Agway, Inc. v. Gray

Agway, Inc. v. Gray  (95-651); 167 Vt. 313; 706 A.2d 440

[Opinion Filed 21-Nov-1997]

[Motion for Reargument Denied 19-Dec-1997]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                            No. 95-651


Agway, Inc.                                  Supreme Court

                                             On Appeal from
    v.                                       Orleans Superior Court

Keith Gray                                   September Term, 1996


Brian L. Burgess, J.

Susan J. Steckel, Montpelier, for plaintiff-appellee

Robert R. Bent of Zuccaro, Willis & Bent, P.C., St. Johnsbury, for 
  defendant-appellant


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.


       MORSE, J.   Defendant Keith Gray appeals from a summary judgment of
  the Orleans Superior Court enforcing a New York judgment in favor of
  plaintiff Agway, Inc.  Gray contends the court erred in ruling that his
  counterclaims for consequential damages were barred by the New York
  judgment entered on an arbitration award.  We affirm.

       Agway, whose principal place of business is in Syracuse, New York,
  sold to Gray and installed at his farm in Holland, Vermont an automated
  milking parlor.  The two contracts of sale contained identical arbitration
  clauses providing that:

     [a]ny controversy or claim relating to this agreement shall be
     settled by arbitration in Syracuse, New York, in accordance with
     the rules of the American Arbitration Association, and any
     judgment upon any award rendered by the arbitrators may be
     entered in any court having jurisdiction thereof.  The determination
     of the arbitrators shall be final and binding upon both parties.

  The contracts also contained a waiver of any claim against Agway for
  incidental or consequential damages of any nature.

       Installation and modification of the equipment was completed early in
  1992.  Alleging that Gray had paid no part of the bill, Agway demanded
  payment in October 1992, and

 

  thereafter filed a demand for arbitration under the contracts.

       Gray was represented by counsel in the arbitration proceeding and
  actively contested Agway's claim.  He contended that the milking equipment
  was defective, that he had lost income from decreased milk production, and
  that he had incurred expenses to replace cows allegedly injured by the
  milking parlor.  Gray sought an offset against the sale price for the
  reduced value of the defective milking equipment (his lost benefit of the
  bargain) of approximately $18,000, as well as an offset for his
  consequential damages, which allegedly exceeded $125,000.

       In connection with his claim for consequential damages, Gray asserted
  that the contract clause excluding such damages was unenforceable for two
  reasons.  First, he argued that the exclusion had "fail[ed] of its
  essential purpose."  N.Y. U.C.C. § 2-719(2) (McKinney 1993). Second, he
  asserted that the exclusion was "unconscionable" under N.Y. U.C.C. §
  2-719(3), which provides: "Consequential damages may be limited or excluded
  unless the limitation or exclusion is unconscionable."  Gray argued in this
  regard that the parties enjoyed vastly unequal bargaining power ("Gray was
  an individual dairy farmer dealing with a large commercial operation") and
  that the agreement was a classic contract of adhesion; it had been
  presented on a preprinted form prepared by Agway, and its effect was never
  explained.  Gray cited a number of legal authorities in support of his
  claim, including Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 465 N.Y.S.2d 606 (N.Y. App. Div. 1983), and Clark v. International Harvester
  Co., 581 P.2d 784 (Idaho 1978).

       Following the hearing, the arbitrator reduced Agway's claims by
  $15,950 attributable to defective materials in the milking parlor, but
  found no merit to Gray's claim for consequential damages, and accordingly
  entered an award of $57,945 in Agway's favor.  In response to Gray's motion
  for modification, the arbitrator reduced the award to $56,945.  The New
  York Supreme Court for Onondaga County subsequently granted Agway's motion
  to confirm the award and entered judgment in favor of Agway in the amount
  of $58,048.18 (the award plus interest). Gray neither appealed nor
  otherwise sought to modify the award in New York.

       Agway thereafter brought this action in the Orleans Superior Court to
  enforce the New

 

  York judgment.  Gray moved to stay enforcement of the judgment, arguing
  that the arbitrator had lacked jurisdiction to hear any counterclaim or
  defense relating to the unconscionability of the consequential-damages
  exclusion.  He also asserted counterclaims for breach of warranty and
  negligence, seeking consequential damages of $300,000.  Following a
  hearing, the trial court granted Agway's motion to dismiss the
  counterclaims and entered summary judgment in favor of Agway, ruling that
  Gray's counterclaims were barred under principles of res judicata. This
  appeal followed.

