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WERNER & PFLEIDERER CORP. v. GARY CHEM. CORP.

October 12, 1988

WERNER & PFLEIDERER CORPORATION, Plaintiff and Defendant-in-Counterclaim,
v.
GARY CHEMICAL CORPORATION, Defendant and Plaintiff-in-Counterclaim, v. WERNER & PFLEIDERER MASCHINENFABRIK, STUTTGART, Defendant-in-Counterclaim



The opinion of the court was delivered by: WOLIN

 Two motions are currently before the Court. In the first, plaintiff Werner & Pfleiderer ("WPC"), moves for summary judgment dismissing the counterclaims of defendant Gary Chemical Corporation ("Gary Chemical"), and for summary judgment in favor of its claim for $ 133,333.00. In the second motion, defendant-in-counterclaim Werner & Pfleiderer Maschinenfabrik Stuttgart ("WPS"), seeks summary judgment dismissing the claims asserted against it by Gary Chemical, or alternatively, partial summary judgment striking Gary Chemical's claims for consequential and incidental damages. For the reasons set forth below, the Court grants partial summary judgment in favor of WPC, dismissing Gary Chemical's claims for consequential and incidental damages, and dismissing the negligence and fraud counterclaims of Gary Chemical. The Court denies summary judgment as to WPC's claim for $ 133,333.00. Finally, the Court grants partial summary judgment for WPS, striking Gary Chemical's claims for consequential and incidental damages.

 I. BACKGROUND

 Defendant Gary Chemical is a thermoplastics compounder specializing in the production of polyvinylchloride ("PVC") compounds for use in various industries. Gary Chemical manufactures plastic PVC compounds by mixing PVC resin together with other chemical components. The PVC compounds are manufactured in a pellet form and Gary Chemical's customers purchase the pellets and mold them into a form designed for their individual application. Plaintiff WPC, a Delaware corporation with its principal place of business in New Jersey, is a seller of machinery for the plastics processing industry. WPC is the exclusive United States distributor of WPS, the defendant-in-counterclaim.

 In 1983, Gary Chemical and WPC entered into discussions regarding Gary Chemical's purchase of a Kombiplast Type KP 90/200 ("Kombiplast"), a plastics processing machine. On January 31, 1984, WPC generated a seven page quotation for the Kombiplast which Gary Chemical "marked up" and included in a Purchase Order, dated May 9, 1984. Gary Chemical amended the Payment Schedule to provide that the final one-third payment of the total purchase price of $ 475,000.00 was not due until "successful start-up and guaranteed production rates achieved." The guaranteed production rate for flexible PVC products was 4,000 pounds per hour. This guaranteed production rate had been included in the written order for the Kombiplast that WPC placed with WPS on February 28, 1984. WPS responded by accepting WPC's order by means of a written specification, which identified Gary Chemical as the ultimate purchaser and also included a guaranteed production rate of "up to 4000 lbs. per hour."

 The final contract between Gary Chemical and WPC included the following negotiated warranty:

 
Warranty: WPC warrants that goods manufactured by WPC and services provided by WPC hereunder will be free from defects in workmanship and material for a period of eighteen months from the transfer of risk per Section 4 hereof or one year after the equipment has been first put into operation. If any such goods or services fail to meet the foregoing warranties, WPC will correct any such failure by repair or replacement of any defective or damaged part or parts of the goods free of charge relative to cost of parts and labor supplied by WPC. Final determination as to whether a good or part is actually defective rests with WPC. The obligation of WPC hereunder will be limited solely to the repair and replacement of goods that fall within the foregoing limitations and will be conditioned upon receipt by us of written notice. . . . In addition, WPC will not be liable for any loss, damage or injury of any nature, whether direct, indirect, incidental, consequential or special, in connection with or resulting from the use of the goods or services.
 
THE WARRANTIES SET FORTH HEREIN ARE In LIEU OF ANY OTHER CONDITION OR WARRANTY OF FITNESS, QUALITY, OR MERCHANTABILITY, EXPRESS OR IMPLIED.

 The WPC Kombiplast was installed at Gary Chemical's plant in September, 1984. WPC's technicians attempted to start-up the machine and get it to run at the guaranteed production rate. While start-up was accomplished, it remains in dispute if the guaranteed production rates were ever achieved. Gary Chemical's principal complaint was that when the Kombiplast was run at the guaranteed production rate, part of the produced material was agglomerated, a condition in which the plastic product sticks together.

 From September, 1984 to October, 1985, WPC and Gary Chemical attempted to get the Kombiplast to run at guaranteed production rates with minimal agglomeration (2% was the acceptable rate). WPC installed new equipment in the Kombiplast but Gary Chemical remained unsatisfied. It remains in dispute whether the Kombiplast did indeed ever achieve the guaranteed production rate. Both sides point to memoranda in which the other did or did not admit that the Kombiplast had achieved the guaranteed production rate.

