limited by three clauses that are at the heart of this appeal. First, Rheem limited the remedies available for breach of the warranty to replacement of parts:
(Id.) Finally, Rheem disclaimed any liability for the cost of servicing the furnaces:
During the early 1990s, several types of Rheem furnaces malfunctioned after Phelps installed them. A Phelps executive testified that from "late 1989 until 1993, Rheem had virtually no high efficiency furnaces on the market that were not experiencing reliability problems ...." (R. at 326.) While Rheem issued numerous "technical service bulletins" offering instructions
Phelps executives met with a Rheem service representative on May 11, 1994. At this meeting, Phelps requested between $40,000 and $65,000 to compensate it for the cost involved in servicing the furnaces. Rheem rejected this request.
Phelps brought suit against Rheem and Federated on August 8, 1994, claiming that Rheem breached its express and implied warranties and was negligent in its manufacture of the furnaces. Underlying all of these claims is Phelps's assertion that the furnaces "shut down and were not operational after installation. Among other things, the pilot assemblies, hot surface ignitors, flame sensors and ignition controls failed." (R. at 26.) The complaint first contended that Rheem breached the implied warranty of fitness for a particular purpose because Rheem and Federated "knew that Phelps intended to use the furnaces and install them in properties serviced by Phelps" (R. at 21) but the furnaces were "defective, and after they had been installed ... they failed to function properly." (Id.) Similarly, Phelps sought damages for breach of the implied warranty of merchantability, contending that Rheem and Federated were merchants but that the defects in the furnaces made them "unsuitable and posed a risk of personal injury and property damages to customers serviced by Phelps ...." (R. at 23.) Phelps also asserted a claim under the express warranty, arguing that it "incurred substantial expenses and other damages in remedying the problems caused by the defective furnaces." (R. at 25.) Finally, Phelps claimed that "Rheem and Federated Supply were negligent and careless in their design and sale of the furnaces by failing to manufacture and provide furnaces which were operational and in reasonable working order." (R. at 26.)
Phelps described its damages as including "but not limited to, lost customers, lost profits, and the additional cost of servicing the defective furnaces and remedying the defects therein." (R. at 22.) In answers to interrogatories, Phelps listed its warranty damages as "lost service charges," "lost labor charges," "lost profits" from two customers who would no longer do business with Phelps, and the "approximate value of office time spent ... comput[ing] damages." (R. at 225.)
Rheem moved for summary judgment on all of these claims. Rheem's brief in support of its motion asserted that the damages Phelps sought on the warranty theories were precluded by the limitations in the express warranty and by lack of privity on the implied warranties. Rheem also argued that Phelps could not claim tort damages for the purely economic injuries that resulted from the failure of the furnaces to operate as intended. The trial court granted Rheem's motion for summary judgment in regards to negligence, but denied it as to the warranties.
Rheem sought an interlocutory appeal on the warranty claims and the trial court certified its order. The Court of Appeals affirmed the denial of summary judgment. Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218 (Ind. Ct.App.1999). As for the express warranties, the Court of Appeals found a genuine issue of material fact as to "whether the cumulative effect of Rheem's actions was commercially reasonable." Id. at 1228 (emphasis in original). On the implied warranty claims, the court stated that the evidence establishing privity was "slight." The court nevertheless held that "perfect vertical privity is not necessary in this case" and then found a genuine issue of material fact as to whether Rheem breached
When reviewing an entry of summary judgment, we stand in the shoes of the trial court. Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Ind. Trial Rule 56(C). We do not reweigh the evidence, but will consider the facts in the light most favorable to the nonmoving party. See City of Gary v. Indiana Bell Telephone Co., 732 N.E.2d 149, 153 (Ind.2000).
Rheem's appeal raises three issues which require us to analyze the operation of express and implied warranties under Indiana's version of the Uniform Commercial Code ("the UCC").
Rheem first argues that the trial court should have granted summary judgment as to Phelps's claim for lost profits under the express warranty because the warranty excluded consequential damages.
Rheem and Phelps present conflicting constructions of these subsections. Both parties appear to accept that the remedy provided by Rheem failed of its essential purpose and that Phelps is entitled to the benefits of the express warranty.
