'A. The law and arbitration, limitation of liability, and quality terms: UCC § 2-207

[Claimant] maintains these terms found in [Respondent's] Confirmation are not part of the sale agreement because (1) upon information and belief [Claimant] did not receive the Confirmation until February, 2002; (2) even if it was received on November 21, 2001, when [Respondent] contends it was faxed to [Claimant], agreement had been concluded on November 15, 2001, and performance had commenced on November 19, 2001; and, (3) the New York arbitration and choice of law, disclaimer of quality, and limitation of liability terms constitute material additional terms requiring express acceptance by [Claimant], which did not happen.

[Respondent] contends (1) the Terms of Reference confirms [Claimant]'s acceptance of the New York choice of law provision and New York as the site for arbitration proceedings; (2) by its Confirmation [Respondent] effectively rejected the "quality parameters" set out in [Claimant]'s Revised Purchase Order; and, (3) the Limitation of Liability provision is not a "material alteration" since it did not cause either surprise or hardship.

Preliminarily, [Claimant] made it clear before signing that the Terms of Reference did not constitute an acceptance of the Law and Arbitration term of [Respondent's] Confirmation. Among the issues to be determined is: "Are the Law and Arbitration, Quality, and Limitation of Liability provisions of [Respondent]'s confirmation memoranda dated November 16, 2001 binding upon the parties?" Terms of Reference ¶ 4(d). However, "separately, and independently, from any contractual agreement or provision" the parties agreed to arbitration before a Sole Arbitrator in New York with New York law governing. Terms of Reference ¶ 6.

Also, the parties appear to be in agreement the United Nations Convention on the International Sale of Goods does not govern. This is consistent with the opt-out term set out in [Respondent's] Confirmation.

Neither party asserts any law other than the law of the State of New York governs, and both parties rely upon the N.Y. Uniform Commercial Code ("N.Y. UCC") and, for the most part, New York case law.

[Respondent] and [Claimant] are "merchants" within the meaning of N.Y. UCC § 2-104(1).

N.Y. UCC § 207 provides:

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though 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.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

Section 2-207 applies both to acceptances that form the contract, and to written confirmations of agreements already made. N.Y. UCC § 2-207 Cmt. 2; Aceros Prefabricados, S.A. v. Tradearbed, Inc., 46 UCC Rep. Serv. 2d 596, 603, 282 F.3d 92, 98 (2d Cir. 2002).

The record indicates on November 21, 2001 [Respondent's] Confirmation was faxed to [Claimant] … [Respondent's] Exhibit 5 indicates the Confirmation was successfully transmitted, and there is no denial of receipt … [It has been stated]: "[Claimant]'s business records do not reflect receipt of the 'confirmatory memoranda' (which [Respondent] purportedly faxed on November 21, 2001) until February, 2002." … However, I find [Respondent's] Confirmation was transmitted on November 21, 2001, and the declaration … is insufficient to establish non-receipt.

I also find [Respondent's] Confirmation faxed five days after the date of [Claimant's] Revised Order was sent "within a reasonable time," as required by § 2-207(1).

The Arbitration and Law, Limitation of Liability, and Quality terms of [Respondent's] Confirmation are additional terms constituting proposals for additions to the contract. Between merchants, these proposals become part of the contract unless [Claimant's] offer expressly limited acceptance to terms of the offer, they materially alter it, or notification of rejection has been given, or is given within a reasonable time. § 2-207(2)(a)(b)(c).

[Claimant's] offer does not limit acceptance to its terms, and [Claimant] did not provide a notification of rejection. To exclude these terms from the contract, [Claimant] relies upon the "material alteration" exception of § 2-207(b).

(1) The New York arbitration term

By the Terms of Reference, the parties agreed to arbitration at New York before a Sole Arbitrator with New York law governing. However, [Claimant] maintains this agreement is separate and independent from the Arbitration and Law term of [Respondent's] Confirmation, and the Terms of Reference identify as issue (d) the question of whether this Term is binding upon the parties. On this basis, the question will be addressed.