 WPC brought suit against Gary Chemical for payment of $ 133,333.00, the remaining one-third of the purchase price which Gary Chemical had the right to retain until the Kombiplast achieved the guaranteed production rate. Gary counterclaimed against WPC for breach of implied warranties, negligent supply of improperly designed machine, breach of contract for improper service, and negligent repair of machine. Gary also included in its counterclaim counts of fraud and violation of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-19 et seq. Gary seeks compensatory and punitive damages, as well as treble damages under the New Jersey Consumer Fraud Statute. Gary Chemical also filed a third party claim against WPS for breach of an express warranty Gary claims WPS gave to WPC.

 II. DISCUSSION

 A. Gary Chemical's Claim for Incidental and Consequential Damages as a Result of WPC's Breach of Warranties

 In Count One of its amended counterclaim, Gary Chemical alleges that WPC breached its contract with Gary and demands damages for lost hours of production, lost administrative and managerial time, loss of good will, destruction of raw materials, damages caused by the production of inferior goods, cost of the machine and loss of sales opportunity. Gary calculates the sales opportunity loss alone to be $ 3,153,716.00. In Counts Two and Three of Gary's counterclaim, Gary alleges, respectively, that WPC impliedly warranted that the machine was fit for a particular purpose and gave an implied warrant of merchantability. Gary claims damages as a result of the breach of these implied warranties.

 Gary Chemical, in its amended counterclaim, terms the damages it seeks as "compensatory." Amended Counterclaim para. 78. However, the better description for certain claimed damages of Gary, such as lost sales opportunity, is "consequential" or "incidental." Gary's demand for such consequential damages is, according to WPC, barred by the warranty clause of the contract between WPC and Gary, and, in particular, the portion of the warranty clause in which WPC limits its obligations to repair or replacement of the Kombiplast and disclaims liability for all consequential and incidental damages. See supra, slip op., page 4. Gary Chemical argues that given the failure of WPC to repair the Kombiplast so it would perform at the guaranteed production rates, the repair and replacement remedy of the contract failed of its essential purpose. *fn1" Such a failure, argues Gary, causes the warranty's limitation of remedies to become inapplicable, allowing Gary to press its claim for consequential damages. The Court finds Gary Chemical's argument unpersuasive in light of New Jersey law and the New Jersey Supreme Court's interpretation of the Uniform Commercial Code.

 The most important New Jersey case in this area is undoubtedly Kearney & Trecker v. Master Engraving, 107 N.J. 584, 527 A.2d 429 (1987). In that case, the New Jersey Supreme Court held that the Uniform Commercial Code did not require invalidation of a contractual exclusion of consequential damages when a limited repair and replacement warranty failed to achieve its essential purpose. Kearney, 107 N.J. at 600. The Court adopted the reasoning of Chatlos Sys. v. National Cash Register Corp., 635 F.2d 1081 (3d Cir. 1980), in which the Third Circuit predicted how New Jersey courts would rule on the subject. In Chatlos, the Court stated:

 
"It appears to us that the better reasoned approach is to treat the consequential damage disclaimer as an independent provision, valid unless unconscionable. . . . The limited remedy of repair and a consequential damages exclusion are two discrete ways of attempting to limit recovery for breach of warranty. The Code, moreover, tests each by a different standard. The former survives unless it fails of its essential purpose, while the latter is valid unless it is unconscionable. We therefore see no reason to hold, as a general proposition, that the failure of the limited remedy provided in the contract, without more, invalidates a wholly distinct term in the agreement excluding consequential damages. The two are not mutually exclusive."

 Chatlos, 635 F.2d at 1086 (footnotes and citations omitted).

 Both Kearney and Chatlos are based on a careful analysis of U.C.C. § 2-719 and § 2-714. Section 2-719(1)(a) allows an agreement to limit the buyer's remedies to repair and replacement of non-conforming goods. Section 2-719(2) provides that: "Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act." Finally, § 2-719(3) provides, in part: "Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable." The courts in Kearney and Chatlos were faced with the question of how to interpret § 2-719(2) when a repair and replacement remedy failed. They decided that because the Code provides a § 2-714(2) measure of damages to an aggrieved buyer, it would be in keeping with the Code's emphasis on freedom of contract to allow a consequential damages exclusion to withstand the failure of a repair and replacement warranty. In other words, when a buyer such as Gary Chemical is faced with a failure of a limited repair and replacement remedy, and is subject to a consequential damage exclusion, the buyer is not left without a remedy, as Gary Chemical mistakenly suggests, but can get the § 2-714(2) measure of damages: The difference between the value of the goods accepted and the value they would have had if they had been as warranted. Additionally, as a matter of basic contract law, if a seller such as WPC does not meet its repair obligations and the buyer completes the repairs successfully at its own expense, the Court finds it probable that the buyer would be able to recover the repair costs. *fn2"

 Because Gary Chemical's attempts to distinguish Kearney and Chatlos are unpersuasive, Gary's only remaining argument for not enforcing the consequential damage exclusion clause is that enforcement of the clause would in some way be unconscionable in this case. ...


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