These arguments pose the question of whether an exclusion of consequential damages survives when a separate contract provision limiting a buyer's remedies has failed of its essential purpose. The courts that have faced this issue have fallen into two camps that are divided along the lines of the parties' arguments in this case. One group takes what is known as the "dependent" view and reads § 2-719(2)'s reference to remedies "provided in [the UCC]" as overriding a contract's consequential damage exclusion. See, e.g. Middletown Concrete Prod. v. Black Clawson Co., 802 F.Supp. 1135, 1151 (D.Del. 1992) (collecting cases). This gloss on § 2-719 makes an exclusion of consequential damages dependent on whether a limited remedy fails of its essential purpose. See Adams v. J.I. Case Co., 125 Ill.App.2d 388, 261 N.E.2d 1, 8 (1970). Other courts take an "independent" view and reason that because §§ 2-719(2) and (3) are separate subsections with separate language and separate standards, the failure of a limited remedy has no effect on an exclusion of consequential damages. See Waters v. Massey-Ferguson, Inc., 775 F.2d 587, 592-93 (4th Cir.1985) (collecting cases).
The Court of Appeals accepted the independent view. However, the court also grafted onto § 2-719 a requirement of "commercial reasonableness" and affirmed the denial of summary judgment on the ground that a triable issue existed as to whether Rheem's consequential damages exclusion and limited remedy were commercially reasonable.
We hold that Indiana Code § 26-1-2-719(2) does not categorically invalidate an exclusion of consequential damages when a limited remedy fails of its essential purpose. See Schurtz v. BMW of North America, Inc., 814 P.2d 1108, 1112 (Utah 1991) (using tools of statutory interpretation in applying independent view). Our first step in interpreting any Indiana statute is to determine whether the legislature has spoken clearly and unambiguously on the point in question. See Poehlman v. Feferman, 717 N.E.2d 578, 581 (Ind.1999) ("When a statute is clear and unambiguous, we need not apply any rules of construction other than to require that words and phrases be taken in their plain, ordinary, and usual sense. Clear and unambiguous statutory meaning leaves no room for judicial construction."), reh'g denied; Benham v. State, 637 N.E.2d 133, 136-37 (Ind.1994) ("When a statute is clear and unambiguous, there is no need to apply any rules of construction other than that requiring words and phrases to be taken in their plain, ordinary, and usual sense."). A statute is ambiguous when "it is susceptible to more than one interpretation." In re Lehman, 690 N.E.2d 696, 702 (Ind. 1997). See also Amoco Production Co. v. Laird, 622 N.E.2d 912 (Ind.1993).
Faced with an ambiguous statute, we turn next to other applicable canons of construction. First, we note that "[o]ur main objective in statutory construction is to determine, effect and implement the intent of the legislature." Melrose v. Capitol City Motor Lodge, Inc., 705 N.E.2d 985, 989 (Ind.1998). See also Seifert v. Bland, 587 N.E.2d 1317, 1319 (Ind. 1992), reh'g denied. In ascertaining this intent, we "presume that the legislature did not enact a useless provision" such that "[w]here statutory provisions are in conflict, no part of a statute should be rendered meaningless but should be reconciled with the rest of the statute." Robinson v. Wroblewski, 704 N.E.2d 467, 474-75 (Ind.1998). See also Spaulding v. International Bakers Services, Inc., 550 N.E.2d 307, 309 (Ind.1990) ("Where possible, every word must be given effect and meaning, and no part is to be held meaningless if it can be reconciled with the rest of the statute.").
Several aspects of Indiana Code §§ 26-1-2-719(2) and (3) point to a legislative intent consistent with the independent view. First, as many independent courts have noted, the drafters of the UCC inserted distinct legal standards into each provision. A limited remedy will be struck when it fails of its essential purpose; an exclusion of consequential damages fails when it is unconscionable. Moreover, these subsections are distinct in who applies the standards they set out. Whether a limited remedy fails of its essential purpose is an issue of fact that a jury may determine. See, e.g., Delhomme Indus., Inc. v. Houston Beechcraft, Inc., 669 F.2d 1049, 1063 (5th Cir.1982). Conversely, an exclusion of consequential damages stands unless it is unconscionable, and unconscionability is determined by a court as a matter of law. See Ind.Code § 26-1-2-302 (1993).