       The principle of res judicata, or claim preclusion, "`bars litigation
  of claims or causes of action which were or might properly have been
  litigated in a previous action.'"  State v. Dann, 8 Vt. L.W. 209, 210
  (1997) (quoting Cold Springs Farm Dev., Inc. v. Ball, 163 Vt. 466, 472, 661 A.2d 89, 93 (1995)).  The related doctrine of collateral estoppel, or issue
  preclusion, "prevents a party from relitigating an issue that has
  necessarily been decided in a previous action."  Cold Springs Farm, 163 Vt.
  at 468, 661 A.2d  at 91.  The core inquiry in either case is whether there
  was a "full and fair opportunity to litigate" the matter in the earlier
  action.  Id. at 469, 661 A.2d  at 91.  As one court has succinctly
  explained: "The doctrine of res judicata is based upon requirements of
  justice and public policy which reflect the consideration that there be an
  end to litigation after each party has had a full and fair opportunity to
  present all pertinent facts."  Kemling v. Country Mut. Ins. Co., 437 N.E.2d 1253, 1255 (Ill. App. Ct. 1982).

       For purposes of both res judicata and collateral estoppel, it is
  widely accepted that an arbitration is in the nature of a judicial inquiry,
  and thus has the same force and effect of an adjudication in terms of
  precluding the same parties from relitigating the same subject.   See e.g.,
  Restatement (Second) of Judgments § 84(1) (1982) ("[A] valid and final
  award by arbitration has the same effects under the rules of res judicata,
  subject to the same exceptions and qualifications, as a judgment of a
  court."); SCAC Transport (USA), Inc. v. S.S. Danos, 845 F.2d 1157, 1163 (2d
  Cir. 1988) (arbitration decision can have collateral estoppel or res
  judicata effect when arbitration "`affords basic elements of adjudicatory
  procedure'") (quoting Greenblatt v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1360 (11th Cir. 1985)); Sanders v.

 

  Washington Metro. Area Transit Auth., 819 F.2d 1151, 1157 (D.C. Cir. 1987)
  ("[T]he decisions of an arbitrator can have res judicata (claim preclusion)
  or collateral estoppel (issue preclusion) effect on a subsequent law
  suit."); Herriford v. Boyles, 550 N.E.2d 654, 658 (Ill. App. Ct. 1990) ("A
  valid arbitration award has all the force of an adjudication, and precludes
  the parties from again litigating the same matters."); Bailey v.
  Metropolitan Property & Liab. Ins. Co., 505 N.E.2d 908, 910 (Mass. App. Ct.
  1987) ("An arbitration decision can have preclusive effect. . . . ");
  Aufderhar v. Data Dispatch, Inc., 452 N.W.2d 648, 651 (Minn. 1990) ("Most
  courts have considered an arbitration award to constitute a `prior
  adjudication' for purposes of triggering an estoppel.").

       In deciding whether to give preclusive effect to an arbitration, the
  key inquiry remains whether the parties were afforded a full and fair
  opportunity to litigate.  See Kemling, 437 N.E.2d  at 1257 (Collateral
  estoppel applies to issue decided in arbitration if "the party against whom
  the estoppel is asserted had a full and fair opportunity to contest it at
  that time."); Bailey, 505 N.E.2d  at 910 ("When arbitration affords
  opportunity for presentation of evidence and argument substantially similar
  in form and scope to judicial proceedings, the award should have the same
  [preclusive] effect.").

       Here, the record shows that Gray not only had the opportunity to
  litigate the consequential damage issue, but took full advantage of that
  opportunity.  He acceded to the arbitration, was represented by counsel,
  and vigorously challenged the validity of the consequential-damage
  exclusion, citing both facts and law in support of his claim that the
  clause was unenforcable.  Indeed, he acknowledged in his post-hearing
  arbitration memorandum that he had been "afforded the opportunity to
  introduce witnesses and evidence in support of [his] positions and to
  cross-examine the witnesses called by the other party."

