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Paul Gottlied & Co., Inc v. Alps South Corp

    Brief Fact Summary. the removal of a limitation of liability clause on the back of the standardized finished goods contract of Paul Gottlieb & Co., Inc. did not materially alter the contract it had with Alps South Corp, (Alps) (D), so that as a matter of law, the clause should not have been removed from the contract, and therefore, the clause served to limit Gottlieb’s (P) liability to Alps (D) for consequential damages.

    Synopsis of Rule of Law. the limitation of limited liability clause found on the back of a standardized contract for the sale of goods between merchants as stipulated under the Uniform Commercial Code (U.C.C.) S 2-207, does not significantly alter the contract where it does not as a matter of law, cause unreasonable surprise or hardship.

    Facts. Alps South Corp. (Alps) (D), a medical manufacturer of product liners used by amputees to attach prosthetic devices, began the test of different high-tech fabrics to enhance the durability and stability of its liners, of which Paul Gottlieb & Co., Inc. (Gottlieb) (P) who was into the production of specialty fabrics supplied Alps (D) with fabrics (D). Alps (D) finally settled for Gottlieb’s (P) “Coolmax” fabrics because it was highly patronized by its customers. But six months to this time, some fabric samples which Gottlieb submitted to Alps (D) was rejected on for the inconsistencies that was noticed in both the texture and the color. Alps (D) penned his dissatisfaction immediately to Gottlieb (P) stating that future commercial relationship mandated the provision of a more consistent product.
    But this letter did not convey the information that Alps (D) could incur a significant additional cost as a result of switching to the use of another fabric and the specialized used Alps (D) was putting the product into was not also disclosed to Gottlieb (P). Gottlieb concurred to rework the fabric before final delivery to Alps (D0 but did not notify Alps (D) when it exhausted and substituted the stock of the yarn it had used in making the Coolmax fabric. The issue that arose from the substituted yarn was that it was not as elastic and the previous one and the customers of Alps (D) started complaining about the usage of the liners. This prompted Alps (D) to recall and destroy the liners that were substituted with the new yarn and after this incidence; both parties found out that the substituted yarn was the cause of the complaints.
    This made Alps (D) to hold unto the money it was to pay Gottlieb (P) in which Gottlieb (P) brought suit for damages for the nonpayment while Alps (D) counterclaimed for damages which it alleged was suffered as a result of Gottlieb’s (P) breach of warranty. Pertaining to Alps (D) counterclaim, on the back of the goods was a limitation of liability contract that purported to limit consequential damages (the contract was one of the series of six that had similar clauses on the forms). The court in its wisdom however held that the clause significantly changed the contract so that the clause was excluded from the contract under the U.C.C. S 2-207 after it had considered the language of the clause to be affirmative. This made the court to award a consequential damage (up to the tune of $695,000) to Alps (D) and nonpayment damages (up to the tune of $29,000) to Gottlieb (P). The intermediate appellate court of the state however granted the review of this ruling.

    Issue. Does the limitation of limited liability clause found on the back of a standardized contract for the sale of goods between merchants as stipulated under the Uniform Commercial Code (U.C.C.) S 2-207, significantly alter the contract where it does not as a matter of law, cause unreasonable surprise or hardship?

     

    Held. (Casanueva, J.) No. The limitation of limited liability clause found on the back of a standardized contract for the sale of goods between merchants as stipulated under the Uniform Commercial Code (U.C.C.) S 2-207, does not significantly alter the contract where it does not as a matter of law, cause unreasonable surprise or hardship. The trial court reasoned in excluding the limitation clause that if effect was given to the clause, then the limitation of the liability “would allow Gottlieb to substitute a product without notice to Alps that would affect the final marketability of the final product”.
    This reasoning was defective. The substitution of the fabric by Gottlieb (P) is evidential and does not significantly affect the construction of the contract and this resulted in a breach of contract in which the trial court should have determined only the clause, as a matter of law, significantly changed the contract. That a timely acceptance serves as an acceptance, notwithstanding that it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms is stipulated under S 2-207 (1) of the U.C.C. In situation where additional terms are available, these terms too become part and parcel of the contract unless among other things, they significantly change the contract.
    Hence, determining whether the clause behind Gottlieb’s (P) form contract significantly affected the contract was the only issue before the court. To exclude the additional terms to prove significant change to the contract was a huge burden for Alps (D). The use of some alternative of a “surprise or hardship” test is normally employed by the courts to determine whether an additional term significantly alter a contract and in some cases, some courts have excluded the hardship portion of the test and focused mainly on the surprise aspect. Employing the surprise test in this case means Alps (D) would have to prove that in the present circumstance, it cannot be presumed that a reasonable merchant would have agreed to additional term, nut this is not the case.
    The only excuse which Alps (D) had is that it did not read the additional terms and this surprise action cannot let a party out of a contract. As the result of the surprise, Alps (D) failed to adduce evidence of hardship. Gottlieb (P) on the other hand did not categorically state it would claim responsibility for any loss suffered by Alps (D) in case there was a breach of contract. But Gottlieb (P) had only received fabrics which did not conform to the specifications of Alps (D) with a letter which insisted on the supply of standard fabric. Also, Alps (D) never brought to the notice of Gottlieb (P) any consequence of the continuous supply of substandard fabrics other than the termination of their business relationship, or the fabric was meant to be used or how the fabric was to be incorporated in the product it was selling.
    This implies that Gottlieb could not have foreseen the extent of its potential liability upon breach. The failure of Alps (D) to inform Gottlieb (P) of the larger consequences of the breach means that Alps (D) cannot maintain that incorporating the limitation of the liability clause would result in a severe economic hardship. Alps (D) also failed to carry the burden of proof on significant change and the limitation of liability clause is part of the contract between the parties. Consequential damages as well as profit is limited by the clause and Alps failed to carry its burden of proving lost profits with reasonable certainty as an additional ground for precluding lost profits. Non-consequential damages such as direct and incidental damages, which the trial should determine on remand, may still be pursued by Alps (D). The ruling was reversed and remanded.

    Discussion. Suit of this nature arises from the common, but risky, commercial practice in which the seller and buyer negotiate a contract involving goods through the exchange of standardized forms. The practice is governed by S 2-207 and it is called “the battle of forms”. This particular law seeks to solve the conflicting purchase order forms and acknowledgment and acceptance forms through the elimination of uncertainty. The battle lines are frequently occur where as in this case, the seller’s form contain terms which is not in consonance or additional to those set forth in the buyer’s form. Therefore, both parties normally end up in the court after they might have concluded the commercial transactions despite the differences in the form.


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