Second, the independent view is consistent with the principle of statutory interpretation that "[w]here possible, we interpret a statute such that every word receives effect and meaning and no part is rendered `meaningless if it can be reconciled with the rest of the statute.'" Bagnall v. Town of Beverly Shores, 726 N.E.2d 782,
Third, the UCC instructs us to construe its provisions with three specific legislative purposes in mind, all of which comport with the independent view:
Ind.Code § 26-1-1-102 (1993) (emphasis added) ("Purposes; rules of construction; variation by agreement"). See also id. cmt. 1 ("The Act should be construed in accordance with its underlying purposes and policies. The text of each subsection should be read in the light of the purpose and policy of the rule or principle in question, as also of the Act as a whole ...."); Kearney & Trecker Corp. v. Master Engraving Co., 107 N.J. 584, 527 A.2d 429, 432 (1987) (relying on § 1-102 to apply independent view). The independent view serves all of the enumerated purposes. The independent view supplies simplicity and clarity by allowing a clearly expressed agreement to control a transaction. See Ind.Code § 26-1-1-102(2)(a) (1993). The independent view is also the modern trend. See Middletown Concrete, 802 F.Supp. at
Finally, the legislature's intent to follow the independent view is also supported by the UCC's general policy favoring the parties' freedom of contract. The UCC tells us that one of its paramount concerns is enabling contracting parties to control their own relationships. See, e.g., Ind. Code § 26-1-1-102(3) (1993) ("The effect of provisions of IC 26-1 may be varied by agreement, except as otherwise provided in IC 26-1 ...."); Id. cmt. 2 ("Subsection (3) states affirmatively at the outset that freedom of contract is a principle of the [UCC] ...."). Official Comment One to Indiana Code § 26-1-2-719 states that "[u]nder this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect." However, the dependent view ignores the intent of the parties and allows a buyer to recover consequential damages despite an explicit contract term excluding them. The dependent courts essentially presume that the parties intended the exclusion of consequential damages to depend on the limited remedy. See, e.g., Kathryn I. Murtagh, Note, UCC Section 2-719: Limited Remedies and Consequential Damage Exclusions, 74 Cornell L.Rev. 359, 369 (1989) ("Dependent courts begin by presuming that the parties intended to link the consequential damage exclusion and limited remedy.").
This freedom to set contract terms is especially important in the context of a commercial transaction. Sophisticated commercial actors should be free to allocate risks as they see fit, and courts
White & Summers, Uniform Commercial Code § 12-10, at 605 (3rd ed.1988) (hereinafter "White & Summers"). See also S.M. Wilson & Co. v. Smith Intern., Inc., 587 F.2d 1363, 1375 (9th Cir.1978) ("Risk-shifting is socially expensive and should not be undertaken in the absence of a good reason. An even better reason is required when to so shift is contrary to a contract freely negotiated."); Polycon Indus., Inc. v. Hercules, Inc., 471 F.Supp. 1316, 1325 (E.D.Wis.1979) ("[T]he exclusion of consequential and special damages was an allocation of risks agreed to between two commercial parties of equal strength and should be given effect.").
Phelps attempts to escape this conclusion by arguing that the furnace sales were not a sophisticated commercial transaction worthy of such deference. Appellee's Br. in Opposition to Transfer at 8. Phelps notes that the warranties were simply found inside of the furnace box and were not the product of detailed negations. Cf. American Electric Power Co. v. Westinghouse Elec. Corp., 418 F.Supp. 435 (S.D.N.Y.1976). Phelps's argument here may prove too much, i.e., that only the ultimate customer, and not Phelps at all, was to benefit from the warranty. If Phelps is a beneficiary of the warranty (as we have noted both parties appear to assume), Phelps cannot escape the conclusion that these goods were relatively sophisticated and flowed between businesses entities. See, e.g., S.M. Wilson, 587 F.2d at 1375 ("Parties of relatively equal bargaining power negotiated an allocation of their risks of loss. ... The machine was a complex piece of equipment designed for the buyer's purposes."). This context is far different than those confronted in the many dependent cases that focus on losses suffered by consumers at the hands of large commercial entities. See, e.g., Kelynack v. Yamaha Motor Corp., 152 Mich.App. 105, 394 N.W.2d 17, 21 (1986); Goddard v. General Motors Corp., 60 Ohio St.2d 41, 14 O.O.3d 203, 396 N.E.2d 761, 765 (1979).