       In its decision, the arbitrator expressly rejected Gray's claim that
  the exclusionary clause had failed of its essential purpose, ruling that it
  was valid and enforceable.  Gray now notes that the decision does not also
  expressly reject the unconscionability claim.  He fails to explain,
  however, why he apparently never sought clarification of the ruling, as he
  was entitled under

 

  New York law.  N.Y. Civ. Prac. L. & R. 7509 (McKinney 1980).  Although he
  filed a request to modify the award, he apparently did not seek a more
  explicity ruling on this issue. Moreover, when Agway subsequently moved to
  confirm the award in New York, Gray neither opposed the motion nor filed
  his own cross-motion to vacate, amend, or modify the award on the basis
  that the decision failed to explicitly address an issue fully litigated in
  the arbitration proceeding, as he was equally entitled under New York law
  and practice.  Id. 7511(b)(1)(iii); PPX Enters. v. Scepter Records, Inc.,
  381 N.Y.S.2d 263, 265 (N.Y. App. Div. 1976) (award was so unresponsive to
  issues posed in arbitration as to require that it be remanded).  Nor,
  finally, did Gray ever appeal from the judgment entered on the award in New
  York.

       Under these circumstances, we have little difficulty concluding that
  Gray was afforded a full and fair opportunity to litigate the issue of
  consequential damages in the arbitration proceeding, that the judgment
  entered on that arbitration was final and conclusive of the issue, and that
  neither justice nor public policy would be served by allowing him to
  relitigate the same issue against the same party in Vermont.

       The dissent raises two objections to this conclusion.  First, it
  contends that Gray was somehow denied the same opportunity to challenge the
  validity of the damage exclusion in the New York arbitration that he would
  have received in a Vermont court.  On the contrary, the law of New York is
  clear that an arbitrator enjoys broad authority to reject a contractual
  damage limitation as unconscionable:

     The presence of a contractual provision excluding consequential
     damages does not eliminate the question of consequential damages
     as a controversy or claim within the scope of the arbitration.
     Issues concerning the applicability of the damage limitation clause,
     its enforceability in this particular instance, its validity, and any
     other issues concerning the amount of damages recoverable in the
     face of such provision are for the arbitrator to determine.

  Allen Knitting Mills, Inc. v. Dorado Dress Corp., 333 N.Y.S.2d 848, 850
  (N.Y. App. Div. 1972).  As New York's highest court has observed, "`[t]here
  is no doubt that an arbitrator, if he so decides, may indeed refuse to
  enforce such a damage limitation clause on the ground of unconscionability
  . . . '"  Id. at 851 (quoting Granite Worsted Mills v. Aaronson Cowen,
  Ltd.,

 

  306 N.Y.S.2d 934, 939 (N.Y. 1969).  Thus, the arbitrator's scope of review
  and discretion to reject the damage-limitation clause as unconscionable was
  as broad as any court in New York or Vermont.

       The dissent appears to suggest nevertheless that Vermont and New York
  law differ in this regard, and that a Vermont court would have been more
  protective of Gray's rights.  The dissent cites no authority for this
  proposition, however, and our recent case law indicates that Vermont takes
  the identical approach to determining the validity of exclusionary clauses
  under U.C.C. 2-719(3) as jurisidictions elsewhere.  See Wilk Paving, Inc.
  v. Southworth-Milton, Inc., 162 Vt. 552, 559, 649 A.2d 778, 783 (1994)
  (rejecting plaintiff's claim of unconscionability under 9A V.S.A. §
  2-719(3) and upholding contractual exclusion of consequential damages
  notwithstanding plaintiff's claim of oppression and surprise).

       Finally, the dissent suggests that the counterclaim for consequential
  damages was not barred in Vermont because in New York counterclaims are
  permissive rather than compulsory. The distinction would be relevant if the
  assertion here were that Gray could have, but failed to, litigate the claim
  in New York.  See Cold Springs Farm, 163 Vt. at 472-73, 661 A.2d  at 93. In
  this case, however, the claim was actually litigated between the parties. 
  Hence, it is plainly barred.  Id.

       Affirmed.


                              FOR THE COURT:



                              _______________________________________
                              Associate Justice


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                                 Dissenting


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                            No. 95-651


Agway, Inc.                                  Supreme Court

                                             On Appeal from
    v.                                       Orleans Superior Court

Keith Gray                                   September Term, 1996


Brian L. Burgess, J.

