Will North Dakota enforce this clause limiting our remedy or excluding consequential damages?
Yes, subject to two limits stated in N.D.C.C. § 41-02-98 (UCC 2-719). First, failure of essential purpose: "If circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this title." Second, unconscionability, stated asymmetrically: "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." Construction Associates, Inc. v. Fargo Water Equipment Co. shows the unconscionability limit reaches even a purely commercial transaction between businesses: the Supreme Court held that on the facts before it (a limited-remedy clause that would have left the buyer with replacement pipe useless for the actual repair method needed) "[t]he circumstances of this case demonstrate elements of procedural and substantive unconscionability which, when viewed in totality, adequately support the trial court's conclusion that the clause limiting remedies and excluding consequential damages was unconscionable under the relevant statutory provisions." It affirmed: "The trial court therefore did not err in refusing to enforce the limitation of remedies and exclusion of consequential damages."
The trap
Subsection 3's asymmetry means a drafter cannot assume North Dakota treats a consequential-damages exclusion the same way regardless of context: the statute starts a consumer-goods personal-injury exclusion off PRESUMED unconscionable, while an identical clause limiting only commercial loss is not. Construction Associates is also a reminder that a commercial setting is not a safe one. Courts "have generally been more reluctant to find unconscionability in purely commercial settings," but "under appropriate circumstances a contractual provision may be found unconscionable even in a commercial setting," and the Court found it here even though the dispute was between two businesses, resting in part on a real disparity in size and sophistication (a small local contractor against "an enormous, highly diversified, international conglomerate") and on the limited remedy leaving the buyer, in the trial court's words, with a remedy that "amount[ed] to nothing whatsoever" for the actual defect. The court expressly did not need to reach the SEPARATE failure-of-essential-purpose question because unconscionability alone was enough: the two doctrines in § 41-02-98 are independent grounds, either of which can defeat the same clause, and a drafter should not assume defeating one leaves the clause otherwise safe. The test the Court applied asks "whether, under the circumstances presented in the particular commercial setting, the terms of the agreement are so one-sided as to be unconscionable," on a "two-pronged framework: procedural unconscionability, which encompasses factors relating to unfair surprise, oppression, and inequality of bargaining power, and substantive unconscionability, which focuses upon the harshness or one-sidedness of the contractual provision in question."
9 authorities
- statuteN.D.C.C. § 41-02-98enactment date not established
The words that state the rule
Subject to the provisions of subsections 2 and 3 of this section and of section 41-02-97 on liquidation and limitation of damages: - The agreement may provide for remedies in addition to or in substitution for those provided in this chapter and may limit or alter the measure of damages recoverable under this chapter, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and - Resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
- statuteN.D.C.C. § 41-02-98enactment date not established
The words that state the rule
If circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this title.
- statuteN.D.C.C. § 41-02-98enactment date not established
The words that state the rule
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.
- case446 N.W.2d 237Construction Associates, Inc. v. Fargo Water Equipment Co.N.D.decided 1989read it at the source ↗
The words that state the rule
The circumstances presented in this case demonstrate a substantial inequality in bargaining power between J-M and Construction Associates. Construction Associates is a relatively small local construction firm, while J-M is part of an enormous, highly diversified, international conglomerate.
- case446 N.W.2d 237Construction Associates, Inc. v. Fargo Water Equipment Co.N.D.decided 1989read it at the source ↗
The words that state the rule
The clause at issue here would limit Construction Associates' remedy for J-M's breach to a like quantity of replacement pipe, with no recovery of consequential damages. Construction Associates argues, with support in the evidence, that replacement pipe is not used when making repairs to leaking joints on a completed underground water pipeline. Because the accepted method of repair is to cut out the leaking joint and repair it with a stainless steel sleeve, Construction Associates argues, the replacement pipe would be useless in effecting repairs upon the line. The trial court determined that J-M's limited remedy "amount[ed] to nothing whatsoever."
- case446 N.W.2d 237Construction Associates, Inc. v. Fargo Water Equipment Co.N.D.decided 1989read it at the source ↗
The words that state the rule
The circumstances of this case demonstrate elements of procedural and substantive unconscionability which, when viewed in totality, adequately support the trial court's conclusion that the clause limiting remedies and excluding consequential damages was unconscionable under the relevant statutory provisions. The trial court therefore did not err in refusing to enforce the limitation of remedies and exclusion of consequential damages. The judgment of the district court is affirmed.
- case446 N.W.2d 237Construction Associates, Inc. v. Fargo Water Equipment Co.N.D.decided 1989read it at the source ↗
The words that state the rule
[5] The trial court also determined that the limitation of remedies failed of its essential purpose. See Section 41-02-98(2), N.D.C.C. [U.C.C. § 2-719(2)]. Because we conclude that the trial court did not err in determining that the limitation of remedies was unconscionable, we find it unnecessary to address the separate issue of failure of essential purpose.
- case446 N.W.2d 237Construction Associates, Inc. v. Fargo Water Equipment Co.N.D.decided 1989read it at the source ↗
The words that state the rule
The determination to be made is whether, under the circumstances presented in the particular commercial setting, the terms of the agreement are so one-sided as to be unconscionable. Peoples Bank and Trust v. Reiff , 256 N.W.2d 336, 344 (N.D.1977); Haugen v. Ford Motor Co., supra, 219 N.W.2d at 467 ; U.C.C. § 2-302, Official Comment. The principle underlying the Code's unconscionability provisions is the prevention of oppression and unfair surprise. Peoples Bank and Trust v. Reiff, supra, 256 N.W.2d at 344 ; Haugen v. Ford Motor Co., supra, 219 N.W.2d at 467 ; U.C.C. § 2-302, Official Comment. Courts and commentators have generally viewed the Code's unconscionability provisions within a two-pronged framework: procedural unconscionability, which encompasses factors relating to unfair surprise, oppression, and inequality of bargaining power, and substantive unconscionability, which focuses upon the harshness or one-sidedness of the contractual provision in question.
- case446 N.W.2d 237Construction Associates, Inc. v. Fargo Water Equipment Co.N.D.decided 1989read it at the source ↗
The words that state the rule
We initially note that this case presents a commercial, rather than a consumer, transaction. Although courts have generally been more reluctant to find unconscionability in purely commercial settings, see Ray Farmers Union Elevator Co. v. Weyrauch, supra, 238 N.W.2d at 50 , under appropriate circumstances a contractual provision may be found unconscionable even in a commercial setting.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.