The Court of Appeals applied the independent view, but found a genuine issue of material fact as to whether "the cumulative effect of Rheem's actions was commercially reasonable." Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218, 1228 (Ind.Ct.App.1999). The court pointed to no statutory authority that requires these exclusions or limitations to be "commercially reasonable," nor did it define this term.
Rheem next argues that the trial court erred by denying summary judgment
The first step in determining whether a limited remedy failed of its essential purpose is to parse out exactly what purpose the remedy was to serve. See Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078, 1086 (Ind.1993). While the parties, the trial court, and the Court of Appeals make no reference to this inquiry,
These facts demonstrate that the limited remedy was intended to maintain a reasonable division of responsibilities between the manufacturer and the contractor when customers experienced problems. Rheem's parts-only warranty worked in tandem with Phelps's labor warranties to let customers know that they had to seek repair service from the local contractor, not the distant manufacturer. Phelps benefited from this relationship by marketing extended warranties on top of its one-year service warranty. If the warranty held Rheem liable for repairs, Rheem would naturally skip over Phelps and sell extended service warranties directly to the customer. For its part, the limited remedy gave Rheem the reassurance that it would not be liable for repairs on its furnaces at distant locations around the country. With this limitation in place, customers could rely on local repair service, Phelps could market extended warranties, and Rheem could be sure it would not be obligated to make repairs. Thus the apparent purpose of this limited remedy was to facilitate the manufacturer/contractor distinction for the benefit of all parties.
We must next determine whether circumstances caused the remedy to fail of this purpose. We set out the basic framework for analyzing the failure of essential purpose in Martin Rispens:
621 N.E.2d at 1086. See also Indiana Comment to Ind.Code § 26-1-2-719 (Burns 1974) ("[T]he parties' substitute arrangement may fail, in unusual circumstances.") (emphasis added); White and Summers, § 12-10 at 602. ("There are probably relatively few situations where a remedy can fail of its essential purpose.").
Using this analysis, we hold that the remedy served its purpose. Rheem, as the manufacturer, had technical expertise in the functioning of its product. It was reasonable for Phelps to expect Rheem to use this expertise to supply replacement parts and technical guidance in the event of malfunctions.
Phelps's main argument as to the failure of essential purpose is that the furnaces experienced problems for roughly four years. However, the purpose of the limited remedy was not to guarantee that every furnace would be easily fixed, but to guarantee that the most logical party would be charged with making the repairs. Phelps was that party, and under this limitation it accepted the risk that repairs would be difficult and labor intensive. In Martin Rispens, we stated that a limited remedy fails only in the face of "`novel circumstances not contemplated by the parties.'" 621 N.E.2d at 1085 (citation omitted). As Comment One to Indiana Code § 26-1-2-719 puts it, a limited remedy fails when its application "operates to deprive either party of the substantial value of the bargain." Thus a limited remedy fails of its essential purpose when an unexpected circumstance arises and neither party accepted the risk that such circumstance would occur. See Osgood v. Medical, Inc., 415 N.W.2d 896, 902 (Minn.App. 1987) ("This case involves the allocation of risks between two merchant manufacturers. That is exactly the intended effect of the Special Terms. We will not apply [2-719(2)] to overturn that result when the case involves the allocation of risk between two merchant manufacturers."); V.M. Corp. v. Bernard Distributing Co., 447 F.2d 864, 865 (7th Cir.1971) ("§ 2-719 was intended to encourage and facilitate consensual allocations of risk associated with the sale of goods. This is particularly true where commercial, rather than consumer sales are involved. Even where the defects of the goods cause substantial difficulties to those involved in wholesale and resale distribution, § 2-719(2) need not automatically require disregard of the particular limitation ....").
Even if we were to find that this remedy failed of its essential purpose, Phelps would not be entitled to the damages it seeks under the warranty. The parties characterize these service repair costs as either consequential damages or direct damages. In either event, Phelps is not entitled to recovery under the warranty and summary judgment should be entered.
The parties characterize the service labor as a form of consequential damage because Rheem should have foreseen that its failure to provide functioning furnaces would have caused Rheem to make multiple repairs under its service warranty. See Ind.Code § 26-1-2-715 (1993). To the extent these repair costs were consequential damages, they are excluded by Rheem's warranty as discussed in Part I, supra.