Susan J. Steckel, Montpelier, for plaintiff-appellee

Robert R. Bent of Zuccaro, Willis & Bent, P.C., St. Johnsbury, for 
  defendant-appellant


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.

       DOOLEY, J., dissenting.  Based on the facts and history described in
  the majority opinion, its conclusion looks fair: defendant went through
  arbitration and lost and is now trying to raise by counterclaim the same
  issues he lost in arbitration.  If the majority had fully described the
  events and the position of defendant, I would have agreed with it.  This
  is, however, a case in which context is everything, and the key points of
  the context are missing from the opinion.  Once the context is understood,
  I believe defendant should be allowed to pursue his counterclaim; thus, I
  dissent from the majority opinion affirming its dismissal.

       There are three items missing from the majority analysis.  The first,
  and most important, is the full scope of the dispute-resolution part of the
  contract and its significance for the applicable law.  The contract
  provided not only that any dispute over the milking equipment would be
  decided in a New York forum, but also that New York law would govern the
  dispute. The choice-of-law question is particularly important to this case
  because the laws of Vermont and New York are different with respect to
  contractual waivers of consequential damage claims arising out of a breach
  of warranty.  Under Vermont law, provisions that exclude or modify

 

  remedies for breach of certain warranties are unenforceable with respect to
  the sales of new consumer goods, 9A V.S.A. § 2-316(5), and the definition
  of "consumer" extends to farmers who purchase goods for the operation of a
  farm for business purposes.  9 V.S.A. § 2451a(a); see 9A V.S.A. § 2-316(5)
  (referring to 9 V.S.A. § 2451 for definition of "consumer").  In New York,
  such exclusions are valid.  See N.Y. U.C.C. § 2-316(4) (McKinney 1993).

       The difference in the law of modification of warranties is critical to
  this case.  Plaintiff sold defendant a defective milking parlor. Under
  Vermont law, defendant does not have to pay full retail value for the
  parlor and can recover for any lost milk production as a result of the
  defective parlor, irrespective of any contractual provision that attempts
  to limit defendant s remedies.  Under New York law, defendant does not have
  to pay full retail value for the parlor, but cannot recover any damages
  caused by the defective parlor.  Since the sums claimed for consequential
  damages far exceed the value of the parlor, the applicability of New York
  law greatly restricts defendant s remedy.

       The designation of a New York dispute resolution forum and the use of
  New York law is contained in contract boilerplate about which there is no
  negotiation.  Although the sale was consummated in Vermont, the goods were
  delivered in Vermont and the parlor was used in Vermont.  New York was
  chosen apparently because the main office of plaintiff is in Syracuse, New
  York.  If this dispute were to reach the merits, I think it likely we would
  hold that the forum selection clause was unreasonable under the
  circumstances and unenforceable.  See Chase Commercial Corp. v. Barton, 153
  Vt. 457, 460, 571 A.2d 682, 685 (1990).  For similar reasons, I believe we
  would not enforce a contractual requirement that New York law governs this
  dispute.  See Restatement of Conflict of Laws (Second) § 187 cmt. b (1971);
  see generally E. Scoles & P. Hay, Conflict of Laws, § 18.5, at 640 (1982)
  (noting that choice of law provisions in adhesion contracts generally "will
  be ignored only if its application would be to the detriment of a weaker
  party" and collecting cases).  The Vermont Legislature s decision to
  protect farmers by ensuring that they have full warranty protection when
  they buy goods is

 

  illusory if, by boilerplate, the seller can contractually limit the
  warranties and declare that the law of another state, where the contractual
  limit is valid, applies to any contract dispute.

       Second, defendant intentionally removed the claim stated in his
  counterclaim from the jurisdiction of the New York arbitrator.  Under the
  rules of the American Arbitration Association, counterclaims are
  permissive, but a party asserting a counterclaim must pay a filing fee
  based on the amount of the claim.  For defendant s counterclaim the amount
  of the filing fee would have been $1,500.  After learning of the fee,
  defendant abandoned his plan to assert a counterclaim before the
  arbitrator.  The arbitrator s initial award stated that he had resolved
  defendant s counterclaim against him.  Defendant s counsel sent the
  arbitrator a letter requesting that the statement be deleted:

     The Respondent . . . never filed any counterclaim for damages in
     the arbitration proceeding and, in fact, made an express decision
     not to do so to prevent possible res judicata problems should the
     respondent seek to litigate damage claims in the future.
   
