Contract Law: Wisconsin Court Decisions

January 5, 2015

Please note, this is the third article in my five-part series on contract law. To view the second post, please click here. To view the first post, please click here.

An example of how various UCC sections are interpreted by Wisconsin courts – Phillips Petroleum Co. v. Bucyrus-Erie Co., 125 Wis. 2d 418 (Ct. App 1985) and 131 Wis.2d 21 (1986) – involved the catastrophic failure of marine cranes manufactured by Defendant Seller and sold to Plaintiff Purchaser.

The parties began negotiating in 1970, and Seller submitted Proposals to Purchaser in March and April of 1971. The Proposals contained detailed descriptions of the crane equipment, delivery schedules, price and other terms. Also included were certain “conditions of proposal” that limited Seller’s warranties, liability and damages.1 Seller’s Proposal also reserved the right to substitute materials.2

Purchaser sent several Purchase Orders to Seller, some of which were stamped: “This order expressly limits acceptance to the terms stated herein. Purchaser objects to any additional or different terms of the seller.” Upon receiving the orders, Seller began manufacturing the cranes.

The Seller’s Proposal said it would submit to Purchaser specifications and drawings of the component that ultimately failed. There was some discussion between the parties on the type of steel to be used, and Purchaser ultimately asked Seller use one of three types of tougher steel than Seller proposed. Seller chose one of the three, but when the selected type could not be obtained in time for Seller to meet Purchaser’s delivery schedules, Seller substituted a type that its engineers approved.

After the cranes failed, Purchaser sued Seller for breach of contract, arguing Seller had substituted inadequate steel. Purchaser sought compensation to replace the defective components.

So, what is the “offer,” and what is the “acceptance?”

The Trial Court Decision

The trial court ruled that Seller’s Proposals were offers; that Purchaser’s Purchase Orders were acceptances; and, that the stamped portion of some of the Purchase Orders was not a counteroffer because it did not clearly state that Purchaser was unwilling to proceed with the deal unless there was an express agreement to different warranty terms. Regarding the stamped clause in the Purchase Order – “This order expressly limits acceptance to the terms stated herein. Purchaser objects to any additional or different terms of the seller” – the trial court interpreted it as incorporating all Uniform Commercial Code warranties and unlimited Seller liability.

Because the warranty terms in the acceptance contained additional and different terms, the trial court held that the conflicting terms cancelled each other out and created gaps that were then filled by the gap-filler provisions of sections 402.314 and 402.315, Wis. Stats. The pro‑Seller disclaimers and limitations and the pro-Purchaser warranties knocked each other out, and the gaps thus created were filled by the pro-Purchaser UCC gap-fillers. The result was that all UCC warranties applied, and all remedies were available to Purchaser. The jury found that Seller breached the contract by failing to make the component of the specified grade of steel, and it awarded Purchaser $1,680,646 in compensatory damages.

On appeal, Seller argued the trial court erred in holding that terms in its offer that disclaimed warranties, limited its liability, and allowed for the substitution of materials were deemed not a part of the contract.

The Court of Appeals Decision

The Court of Appeals noted, although the Purchase Order stated that Purchaser “expressly limits acceptance to the terms stated herein,” the Purchase Order nowhere mentions warranty or liability terms and, therefore, it did not set forth additional or different warranty or liability terms. The appellate court held that the trial court erred in equating silence with a gap:

Where a crucial term is found in the offer and the acceptance is silent on that term, the terms of the offer control. The Purchase Order merely attempted to limit the contract solely to the terms of the Purchase Order. Such an attempt would be effective in an offer, but has no effect in an acceptance.

Alternatively, the Court of Appeals said even if the Purchase Order contained different terms, sec. 402.207(2) (b) would exclude them: an attempt on the Purchaser’s part to impose consequential liability on the Seller when the Seller initially disclaimed such liability is a material alteration. Disclaimer of an implied warranty of merchantability is also material. “Different terms materially altering what would otherwise be firmed by the acceptance of an offer will not be included in the contract unless the other party expressly agrees thereto.”

The Court of Appeals reversed and held that the trial court erred in interpreting the contract; that the disclaimer clause in Seller’s offer was part of the contract; that the disclaimer clause was enforceable; and that, therefore, Purchaser’s damages were limited to the replacement value of the equipment components as specified in the disclaimer.

The Wisconsin Supreme Court Decision

The Wisconsin Supreme Court viewed the contract differently than either of the lower courts. After characterizing the exchange of contract documents as posing “Byzantine complexities,” the Court held that “a rather simple straight-forward modified contract arose during the course of negotiations.”

The Supreme Court analyzed the situation: Seller’s original proposal acknowledged that approval drawings would be submitted in the event the parties initially struck a deal to buy and sell. In compliance with this provision, Seller submitted for Purchaser’s approval drawings that specified the steel that would be used. Purchaser responded the proposed steel was not satisfactory for the intended use and advised the Seller that any one of three specifically described and identified qualities of steel would be necessary. Seller then submitted an approval drawing, identifying one of the three acceptable grades of steel. Purchaser then issued change orders with the selected type of steel. Seller’s international contracts supervisor wrote a confirmatory letter guaranteeing the components would be in accordance with their approval drawing. The Court concluded:

Thus, whatever the prior state of the contract may have been in respect to warranting the fabrication from a particular steel or a steel fit for the use intended, the contract after [the confirmatory letter], contained, as a modification of the original contract, an express warranty under the provisions of sec. 402.313(1), Stats. That warranty was breached.

The Supreme Court reversed the decision of the Court of Appeals, thus allowing the judgment of the circuit court to stand, although for different reasons.

1“Manufacturer warrants the machinery, and all spares, replacements, tools, and auxiliary equipment, now or hereafter furnished by it therefor, to be built in a workmanlike manner of sound high-grade material, and, under normal use and proper attention, to operate properly. . .  Manufacturer is to have the option of replacing F.O.B. works any element proved to be defective or of remedying any proved defect, but Manufacturer’s liability in any event shall not exceed the replacement value of the defective element F.O.B. works. . . . The fore-going [sic] warranty is in lieu of all tort liability and all other warranties or representations or rights of rejection, express or implied, by law or by contract.”

2“The right is reserved to make changes in specifications or design which, in the opinion of Manufacturer, are an improvement or are necessary because of the unavailability of materials.

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