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

Brief Fact Summary. Plaintiff Dale R. Horning Co. purchased defective glass products from Defendant Falconer Glass Industries, Inc. resulting in additional costs to Plaintiff for the replacement of the defective products. Plaintiff initiated this cause of action to recover consequential damages incurred from the replacement of the defective products and the resulting delay. Defendant included a provision disclaiming liability for consequential damages on the back of its form.

Synopsis of Rule of Law. An additional term limiting liability for consequential damages in an agreement between merchants will not be enforced when enforcement would result in hardship to the non-assenting party.

Facts. Plaintiff was a subcontractor on a construction project where time was of the essence. If Plaintiff failed to meet deadlines of the project, the result would be daily fines and possible termination. Plaintiff ordered a glass product from Defendant over the telephone. During the telephone conversation, no mention was made of limiting remedies or disclaiming warranties. Defendant had reason to know at the time the order was made of Plaintiff’s general or particular requirements. The day after the telephone conversation, Plaintiff sent Defendant a confirming order form. The form contained nothing about warranties or damages, but did include a handwritten notation that the shipment was on an “as needed” basis. Defendant also sent a form to Plaintiff at the same time. The form indicated that the product was due “3rd Qtr. 1986” and that four weeks was the manufacturing time. The reverse side of Defendant’s form also limited Plaintiff’s remedy for defective goods to replacement and d
isclaimed liability for “special, direct, indirect, incidental or consequential damages.” The language on the reverse side was not in a larger print than the rest of the terms and was not in capital letters, underlined or bold-faced.
Once Plaintiff informed Defendant of the specifications, Defendant delivered a defective product to Plaintiff. Plaintiff notified Defendant of the defects and attempted to correct the defects according to Defendant’s instructions. Plaintiff temporarily installed Defendant’s product to avoid incurring additional costs. Had this first shipment been without defect, Plaintiff would have completed the work on time and without any additional cost.
An officer of Plaintiff informed Defendant’s manufacturing manager (Carmen) that Defendant would be liable for Plaintiff’s additional costs and Carmen did not object. Plaintiff’s office again informed Carmen that Defendant would be liable when Carmen came to inspect the replacement shipment. Later, Plaintiff’s manager informed Defendant’s regional sales representative that Plaintiff expected Defendant to pay the additional costs. The regional sales representative agreed that Defendant should be responsible but asked that Plaintiff “take it easy on us.”
Defendant sent several corrective shipments. Plaintiff incurred the costs of preparing and installing the replacement shipments. Plaintiff was unaware of the terms and conditions on the reverse side of Defendant’s form. However, Plaintiff was aware that Defendant and other suppliers do place terms and conditions on the reverse side of their forms. In the commercial glass industry, restrictive warranties are common practice, but suppliers often cover some or all of additional costs resulting from a defective product.

Issue. Is the additional term disclaiming Defendant’s liability for consequential damages part of the contract between the parties?

Held. No. Defendant’s provision disclaiming liability for consequential damages is not part of the contract between the parties.
In a contract between merchants additional terms are included unless they materially alter the agreement between the parties. If the inclusion of a term without express awareness of the other party would result in surprise or hardship, the term is said to materially alter the agreement. Courts are split on whether a provision limiting consequential damages materially alters a contract. In the present case, the Court focuses on whether the inclusion would result in surprise or hardship, not whether the provision is reasonable.
In looking at whether the provision materially altered the agreement based on surprise to Plaintiff, the Court looks at both a subjective and objective standard. Subjectively, Plaintiff was not aware of the provision on the back of Defendant’s form. However, objectively, Plaintiff was aware that such provisions do appear on the back of supplier forms. The Court determined that because Plaintiff should anticipate such provisions, the provision does not materially alter the contract under the surprise aspect.
In looking at hardship, the Court focuses on whether enforcing the provision would result in “substantial economic hardship” to Plaintiff. Under the fact of the present case, where Defendant knew of Plaintiff’s requirements and potential liability for delay in completing the work, the Court applies a presumption that Plaintiff can recover consequential damages to avoid hardship.
The Court also notes that the limitation of liability for consequential damages was not mentioned in the oral agreement or later negotiated, but was instead inserted in fine print on the back of Defendant’s form.

Discussion. In the present case, the additional term disclaiming Defendant’s liability for consequential damages was not part of the contract between the parties. The Court reasoned that to include this type of provision, located in fine print on the back of the form, and would result in hardship to Plaintiff.