Unpublished Disposition, 931 F.2d 60 (9th Cir. 1986)

No. 89-55825.

United States Court of Appeals, Ninth Circuit.

Before WALLACE, Chief Judge, POOLE, Circuit Judge, and BREWSTER,^*  District Judge.

MEMORANDUM^** 

Mesa Business Equipment, Inc. (Mesa) appeals from the decision of the Bankruptcy Appellate Panel affirming the summary judgment rendered by the bankruptcy court in favor of appellees The Ultimate Corporation and Ultimate Southern California, Inc. (Ultimate). The bankruptcy court found that the contract between Mesa and Ultimate was governed by the California Commercial Code, and that the warranty and damages disclaimers contained in the contract precluded the claims brought by Mesa against Ultimate. Our jurisdiction of this timely appeal is based on 28 U.S.C. section 158(d). We affirm.

FACTS

In 1983 Mesa decided to purchase a new computer system for use in its office supply business. After soliciting bids on the project, Mesa chose Ultimate as the supplier and installer of its new system. The basic agreement between the parties was finalized in five written contracts involving hardware, peripheral equipment, software, and maintenance. The terms of Mesa's software purchase were embodied in the "Application Software Agreement" (Agreement), pursuant to which Mesa purchased its software from Ultimate for an estimated price of $36,850, with the final price to be determined after certain modifications were made to the system. In the Agreement Ultimate disclaimed liability for incidental and consequential damages and further disclaimed any express or implied warranties not specifically set forth in the Agreement.

Shortly after installation of the new system in October, 1983, Mesa alleges that substantial problems arose with the software which wreaked havoc on its business. While the cause of the software defects is disputed, it is undisputed that Ultimate took corrective action and that the system was operating satisfactorily by the summer of 1984. Mesa eventually used the system for two years without incident.

On December 11, 1985, Mesa filed a Petition for Relief under Chapter 11 of the United States Bankruptcy Code. On December, 17, 1985, Mesa filed the instant complaint, and on January 21, 1986 Mesa filed an amended complaint. The amended complaint alleged causes of action based on breach of contract, including breach of express and implied warranties, fraud, and negligence. Mesa sought rescission and restitution, and money damages in excess of $2,000,000.

The bankruptcy court granted summary judgment in favor of Ultimate on all causes of action. In its memorandum decision, the bankruptcy court reached the following conclusions: (1) the transaction was governed by the California Commercial Code (Code); (2) the warranty and damage disclaimers were valid under the Code; (3) Mesa's fraud claim was unsupported by any evidence; and (4) economic losses are not recoverable in tort. This circuit's Bankruptcy Appellate Panel affirmed the decision of the bankruptcy court in all respects.

STANDARD OF REVIEW

A grant of summary judgment is reviewed de novo. Kruso v. International Telephone & Telegraph Corp., 872 F.2d 1416, 1421 (9th Cir. 1989), cert. denied, 110 S. Ct. 3217 (1990); Commercial Recovery, Inc. v. Mill Street, Inc., 96 Bankr. 268, 269 (Bankr. 9th Cir. 1989). The appellate court's review is governed by the same standard used by the trial court under Fed.R.Civ.Proc. 56(c). Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir. 1986). The appellate court must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir. 1989); Judie v. Hamilton, 872 F.2d 919, 920 (9th Cir. 1989).

DISCUSSION

I. Application of the California Commercial Code

Mesa contends that the Agreement is not governed by the Code because it was predominantly a service contract. The Code applies to "transactions in goods." Cal.Com.Code Sec. 2102. The Code defines a good as "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Division 8) and things in action." Cal.Com.Code Sec. 2105.

In applying this definition to a contract which encompasses both goods and services, we look to "the essence of the agreement." RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543, 546 (9th Cir. 1985) (applying California law). As we stated in RRX Industries, "When a sale predominates, incidental services provided do not alter the basic transaction. Because software packages vary depending on the needs of the individual consumer, we apply a case-by-case analysis." Id. (citations omitted).

In RRX Industries, the seller agreed to supply, install, and repair as necessary a software system which the purchaser wished to use in its medical laboratories. Id. at 545. The seller further promised to train purchaser's employees in the proper usage of the system. Id. at 546. In holding that the Code applied to the transaction despite the service component, this court found that " [t]he employee training, repair services, and system upgrading were incidental to sale of the software package and did not defeat characterization of the system as a good." Id.

In this case, as in RRX Industries, the services component of the transaction is incidental to the sale of goods. The services which Ultimate promised to provide included installation, software modification, and employee training. These services were not unique and would not have been necessary absent the underlying sale of goods. Accordingly, the Code must govern our analysis of the Agreement.