     There was evidence of damage suffered by the respondent
     introduced at the arbitration hearing.  That evidence, however, was
     introduced as a defense to the Petitioner s claim for the price of
     the milking parlor, not as evidence in support of any counterclaim.

  The arbitrator then issued an amended award deleting any reference to a
  counterclaim.

       Counterclaims are also permissive in New York courts. See N.Y. Civ.
  Prac. L. & R. 3019, Practice Commentary 3019:2 (McKinney 1991).  Thus,
  defendant was under no obligation to present the counterclaim to the New
  York court when plaintiff moved to confirm the arbitration award.

       Third, the arbitrator never considered the claims that defendant
  raises in his counterclaim.  In response to arguments made by defendant,
  the arbitrator ruled that the clause limiting damages was part of the basic
  agreement between the parties and that  [t]he proof does not support [the]
  contention  that it was only part of separate documents used to identify
  the items supplied and the price.  Further, the arbitrator found that the
  warranty had not  failed of its essential purpose  so that consequential
  damages for breach thereof were not available under

 

  UCC § 2-719(2).  The arbitrator never found that defendant did not suffer
  consequential damages or rule on the validity of the contractual
  prohibition on the recovery of such damages. I cannot agree with the
  majority s statement that the arbitrator  found no merit to Gray s claim
  for consequential damages.

       At the beginning of this dissent, I summarized the way the case should
  be viewed from the majority s perspective.  Let me now suggest an
  alternative view:

          A farmer, whose business has been greatly damaged by a
     defective milking machine sold by plaintiff, faces a demand for
     payment for the machine and a collection action in a distant forum
     where he cannot effectively seek damages for his real losses.  He
     tries to minimize plaintiff s claims, but states that he reserves the
     right to bring a claim for his losses in a forum where it can be
     heard.  He waits until the case reaches Vermont, where the law
     supports his claim for damages and brings his claim at the earliest
     possible opportunity in response to plaintiff s enforcement of
     judgment action.

  We can say, of course, that defendant had alternatives.  He could have
  refused to participate in the New York arbitration and instead brought an
  action here seeking to challenge the forum and law-selection clauses, as
  well as the contractual limit on warranty damage claims.  That would have
  been an expensive, and I think unnecessary, alternative.  Plaintiff has
  used the arbitration proceeding to obtain a judgment, and that judgment is
  not in issue.  It makes little difference whether we intervene now or in
  the beginning of this dispute.

       As the majority states, the issue before us is whether defendant had a
  full and fair opportunity to litigate his claim for consequential damages
  as a result of plaintiff s breach of warranty.  Dragged to an inconvenient
  forum and forced to litigate under substantive rules that virtually
  prohibited his claim, I believe defendant had no full and fair ability to
  litigate his claim for consequential damages.  Moreover, he appeared in
  fora where counterclaims were not compulsory so his failure to raise a
  counterclaim there should not preclude him from doing so here.  See
  Restatement of Judgments (Second) § 22(1) (1982).  Nor is this one of the
  limited circumstances where the relationship between the counterclaim and
  plaintiff s claim is such that

 

  the counterclaim would nullify the initial judgment or would impair rights
  established in the initial action.  See Id. § 22(2)(b) cmt. f; see Rowland
  v. Harrison, 577 A.2d 51, 57 (Md. 1990) ("[W]here the same facts may be
  asserted as either a defense or a counterclaim, and the issue raised by
  defense is not litigated and determined so as to be precluded by collateral
  estoppel, the defendant in the previous action is not barred by res
  judicata from subsequently maintaining an action on the counterclaim."). 
  Irrespective of the result of the counterclaim, plaintiff still has its
  judgment and may enforce it.

       I would reverse the grant of summary judgment and allow defendant to
  go forward with his counterclaim.(FN1)  I am authorized to say that Justice
  Gibson joins in this dissent.


                              _______________________________________
                              Associate Justice


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                                  Footnotes



FN1.  Plaintiff has not argued that defendant's counterclaim, if it
  survives, must be presented to arbitration, an issue that is intertwined
  with the forum location and choice-of-law questions.  To the extent it
  remains in the case, it should be resolved in the first instance by the
  superior court.