Sanchelima International, Inc., vs. Walker Stainless Equipment Co., LLC (7th Cir.) – Where Limited Remedies Provision Would Deprive a Non-Breaching Party of All Remedies Against a Breaching Party, Clause is Unconscionable and Unenforceable.

The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:

SUMMARY:

The Seventh Circuit has held that under Wisconsin law, where a “limited remedies” provision would have deprived the non-breaching party of all of its remedies against the breaching party, the clause is per se unconscionable and is unenforceable.  [Sanchelima International, Inc., vs. Walker Stainless Equipment Co., LLC, 2019 Westlaw 1552681 (7th Cir.).]

Facts: A manufacturer of stainless steel farming equipment entered into an exclusive distribution agreement with a Latin American company.  The agreement contained “limited remedies” provisions stating (1) that the manufacturer would have no liability to the distributor in excess of the purchase price paid by the distributor and (2) that the distributor waived the right to obtain consequential damages, including lost profits.  The contract contained a Wisconsin choice of law clause.

After the manufacturer allegedly breached the exclusivity provision by selling its products directly to end-users in Latin America, the distributor brought suit.  When the manufacturer interposed the “limited remedies” provisions as a defense, the trial court held that the provisions violated Wisconsin’s version of UCC § 2-719.  That section provides:

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had . . . .

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

The trial court reasoned that since the “limited remedy” provision would have provided absolutely no relief to the distributor for the manufacturer’s breach of the exclusivity provision, the provision “failed of its essential purpose” under § 2-719(2) and was therefore unconscionable under § 2-719(3).  After a bench trial, the trial court awarded the distributor roughly $800,000.  The manufacturer appealed.

Reasoning:  Citing Murray v. Holiday Rambler, Inc., 83 Wis.2d 406, 265 N.W.2d 513 (Wis. 1978), the Court of Appeal affirmed, noting that Wisconsin follows the “dependent” construction of § 2-719:

Under the dependent approach, if a litigant proves the limited remedy fails of its essential purpose under UCC § 2-719(2), any accompanying consequential damages disclaimer is per se unconscionable under UCC § 2-719(3).

The court acknowledged that since that 1978 decision, many other states had adopted an “independent” construction of that statute:

[I]n the intervening decades since Murray, many courts have shifted to the “independent approach,” where even if a limited remedy fails of its essential purpose under UCC § 2-719(2), an accompanying consequential damages disclaimer is not necessarily “unconscionable” under UCC § 2-719(3). The litigant must still prove procedural and substantive unconscionability to invalidate a limitation on consequential damages. Today, most state courts use the independent approach, including states whose earlier adoptions of the dependent approach were relied on by the Wisconsin Supreme Court in Murray.

The court went on to hold that it could not second-guess the settled law of Wisconsin; the court declined to certify this issue to the Wisconsin Supreme Court.

Author’s Comment: When drafting a contract that is to be governed by the law of the state following the “dependent” rule, would there be any way to draft around the “dependent” rule, so as to bolster the chances of enforceability of a limited remedies clause?  Perhaps the agreement could include recitals showing that the “essential purpose” of the limited remedies clause is to induce the beneficiary of the clause (here, the manufacturer) to enter into the agreement in the first place.

Note that a “limited remedies” provision is the mirror image of a liquidated damages clause: instead of conferring a damage award on the drafting party, the limited remedies provision limits the non-drafter’s ability to recover damages.  In connection with liquidated damages clauses, clever drafters sometimes include language showing why the liquidated damage clause is necessary.  Perhaps the same strategy could apply to a “limited remedies” provision. 

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw.  Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.