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Chatlos Systems Inc. v. National Cash Register Corp.

decided as amended december 5 1980.: November 26, 1980.



Before Gibbons, Weis and Sloviter, Circuit Judges.

Author: Weis


In this diversity case governed by the Uniform Commercial Code, the district court assessed damages for breach of warranty after finding that the seller's failure to timely program a computer system caused a contractual remedy to fail of its essential purpose. Despite an express provision in the agreement prohibiting recovery of consequential damages, the court also made an award for such losses. Although we accept the determination on the failure of the contractual remedy, we do not agree that the disclaimer of consequential damages is ineffective as a result. We conclude that that clause must be evaluated on its own merits and, in this case, enforced. In addition, we are unable to accept certain trial court determinations on the factors used to compute the other items of damage, and we remand for recalculation.


Chatlos Systems, Inc. (Chatlos), filed suit in the New Jersey Superior Court against National Cash Register Corp. (NCR), alleging, inter alia, breach of warranty in connection with the sale of a computer system. The case was removed to the United States District Court for the District of New Jersey, and after a bench trial, judgment was entered in favor of the plaintiff for $120,710.92.*fn1

Chatlos designs and manufactures cable pressurization equipment for the telecommunications industry. In the spring of 1974, the company decided to purchase a computer system and contacted several manufacturers, among them NCR. That firm suggested a magnetic ledger card system, but, after further inquiry by Chatlos, agreed to provide the 399/656 disc system, a computer utilizing more advanced technology, as the appropriate model for the customer's need.

This system was designed to provide six functions for Chatlos: (1) accounts receivable, (2) payroll, (3) order entry, (4) inventory deletion, (5) state income tax, (6) cash receipts. NCR represented to Chatlos that the system would solve inventory problems, result in direct savings of labor costs, and be programmed by capable NCR personnel to be "up and running" (in full operation) within six months.

On July 24, 1974 Chatlos signed a system service agreement with NCR as part of the transaction, and the computer hardware was delivered the following December. Because NCR would not extend credit, Chatlos made a leasing arrangement with Midlantic National Bank, agreeing to pay $70,162.09 on a monthly installment basis. This is a common practice in the trade; the computer company sells the system to a bank, which in turn leases it to the customer.

Chatlos understood that the system would be operational about three months after delivery and therefore expected it to be "up and running" by March 1975. An NCR employee began programming in January 1975, but by March, only one of the functions, payroll, was in operation. Efforts to install the inventory deletion and order entry programs were unsuccessful. These functions used multiple records per sector technology-the storing of several items of information in one section of a disc. But the NCR programmer was unable to delete any information within the same section without erasing it all. Since Chatlos had purchased the computer to record its extensive parts inventory, the inability to solve the multiple records sector problem posed a major difficulty the withdrawal of one part in a unit erroneously deleted the entire unit.

One year later the problem persisted. NCR analysts attempted a demonstration of the order entry and accounts receivable functions in March 1976, but significant problems surfaced with both. In June 1976 Chatlos asked that the lease be cancelled and the computer removed, but, at NCR's request, agreed to allow additional time to make the system operational. On August 31, 1976 Chatlos experienced problems with the payroll function, the only operation the computer had been performing properly.

On September 1, 1976 the state income tax program was installed. The next day an NCR representative arrived at the Chatlos plant to install the order entry program. Chatlos refused to allow the work to proceed and again asked NCR to terminate the lease and remove the computer. NCR refused, stating that it had no ownership rights in the system, having been paid by the bank.

The district judge, applying New Jersey law, reasoned that despite the service aspects and lease arrangement, the transaction was for the sale of goods within the meaning of Article 2 of the Uniform Commercial Code. N.J.Stat.Ann. ยงยง 12A:2-101 to 12A:2-725 (West 1962 & Cum. Supp. 1980). He determined that certain express warranties had been made in various writings executed by the parties.

The court found that NCR had warranted its product for "12 months after delivery against defects in material, workmanship and operational failure from ordinary use," and further that "services (would be) performed in a skillful and workmanlike manner." In addition, there was an oral, express warranty, memorialized in a purchase order prepared by the Midlantic Bank, providing that "since the goods ... are purchased by us expressly for the use of (Chatlos), (NCR) further warrants that the goods are in good working order, fit for the use (Chatlos) intends them, and fulfill all representations made by (NCR) to (Chatlos)." 479 F. Supp. at 743. The purchase order also provided that Chatlos was "to obtain all the benefits of all warranties." Finally, the court held that since ...

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