The Code creates an implied warranty of merchantability where the seller is a merchant with respect to goods of the kind sold. Cal.Com.Code Sec. 2314. In addition, an implied warranty of fitness for a particular purpose is created " [w]here the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods...." Cal.Com.Code Sec. 2315.

In order to exclude or modify the implied warranty of merchantability, "the language must mention merchantability and in case of a writing must be conspicuous...." Cal.Com.Code Sec. 2316(2). Similarly, to exclude or modify the implied warranty of fitness, the exclusion "must be by a writing and conspicuous." Id. According to Sec. 1201(10) of the Code, " [a] term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it." For example, the use of all capitals or a contrasting type of color renders a term conspicuous under Sec. 1201(10).

In this case, the warranty disclaimer provided:

The warranties set forth herein are in lieu of all other warranties, express or implied, arising out of or in connection with any program (or the use or performance thereof), including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose.

Mesa argues that the warranty disclaimer is unenforceable because it was not conspicuous. As the bankruptcy court held, Mesa is correct in its contention that the disclaimer is not conspicuous as defined by Sec. 1210(10) of the Code.

However, " [d]iscussion of the effectiveness of the disclaimer provisions in the contract does not end with the finding of lack of conspicuousness." Office Supply Co., Inc. v. Basic/Four Corp., 538 F. Supp. 776, 784 (E.D. Wis. 1082) (applying California law). We believe California would rule with the "growing number of cases which hold that if a buyer is actually aware of a warranty disclaimer, then the disclaimer is effective even if not conspicuous." White & Summers, Uniform Commercial Code Sec. 1205 at 444 (2d ed. 1980); see also Dorman v. International Harvester Co., 46 Cal. App. 3d 11, 18, 120 Cal. Rptr. 516, 521 (1975). According to the official comment to Uniform Commercial Code Sec. 2-316, the section requiring conspicuousness is designed to "protect a buyer from unexpected and unbargained language of disclaimer." Therefore, if the buyer is actually aware of the disclaimer, the rationale underlying the conspicuousness requirement has evaporated.

Mesa claims that it was unaware of the inclusion of the warranty disclaimer in the Agreement. This contention is without merit. The record clearly reflects that the computer consultant hired by Mesa, Dr. Alan Campbell, discussed with Mesa's president, Kitty Chodos, the general nature of such disclaimers and the fact that they are regularly contained in software purchase agreements. In fact, the deposition testimony of Dr. Campbell reveals that Chodos was "alarmed" by such clauses and "expressed her displeasure" with them.¹ 

While the Chodos Declaration states that she was unaware of any warranty disclaimer in the Agreement, her deposition testimony confirms the conversation she had with Dr. Campbell concerning such warranties. See Chodos Deposition, Volume III, pp. 89-90. Although the deposition testimony surrounding the Campbell-Chodos conversation conflicts with the Chodos Declaration, " [s]ummary judgment may nevertheless be granted ... if the court is satisfied that the issue created by the affidavit is not 'genuine.' " Basic/Four, 538 F. Supp. at 785; see also Radobenko v. Automated Equipment Corporation, 520 F.2d 540, 544 (9th Cir. 1975). Given the weight of the Campbell and Chodos deposition testimony, the Chodos Declaration does not create a genuine issue of material fact as to Mesa's actual awareness of the warranty disclaimer.

Alternatively, even if Chodos was personally unaware of the disclaimer, it is undisputed that Dr. Campbell was aware of the provision, and we conclude that Dr. Campbell's knowledge can be imputed to Mesa. Knowledge of an agent is imputed to the principal only where the former acquires it while acting within the scope of his authority. See Redman v. Walters, 88 Cal. App. 3d 448, 454, 152 Cal. Rptr. 42, 45 (1979).

Dr. Campbell was hired by Mesa for the specific purpose of locating a supplier and finalizing a software purchase agreement. In his own deposition testimony, Dr. Campbell stated that among his duties he was "to assist as needed in the establishment of a final agreement of the vendor...." Campbell Deposition, pp. 33-34. Moreover, the Chodos-Campbell discussion described above clearly indicates Dr. Campbell's knowledge of industry standards concerning such waivers, and his advice to Chodos concerning same. Accordingly, Mesa was aware of the warranty disclaimer through its agent Dr. Campbell, as well as directly through Chodos.

Because Mesa was aware of the warranty disclaimer, the lack of conspicuousness does not prevent enforcement of the provision against Mesa. Moreover, the disclaimer is not inconsistent with any express warranties, and Ultimate's efforts in repairing the system do not suggest, as Mesa would have us believe, that Ultimate knew that it was vulnerable to implied warranties. Instead, the successful repair allowed Ultimate to fulfill its express promise to provide a functional computer system.² 

We conclude that Ultimate disclaimed the implied warranties of merchantability and fitness, and any express warranties not explicitly contained in the Agreement. Therefore, summary judgment in favor of Ultimate was properly granted on Mesa's breach of warranty claims.

