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District Court, S.D. Indiana • 1990

Dale R. Horning Co. v. Falconer Glass Industries, Inc.

730 F. Supp. 962 | 1990 U.S. Dist. LEXIS 1544 | 1990 WL 12878

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Takeaway

In short, this case teaches that a seller cannot use post-contract fine-print boilerplate to shift foreseeable, substantial consequential-loss risk to a merchant buyer without actual agreement.

Background

Architectural Glass & Metal Company (AGM), an Indiana commercial-glazing subcontractor, ordered ceramic-backed Spandrel glass from Falconer Glass for a credit-union construction project. The parties formed their agreement by telephone on August 4, 1986. Falconer agreed to deliver within three to four weeks, and it knew or had reason to know that AGM faced a tight construction deadline, daily delay penalties, and substantial added costs if the building could not be enclosed on time.

The next day, Falconer sent a confirmation form. On its reverse side, in ordinary fine print, the form stated that replacement was the buyer's exclusive remedy and disclaimed liability for direct, incidental, special, and consequential damages. The telephone agreement had not addressed warranty disclaimers or remedy limitations, and AGM's own confirming order did not contain them.

Falconer's first shipment was timely but defective. AGM notified Falconer, temporarily installed some glass to keep the project moving, and repeatedly removed and replaced defective panels as Falconer sent corrective shipments. AGM incurred extra material, labor, overhead, and related costs. Its employees told Falconer representatives that AGM expected Falconer to cover those costs; the representatives did not object, and one stated Falconer should be responsible. AGM ultimately sought consequential damages for Falconer's breach of warranty.

After a two-day bench trial, the district court determined that Falconer's boilerplate consequential-damages limitation was not part of the contract, awarded AGM $12,303.17 in consequential damages after an evidentiary calculation and setoff, and denied prejudgment interest. The court had previously addressed related contract-formation questions in an earlier order.

Issues

Issue #1

Whether Falconer's post-agreement boilerplate limitation on consequential damages became part of the parties' contract under U.C.C. § 2-207.

Holding

No. Although AGM could not establish surprise, the limitation materially altered the oral agreement because it would impose substantial economic hardship on AGM without its express assent.

Reasoning

Under U.C.C. § 2-715, a buyer may recover consequential losses resulting from needs of which the seller had reason to know at contracting, so long as the losses could not reasonably be avoided. When AGM and Falconer made their oral agreement, Falconer knew or had reason to know that defective glass could delay AGM's time-sensitive construction work and cause substantial added expense. Because the parties did not initially agree to exclude consequential damages, AGM began with the Code's default right to seek them.

Falconer's next-day confirmation introduced an additional term: replacement as the exclusive remedy and an exclusion of consequential damages. Because both parties were merchants, § 2-207(2) would ordinarily incorporate that additional term unless it materially altered the prior agreement. A term materially alters an agreement when its inclusion without the other party's express awareness would result in surprise or hardship.

The court treated surprise and hardship as distinct inquiries, following Trans-Aire International. On surprise, AGM showed that it did not actually know the content of Falconer's fine print. But the evidence also showed that commercial-glass suppliers routinely used restrictive terms on their forms and that AGM knew suppliers commonly placed terms and conditions on their form backs. The court therefore concluded that AGM should have anticipated an attempted limitation of consequential damages and had not proved surprise.

Hardship led to the opposite conclusion. The limitation would shift a substantial foreseeable economic risk from Falconer to AGM: AGM could incur thousands of dollars in labor, removal, reinstallation, and delay-related costs if Falconer's glass was defective. Falconer had every opportunity to negotiate that allocation of risk when the contract was made, but instead attempted to accomplish it through inconspicuous boilerplate sent after the parties' oral agreement.

A boilerplate clause cannot, through § 2-207 alone, transfer a major legal and economic burden to a nonassenting party. Because Falconer's limitation would impose substantial economic hardship on AGM, it materially altered the agreement and did not become a contractual term. Falconer therefore remained liable for consequential damages proximately caused by its defective product, notwithstanding its good-faith efforts to provide replacements.

Issue #2

Whether AGM proved recoverable consequential damages, and in what amount.

Holding

Yes. AGM proved consequential damages with sufficient certainty, and the court awarded $12,303.17 after independently evaluating the competing evidence and applying a setoff.

Reasoning

A buyer bears the burden of proving consequential damages, but the U.C.C. does not demand mathematical precision. The evidence need only permit the factfinder to estimate the loss with reasonable certainty under the circumstances. AGM and Falconer presented competing damage calculations—approximately $19,145.67 and $6,730, respectively—so the court was not required to adopt either side's total wholesale.

The court adjusted AGM's material-cost evidence to account for a credit on an equipment-rental invoice. That adjustment produced recoverable material expenses of $2,631.93, including tax.

For labor, AGM claimed 633.28 replacement-related hours at $13 per hour, while Falconer's expert estimated 250 hours at a prevailing wage of $10.25 per hour. The court used the averages of the competing figures—441.64 hours and $11.62 per hour—then added 21 percent for taxes and insurance, producing labor damages of $6,316.42.

The court accepted AGM's unrebutted overhead rate of $14.26 per hour and applied it to the 441.64 reasonable labor hours, yielding $6,297.79. It also awarded a five-percent profit component, $762.31, because the rate was reasonable and unrefuted. The total was $16,008.48, from which the court deducted $3,705.12 in unpaid Falconer invoices. The resulting consequential-damages award was $12,303.17.

Issue #3

Whether AGM was entitled to prejudgment interest under Indiana law.

Holding

No. The damages were not ascertainable by fixed standards at the time they accrued, no account stated existed, and equitable prejudgment interest was unwarranted.

Reasoning

In a diversity case, state law governs the availability of prejudgment interest. Under Indiana law, prejudgment interest is appropriate when damages can be ascertained when they accrue by fixed rules of evidence and accepted valuation standards. It is inappropriate when determining the amount requires the factfinder to exercise judgment.

AGM could not rely on the statutory rule for an account stated. An account stated requires an agreement that the account items are correct and a promise to pay. Falconer neither agreed that AGM's invoice was accurate nor promised to pay it.

The court's own damage calculation demonstrated that the award was not mechanically ascertainable. It had to resolve competing evidence concerning labor rates and hours, correct invoice amounts, and evaluate the proper overhead figure. Because the damages required judicial judgment rather than a fixed calculation, they were not an appropriate basis for prejudgment interest.

The court also declined to grant prejudgment interest as an equitable matter. In its view, the damages award itself fully and justly compensated AGM, so an additional equitable award was unnecessary.