Caseflicks

District Court of Appeal of Florida • 2007

Paul Gottlieb & Co. v. Alps South Corp.

985 So. 2d 1 | 2007 Fla. App. LEXIS 20245

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Takeaway

In short, a repeated, visible consequential-damages limitation between merchants was enforceable under the U.C.C.; Alps could recover only properly proven direct and incidental damages from Gottlieb's undisputed breach.

Background

Paul Gottlieb & Co., a fabric converter, supplied Alps South, a manufacturer of prosthetic-device liners, with specialty Coolmax fabric. Alps had tested and approved a particular fabric and used it in liners sold to customers. After Gottlieb exhausted its original yarn supply, it substituted a similar but unapproved yarn without telling Alps. The substitute fabric did not stretch as required, a defect that was not readily discoverable until Alps had incorporated it into finished liners. Customer complaints followed, and Alps recalled liners from the market and destroyed recalled products and inventory.

Gottlieb sued Alps for unpaid invoices. Alps counterclaimed for breach of warranty, seeking the costs associated with defective liners and lost profits. The parties had exchanged standardized commercial forms, and Gottlieb's finished-goods contract contained a clause stating that the buyer could not recover indirect or consequential damages, including lost profits, promotional or manufacturing expenses, reputational injury, or loss of customers.

After a nonjury trial, the circuit court awarded Gottlieb $28,846.29 on its collection claim and awarded Alps $694,640.04 on its counterclaim. The trial court held that the consequential-damages limitation was a material alteration under Florida U.C.C. section 672.207 and thus was not part of the parties' contract. Gottlieb appealed.

Issues

Issue #1

Whether Gottlieb preserved its reliance on the limitation-of-liability clause even though it did not plead that defense in its response to Alps' second amended counterclaim.

Holding

Yes. The defense was tried by the parties' consent and was therefore preserved for appellate review.

Reasoning

Although an affirmative defense ordinarily must be pleaded or is waived, Florida procedure recognizes an exception for an issue tried by consent. An issue is tried by consent when the parties litigate it without objection, unless the evidence offered is relevant only to another properly pleaded issue.

Here, both parties addressed the limitation clause in trial briefs, introduced evidence concerning it, and argued its effect at closing. Alps never objected that the issue exceeded the pleadings, and the trial court decided the clause's enforceability on the merits. Those circumstances treated the defense as if it had been pleaded.

Issue #2

Whether the contractual clause barring indirect and consequential damages was a material alteration excluded from the parties' contract under Florida U.C.C. section 672.207.

Holding

No. Alps did not prove that the clause materially altered the contract, so the clause became part of the contract and bars consequential damages.

Reasoning

Section 672.207 governs the commercial 'battle of the forms.' Between merchants, an additional term in an acceptance becomes part of the agreement unless the offer limits acceptance to its own terms, the term materially alters the agreement, or the offeror timely objects. The parties agreed that the first and third exceptions did not apply, leaving only material alteration.

The court held that the party seeking to exclude an additional term as a material alteration bears the burden of proof. Thus, Alps had to establish that the limitation clause should not be incorporated. This approach aligns with the prevailing view in other courts applying U.C.C. section 2-207.

A term is material when a reasonable merchant could not fairly be presumed to have agreed to it because it creates unreasonable surprise. The court followed its earlier approval of the view that hardship is not independently dispositive: a party cannot escape a term it fairly agreed to simply because the term later proves costly.

Alps failed to show unreasonable surprise. This was the sixth contract between these merchants, each contract carried the limitation language, and the terms were visible on the face of the forms. Alps' evidence that it had not read the contract did not establish surprise, because Florida law does not excuse a party from contractual terms merely because it failed to read them. Moreover, the U.C.C. comments identify reasonable remedy limitations as terms that ordinarily do not cause unreasonable surprise.

Alps also did not establish hardship tied to surprise. It never told Gottlieb that the fabric would be used in prosthetic liners or that a defective shipment could expose Alps to substantial downstream losses. Nor did Gottlieb promise to reimburse such losses. The trial court improperly focused on Gottlieb's wrongful yarn substitution when deciding whether the clause materially altered the agreement; the breach itself was distinct from the legal question whether the limitation was part of the contract.

Issue #3

Whether Alps established lost-profit damages with the reasonable certainty required for recovery.

Holding

No. Alps' proof of lost profits was speculative and could not support the award.

Reasoning

Lost profits must be proved with reasonable certainty; a court may not award them based on conjecture. Alps showed that it destroyed 4,249 defective liners, but the trial court effectively awarded lost profits for every destroyed unit without grounding the calculation in marketplace evidence, such as unfilled orders or other proof that those units would have been sold profitably.

The proof also showed that 682 units were recalled but customers received credits for replacement sleeves rather than cash refunds, while 3,567 destroyed units came from inventory. Alps had substantial production costs involving materials, skilled labor, and specialized equipment, yet the trial court made no specific findings separating production costs from lost profits. The record supported only speculation that profits had been lost.

Independently, the enforceable limitation clause barred consequential damages, including lost profits. The court nevertheless addressed the insufficiency of the lost-profit proof as an alternative basis for striking that portion of the judgment.

Issue #4

What damages remain available to Alps after enforcement of the consequential-damages limitation and rejection of the lost-profit award.

Holding

Alps may pursue direct, benefit-of-the-bargain damages and incidental damages naturally arising from Gottlieb's breach, but not consequential damages or lost profits.

Reasoning

The clause barred consequential damages only; it did not eliminate all remedies. Florida's U.C.C. remedies aim to place the injured party in as good a position as performance would have done, subject to valid contractual limitations. Accordingly, a seller cannot use this clause to avoid direct damages caused by its undisputed delivery of nonconforming goods.

Incidental damages may include reasonable expenses of inspection, receipt, transportation, care and custody of rightfully rejected goods, cover, and other reasonable expenses incident to the breach. Expenses that Alps incurred before it discovered the latent defect may be recoverable as incidental damages.

The court remanded for a new hearing limited to damages. On remand, the circuit court could make more specific findings concerning Gottlieb's knowledge of Alps' requirements, relevant trade practices and course of dealing, the character of Alps' inventory, the costs of recovering defective products, and Alps' efforts or ability to mitigate its loss.