Mesa contends that it has a cause of action in tort due to Ultimate's negligence. This circuit, applying California law, has directly addressed the issue of whether a contract between buyer and seller under the Code can give rise to a suit in tort. S.M. Wilson & Co. v. Smith International, Inc., 587 F.2d 1363 (9th Cir. 1978). In S.M. Wilson the court held:

Where the suit is between a non-performing seller and an aggrieved buyer and the injury consists of damage to the goods themselves and the costs of repair of such damage or a loss of profits that the deal had been expected to yield to the buyer, it would be sensible to limit the buyer's rights to those provided by the Uniform Commercial Code. To treat such a breach as an accident is to confuse disappointment with disaster.

Id. at 1376 (citations omitted); see also Tokio Marine & Fire Ins. Co. v. McDonnell Douglas Corp., 617 F.2d 936, 941 (2d Cir. 1980) (A party to a contract cannot "construct a remedy in tort ... where the California [Commercial] code does not otherwise provide for a remedy in tort.") (citing S.M. Wilson) . The court in S.M. Wilson went on to observe that California law achieves this doctrinal result by precluding the recovery of economic losses in negligence claims. S.M. Wilson, 587 F.2d at 1376 (citing Seely v. White Motor Co., 63 Cal. 2d 9, 18, 45 Cal. Rptr. 17, 23 (1965)).

The negligence claim in this case is squarely controlled by S.M. Wilson and Seely. Mesa's reliance on Union Oil Co. v. Oppen, 501 F.2d 558 (9th Cir. 1974), and J'Aire Corp. v. Gregory, 24 Cal. 3d 799, 157 Cal. Rptr. 407, 598 P.2d 60 (1979), is unpersuasive as both cases involve exceptions to the general rule precluding recovery of economic damages for negligence. As the court in Union Oil recognized, such exceptions are justified only by the existence of special circumstances. Union Oil, 501 F.2d at 565-68 (imposing liability for fishermen's economic loss on oil company that negligently caused oil spill). Because this case involves a contract negotiated at arms length by two business entities, there is no support for application of an exception, and summary judgment was properly granted to Ultimate on Mesa's negligence claim.

We can adduce no evidence supporting any possible theory of fraud in this case. Essentially, Mesa's allegations amount to no more than an expression of its disappointment with Ultimate's performance in installing the software. Mesa has offered no evidence even remotely suggesting that Ultimate made fraudulent representations with the intent of inducing Mesa to enter into the Agreement. Similarly, Mesa's allegations concerning representations made by the installer of the equipment do not amount to fraud. Accordingly, summary judgment was properly granted in favor of Ultimate on this cause of action.

Ultimate contends that even if Mesa has a valid breach of contract claim, summary judgment was nevertheless appropriate because the damages disclaimer in the Agreement precludes those damages alleged by Mesa.

Section 2719(1) (a) of the Code states that an agreement "may limit or alter the measure of damages recoverable under this division...." Further, " [l]imitation of consequential damages where the loss is commercial is valid unless it is proved that the limitation is unconscionable." Cal.Com.Code Sec. 2719(3). However, if a limited remedy fails of its essential purpose, the purported limitation is ineffective, and remedy may be had as provided by other sections of the Code. Cal.Com.Code Sec. 2719(2).

In this case, paragraph 3 of the Agreement provides in relevant part: " [T]he amounts to be paid to the Seller under this Agreement do not include any assumption of risk, and the Seller disclaims any and all liability for incidental or consequential damages arising out of the use or operation of the programs provided herein."

Despite this explicit disclaimer, Mesa alleges in its complaint that it has suffered damages in excess of $2,000,000 due to the alleged defects in the software, and that such damages include "out-of-pocket expenses for supplies, employee overtime, consultant fees, equipment leasing, toll calls, trip expenses and data conversions." Moreover, Mesa alleged that it has endured "a severe loss of revenue and irreparable damage to its business and credit reputation...."

In attempting to avoid the preclusive effect of the damages disclaimer, Mesa contends that the damages it has specifically alleged are neither incidental nor consequential, but rather direct, and thus beyond the reach of the disclaimer. However, under the definitions of incidental and consequential damages provided by the Code, this contention must fail. The Code defines incidental damages to include "any commercially reasonable charges, expenses, or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach." Cal.Com.Code Sec. 2715(1). Consequential damages are defined even more broadly, and include any " [i]njury to person or property proximately resulting from any breach of warranty." Cal.Com.Code Sec. 2715(2) (b).