The parties also characterize the repair costs as a form of direct damages. A buyer's remedy for breach of warranty is typically the difference between the goods as warranted and the goods as accepted. See Ind.Code § 26-1-2-714(2) (1993). However, the cost of repair may serve as a proxy for direct damages. See, e.g., Jones v. Abriani, 169 Ind.App. 556, 350 N.E.2d 635, 646 (1976) ("In this case, one reasonable way of measuring the difference in the value of the goods between what was actually delivered (a defective mobile home) and what was warranted (a mobile home with the defects repaired) is the cost of repairing the defects."), Schroeder v. Barth, Inc., 969 F.2d 421,
We hold, however, that Phelps is not in a position to claim this form of remedy. Typically, a buyer claiming repair damages is suing its immediate seller. See, e.g., Abriani, 350 N.E.2d at 646. Recovering the repair cost replicates the typical warranty damages—value of goods as warranted minus value of goods as delivered—by awarding the amount spent to put the goods in the warranted condition. See White and Summers, § 10-2 at 504. This measure of damages reflects the fact that a properly functioning market would deduct from the price of the item the cost of repairs a purchaser would have to make. The repair costs that Phelps seeks to recoup serve no such purpose because Phelps is not in possession of the goods.
We conclude by noting that, while Phelps, as an intermediate seller, is not entitled to these direct warranty damages, it may have a claim sounding in indemnity or subrogation for damages suffered by those with which it shared privity. See, e.g., Black v. Don Schmid Motor, Inc., 232 Kan. 458, 657 P.2d 517, 529 (1983) ("A right of indemnity exists where a party is compelled to pay damages that rightfully should have been paid by another party. 41 Am.Jur.2d, Indemnity, § 20. Thus, a seller that is liable for damages to a purchaser of defective goods may seek indemnity from the manufacturer where the damages were the proximate result of the manufacturer's breach of warranty."). Whether or not Phelps can recover on an indemnity theory is an issue to be decided on remand.
We summarily affirm the Court of Appeals as to Phelps's implied warranty claims. See Martin v. Amoco Oil Co., 696 N.E.2d 383, 386 n. 4 (Ind.), cert. denied, Zrnchik v. Amoco Oil Co., 525 U.S. 1049, 119 S.Ct. 608, 142 L.Ed.2d 548 (1998).
Having previously granted transfer, we reverse the order of the trial court on Phelps's express warranty claims and remand this case for proceedings consistent with this opinion.
SHEPARD, C.J., and BOEHM, J., concur.
RUCKER, J., not participating.
DICKSON, J., dissents with separate opinion.
DICKSON, Justice, dissenting.
I am persuaded that Indiana Code § 26-1-2-719(2) should be construed to invalidate an exclusion of consequential damages when a limitation of remedy fails of its essential purpose. I further conclude that the trial court properly denied Rheem's motion for summary judgment as to Phelps's claims for labor expenses incurred
Ind.Code § 26-1-2-719(1) (1993).
Chatlos Systems v. National Cash Register Corp., 635 F.2d 1081, 1086 (3rd Cir.1980).
Kearney, 527 A.2d at 433. A Rheem executive testified that such exclusions of consequential damages are standard in the gas-powered furnace industry. (R. at 102.)
Id. at 397. The contract also stated that "[s]hould the above-named stallion hereafter become injured or disabled through accident or disease ... this warranty shall be null and void and of no effect and all obligations incurred by me herein shall be considered fulfilled and ended." Id. at 400. These clauses arguably limited the damages Powell could claim for breach of the warranty. Unfortunately, Major McKinley died before Powell could return him to Nave and request a replacement, as the warranty required. Id. at 398. Despite the contract's limited remedy and exclusion of damages, Powell sued for the expense of feeding and stabling Major McKinley and the cost of advertising the stallion's services. Powell also sought compensatory damages in the form of the difference in value between the sterile stallion he received and the fair market price of a fertile stallion. Id. The Court of Appeals recognized that contracting parties may limit the remedies available for the breach of warranty:
Id. at 398. The court then held that the warranty limited Powell's remedies to a replacement horse and reversed the trial court's refusal to dismiss the complaint. Id.