The provision for New York arbitration is found in an international sales transaction which is "commercial," and the Federal Arbitration Act ("FAA") controls. 9 U.S.C. Ch. 1, § 2; Ch. 2, § 202.

The general rule in New York is that "the inclusion of an arbitration agreement materially alters a contract for the sale of goods, and thus, pursuant to section 2-207 … it will not become a part of such a contract unless both parties explicitly agree to it." Marlene Industries Corp. v. Carnac Textiles, Inc., 45 N.Y.2d 327, 408 N.Y.S.2d 410, 380 N.E.2d 239 (1978). However, the rule of Marlene is pre-empted where the FAA applies. Progressive Casualty Ins. Co. v. C.A. Reaseguradora Nacional De Venezuela, 991 F.2d 42, 46 (2d Cir. 1993). Where the FAA applies:

[A]rbitration agreements do not, as a matter of law, constitute material alterations to a contract; rather, the question of their inclusion in a contract under section 2-207(2)(b) is answered by examining, on a case-by-case basis, their materiality under a preponderance of the evidence standard as we would examine any other agreement….

Aceros Prefabricados, S.A. v. Tradearbed, Inc., 46 UCC Reporting Serv.2d 596, 605-06, 282 F.3d 92, 100 (2d Cir. 2002).

The burden of establishing the materiality of an additional term is on the party opposing inclusion. Bayway Refining v. Oxygenated Marketing, 215 F.3d 219, 223-24 (2d Cir. 2000). To carry the burden, "[a] profession of surprise and raised-eyebrows are not enough", the party opposing inclusion "must establish that, under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term". Id. at 224.

Here, [Claimant] has not produced evidence that inclusion of a New York arbitration term as part of [Respondent's] Confirmation came as a surprise, or that reasonable merchants in the relevant trade would have been surprised by inclusion of such a term.

Whether "hardship" constitutes a separate ground for finding an additional term material, is unsettled. See Bayway Refining v. Oxygenated Marketing, 215 F.3d 219, 226 (2d Cir. 2000); Aceros Prefabricados, S.A. v. Tradearbed, Inc., 46 UCC Repr. Serv.2d 596, 607, 282 F.3d 92 (2d Cir. 2002).

In any event, [Claimant] has not established it would suffer any hardship by being bound to the New York Arbitration term. Therefore, by way of N.Y. UCC § 207(2), the New York Arbitration term is part of the contract of sale.

(2) The New York choice of law term

Choice of law provisions are not mentioned in N.Y. UCC § 2-207 cmt. 4 as being among the "typical clauses which would normally 'materially alter' the contract", and a choice of law provision is not per se material under UCC § 2-207. See Liberty Steel Products, Inc. v. Franco Steel Corp., 57 F.Supp.2d 459, 465-66 (N.D. Ohio 1999). Although there is authority to the contrary, see Dassault Falcon Jet Corp. v. Oberflex Inc., 909 F.Supp. 345, 352 (MDNC 1996) (North Carolina law); Galaxy Int'l., Inc. v. White Stores, Inc., 88 F.2d 311, 320-21 (W.D. Pa. 1980) (Pennsylvania law), I find that, as is the case generally with § 2-207 additional terms, to establish materiality, the party opposing inclusion of a choice of law provision must satisfy the "surprise or hardship" test mentioned in N.Y. UCC § 207 cmt. 4.

Here, [Claimant] has not contended the New York choice of law term gave rise to either "surprise" or "hardship", and in the absence of such showing, the term became a part of the contract of sale.

(3) The limitation of liability term

A test for determining whether limitation of liability clauses constitute a § 2-207(2)(b) material alteration is set out in In re Chateaugay Corp., 22 U.C.C. Rep. Serv. 2d 1012, 1024 (Bankr. S.D.N.Y. 1994):

Between merchants, where U.C.C. § 2-207(2)(a) and 2(c) do not apply, the limitations on remedies or damages become part of the parties' agreement, unless the non-assenting party proves that (1) its inclusion constitutes unreasonable surprise in light of the parties' prior dealings, industry custom, or inconspicuousness of the term, or (2) the clause is unconscionable or (3) the limitation fails of its essential purpose.