Because the damages requested by Mesa represent out-of-pocket expenses and lost profits, they must be defined as incidental or consequential, and thus are vulnerable to the limitation contained in the Agreement, provided said limitation is not unconscionable and does not fail of its essential purpose. See Tokio Marine, 617 F.2d at 940-41 (applying California law; affirming summary judgment of lost profit and increased expense claims because of a disclaimer of incidental and consequential damages); Basic/Four, 538 F. Supp. at 786-88 (applying California law; disclaimer of incidental and consequential damages precludes recovery for lost customers, income, good will, personnel expense, and maintenance expense).

In asserting unconscionability, Mesa must overcome the presumption that a damage limitation clause is valid in a commercial setting. Id. at 788 (citing Cal.Com.Code Sec. 2719(3); White and Summers, Uniform Commercial Code, Sec. 12-11 at 473-475 (2d ed. 1980)). Factors which are relevant to determining unconscionability include "the length of the negotiation process, the length of time the buyer has to deliberate before signing the contract, the experience or astuteness of the parties, whether counsel reviewed the contract, and whether the buyer was a reluctant purchaser." Id. at 788 (citing Earman Oil Company, Inc. v. Burroughs Corporation, 625 F.2d 1291 (5th Cir. 1980)).

In this case, Mesa has not produced any evidence which overcomes the presumption of validity. Dr. Campbell, an experienced computer consultant retained by Mesa, was active in evaluating Mesa's needs and assisting in procurement. Mesa solicited bids from a variety of sellers, and settled on Ultimate only after extensively reviewing all of the proposals. There is no evidence suggesting that Ultimate included the disclaimer in a surreptitious manner. Indeed, paragraph 3 is one of only seven provisions in a two-page contract, and the evidence indicates that other requested modifications were incorporated. Moreover, while Mesa did not retain counsel to review the Agreement, there is ample evidence to show that this decision was made in response to self-imposed time constraints, as opposed to pressure created by Ultimate. Accordingly, the limitation on consequential damages is not unconscionable under Sec. 2719(3).

Moreover, the limited remedy provided by the Agreement does not fail of its essential purpose. Where the seller's default is "total and fundamental," this circuit has held that Sec. 2719(2) allows the buyer to recover consequential damages, even if such damages have otherwise been validly barred by a contract provision that is not unconscionable. RRX Industries, 772 F.2d at 547. In RRX Industries, the contract obligated the seller to correct any malfunctions in the computer system, but limited liability to the contract price. Id. at 545. The court held that neither bad faith nor procedural unconscionability need be demonstrated in order to invoke Sec. 2719(2), as that section provides "an independent limit when circumstances render a damages limitation clause oppressive and invalid." Id. at 547; see also S.M. Wilson, 587 F.2d at 1375 (failure of repair remedy, but damages limitation not expunged because default of the seller not total and fundamental).³ 

Unlike RRX Industries, this case does not involve the avaricious seller who, after limiting the buyer's remedies, is " 'unwilling or unable to provide a system that worked as represented, or to fix the "bugs" in the software....' " RRX Industries, 772 F.2d at 547 (quoting district court). Instead, the evidence clearly establishes that Ultimate made extensive repair efforts and was eventually successful in providing Mesa with a satisfactory system. Therefore, because Ultimate's alleged default was not total and fundamental, RRX Industries is inapposite, and Mesa is limited to those damages not excluded by the Agreement.⁴ 

Direct damages are the difference between the value of the goods accepted and the value they would have had if they had been as warranted by the seller. Cal.Com.Code Sec. 2714(2). Mesa argues that it is entitled to at least these damages on its breach of contract claim. Under the Agreement, such damages are not excluded, and provide Mesa with its only remedy besides repair. However, throughout these proceedings Mesa has failed to provide any evidence in support of its claim for direct damages. In Mesa's complaint, there is no allegation of any specific damage to the computer or the software. Instead, the specific damages described by Mesa in its complaint are all incidental or consequential.

To the extent Mesa now alleges that it has suffered direct damages, this contention is belied by the fact that the computer system eventually became fully operational, and Mesa used the system for two years without difficulty. While there were delays in rendering the system fully operational, paragraph 5 of the Agreement states that " [e]stimated completion dates are provided solely as a general guideline ... and, in no event, does Seller assume any liability whatsoever for any failure on its part to complete any Program within the time estimated." Given these facts and the dearth of evidence supplied by Mesa, we cannot speculate as to the "benefit of the bargain" which Mesa may or may not have received. Accordingly, summary judgment was properly granted in favor of Ultimate on Mesa's claim for direct damages.

AFFIRMED.