On certification to the Superior Court, Appellate Division, whose opinion is reported at 211 N.J. Super. 376 (1986).
For reversal and remandment -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern, Stein and Garibaldi. Opposed -- None. The opinion of the Court was delivered by Stein, J.
[107 NJ Page 586] The critical issue posed by this appeal is whether the Uniform Commercial Code, N.J.S.A. 12A:1-101 to 10-106 (U.C.C. or Code), permits the enforcement of a contractual exclusion of consequential damages where the buyer's limited remedy authorized in the contract of sale has failed to achieve its essential purpose. Despite a specific exclusion of consequential damages in the contract between these parties, the trial court instructed the jury that it could award consequential damages if the seller, acting under its repair and replacement warranty, did not "make the machine as warranted." The Appellate Division affirmed the judgment entered on the jury verdict assessing
damages against the seller, concluding that "the allocation of risk through exclusion of consequential damages was inextricably tied to the limitation of remedies." Kearney & Trecker Corp. v. Master Engraving Co., 211 N.J. Super. 376, 381 (1986). Our analysis of the U.C.C. persuades us, however, that the enforceability of an exclusion of consequential damages does not necessarily depend on the effectiveness of the limited remedies afforded by the contract of sale, and that in this case the exclusion should have been enforced, even though the jury may have determined that the repair and replacement warranty failed of its essential purpose. Accordingly, we reverse the judgment below and remand the matter to the Law Division for a new trial.
Kearney & Trecker Corporation (K & T) is the manufacturer of the Milwaukee-Matic 180 (MM-180), a computer-controlled machine tool capable of performing automatically a series of machining operations on metal parts. At the time of trial K & T had sold approximately 700 of these machines throughout the world. Master Engraving Company, Inc. (Master) is engaged in the manufacture and engraving of component parts for industrial application. Organized in 1955, Master operated 22 machines at the time of trial, six of which were computer controlled.
In the fall of 1978, the parties began discussions about Master's purchase of an MM-180. K & T furnished Master with a sales brochure describing the MM-180: "The new Milwaukee-Matic 180 combines simplicity with efficiency. It was designed using fewer parts. It is this simplicity of design that does much to explain the MM 180's amazing low maintenance requirements."
In response to a proposal from K & T, Master issued its purchase order for the MM-180 in December 1978, and the order was promptly acknowledged and accepted by K & T. The
purchase price was $167,000. The written proposal included the following provision:
WARRANTY, DISCLAIMER, LIMITATION OF LIABILITY AND REMEDY: Seller warrants the products furnished hereunder to be free from defects in material and workmanship for the shorter of (i) twelve (12) months from the date of delivery * * * or (ii) four thousand (4,000) operating hours * * *.
THE WARRANTY EXPRESSED HEREIN IS IN LIEU OF ANY OTHER WARRANTIES EXPRESS OR IMPLIED INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IS IN LIEU OF ANY AND ALL OTHER OBLIGATIONS OR LIABILITY ON SELLER'S PART. UNDER NO CIRCUMSTANCES WILL SELLER BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR FOR ANY OTHER LOSS, DAMAGE OR EXPENSE OF ANY KIND, INCLUDING LOSS OF PROFITS ARISING IN CONNECTION WITH THIS CONTRACT OR WITH THE USE OF OR INABILITY TO USE SELLER'S PRODUCTS FURNISHED UNDER THIS CONTRACT. SELLER'S MAXIMUM LIABILITY SHALL NOT EXCEED AND BUYER'S REMEDY IS LIMITED TO EITHER (i) REPAIR OR REPLACEMENT OF THE DEFECTIVE PART OF PRODUCT, OR AT SELLER'S OPTION, (ii) RETURN OF THE PRODUCT AND REFUND OF THE PURCHASE PRICE, AND SUCH REMEDY SHALL BE BUYER'S ENTIRE AND EXCLUSIVE REMEDY.
The MM-180 was delivered in March 1980. According to Master's witnesses, the machine malfunctioned frequently during the first year of operation, and was inoperable from 25% to 50% of the time available for its use, substantially more than the industry average of five percent "downtime" for comparable machines. No specific defect was predominant, according to Master's witnesses. Problems with tool changing, control, alignment and spindles were among Master's complaints. Over K & T's objection, testimony was introduced estimating lost profits on customer orders allegedly unfilled because of the inoperability of the machine. It was conceded that the machine's performance improved after the first year and that the machine was still in use at the time of trial, in September and October 1984. Master did not attempt to return the machine to K & T and obtain a refund of the purchase price.
K & T's witnesses disputed Master's account of the machine's first year of operation. Although conceding a substantial number
of service calls, K & T's area service manager testified that only four or five of thirteen service calls were "valid." K & T's service personnel contended that Master had programmed the machine improperly and that the programs were extensively edited, thereby impairing the efficiency of the MM-180. K & T's witnesses testified that Master did not have adequate testing equipment or spare parts for the machine, and that Master's employees lacked the ability to "troubleshoot" and perform regular maintenance. The testimony about "downtime" during the first year was also disputed; the K & T witnesses testified that the MM-180 was not inoperative on most occasions that K & T service personnel visited the Master's plant. K & T's manager of technical services testified that no service calls were requested from May 1981 to March 1982, and that during the second year of operation the MM-180 was operable approximately 98% of the time available for its use.
Suit was instituted by K & T in July 1981 to recover the cost of two service calls made after the one-year warranty had expired; Master counterclaimed, seeking the damages that are the subject of this appeal.
At the conclusion of the trial, the trial court instructed the jury that it could award consequential damages notwithstanding the contractual exclusion if it found that K & T failed "to make the machine as warranted." The jury was not instructed concerning the proof necessary to demonstrate that the repair or replacement warranty had failed of its essential purpose.
The critical portion of the jury charge follows:
You may find that there was an agreement between the parties to limit the remedy in the event that the machine was not as described in the plaintiff's warranties. You may also find that the plaintiff's contract contained a provision which limited the plaintiff's responsibilities in the event the machine was not as warranted to the repair or replacement of defective parts and that that limitation was limiting his liability to the repair or replacement of defective parts. However, if you find that the plaintiff's actions in repairing and replacing the defective parts did not make the machine as warranted, that is, free from the defects in material and workmanship, then you may find
that the defendant is entitled to all of its consequential economic losses and damages despite the language of the contract. A manufacturer and buyer may agree that only certain warranties shall apply and all others be excluded. Any implied warranty may be excluded if at the time of the sale the manufacturer-seller specifically makes known to the buyer that such warranties are excluded. Any warranties of the machine center involved in this case was [sic] based upon the assumption that it would be used in a reasonable manner appropriate to the purpose for which it was intended. (Emphasis added.)*fn1
The jury returned a verdict in favor of Master for $57,000. In answer to written questions on the verdict sheet, the jury found that although K & T had not sold a defectively-designed product,*fn2 it had nevertheless breached its contract with Master. In affirming, the Appellate Division interpreted the jury verdict to mean that the limited remedy of repair and replacement had failed of its essential purpose. N.J.S.A. 12A:2-719(2). The Appellate Division concluded that under the circumstance of this case "the failure adequately to repair the machine rendered ineffective the exclusion of consequential damages." 211 N.J. Super. at 381.
An understanding of the appropriate relationship between the U.C.C. provisions authorizing the exclusion of consequential damages, N.J.S.A. 12A:2-719(3), and the relief available to a buyer when a limited remedy fails of its essential purpose, id.
at 12A:2-719(2), is enhanced by reference to the purpose and policies of ...