There has been no showing by [Claimant] that inclusion of the Limitation of Liability term in [Respondent]'s Confirmation constitutes "an unreasonable surprise".

With respect to unconscionability: "It is extremely rare for a court to find an unconscionable limitation on consequential damages in a contract between experienced businessmen in a commercial setting." In re Chateaugay Corp., 22 U.C.C. Rep. Serv. 2d 1012, 1028 (Bankr. S.D.N.Y. 1994). There is no reason to deviate from this general rule. Both [Respondent] and [Claimant] are experienced business entities; there is no contention [Claimant] was duped or overborne by [Respondent]; the provision was identified in bold print, and simply worded. See Suzy Phillips Originals, Inc. v. Coville, Inc., 939 F.Supp. 1012, 1018 (E.D.N.Y. 1996), aff'd, 125 F.3d 845 (2d Cir. 1997); Wilson Trading Corp. v. David Ferguson, Ltd., 23 N.Y.2d 398, 297 N.Y.S.2d 108, 244 N.E.2d 685 (1968); In re Chateaugay Corp., 22 U.C.C. Rep. Serv. 2d 1012, 1024, 1025 (S.D.N.Y. 1994).

The third element of the "Chateaugay test" has no application here. [Respondent's] Confirmation leaves [Claimant]'s remedy of general damages undisturbed.

The Limitation of Liability term is part of the contract of sale.

(4) The "quality" term

N.Y. UCC § 2-207 cmt. 4 identifies as a clause which would normally "materially alter" the contract, and so result in surprise or hardship if incorporated without express awareness by the other party, "a clause negating such standard warranties as that of merchantability or fitness for a particular purpose in circumstances in which either warranty normally attaches…" See also Tuck Industries, Inc. v. Reichhold Chemicals, Inc., 151 A.D.2d 566, 542 N.Y.S.2d 676 (Second Dep't. 1989); In re Chateaugay Corp., 22 U.C.C. Rep. Serv.2d 1012, 1024 n. 8 (Bankr. S.D.N.Y. 1994) ("Warranty disclaimers are usually viewed as material alterations under UCC § 207(2)(b) and do not become part of the parties' contract.") Therefore, to the extent the "Quality" term may be considered a warranty disclaimer, it would constitute a § 207(2)(b) material alteration, and it would not be deemed part of the contract.

B. The warranty of merchantability: UCC § 2-314

There is no express warranty of merchantability, or of fitness for a particular purpose.

However, N.Y. UCC § 2-314(1) provides:

Unless excluded or modified (Section 316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind….

[Respondent] is a § 314 merchant with respect to the sale of [the product]. Therefore, unless excluded or modified by other terms, [Respondent] is bound by an implied warranty the [product] it sold to [Claimant] was "merchantable".

To be merchantable, goods must be least such as (1) pass without objection in the trade under the contract description; (2) in the case of tangible goods, are of fair average quality within the description; (3) are fit for the ordinary purposes for which such goods are used; (4) run within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; (5) are adequately contained, packaged and labelled as the agreement may require; and, (6) conform to the promises or affirmations of fact made on the container or label if any. N.Y. UCC § 2-314(2).

To satisfy the implied warranty of merchantability, the goods need not be "perfect". Nassau Suffolk White Trucks, Inc., 62 A.D.2d 982, 403 N.Y.S.2d 322 (Second Dep't. 1978). However, they must be "at least a medium quality or goodness". Empire Cream Separator Co. v. Quinn, 184 A.D. 302, 171 N.Y. Supp. 413 (Fourth Dept. 1918). The question is whether the goods are fit for ordinary purposes for which such goods are used, which focuses on expectations for performance of the products when used in customary, usual and reasonably foreseeable manners. Denny v. Ford Motor Co., 87 N.Y.2d 248, 639 N.Y.S.2d 250, 256, 662 N.E.2d 730 (1995).

Here, [Claimant] complained about inadequate packaging and incorrect labelling, but these matters were resolved when [Respondent] granted its $50 MT discount on price.

The gravamen of [Claimant]'s unmerchantability claim is an alleged volatility value that rendered the [product] unfit for its ordinary use.

The seller may exclude or modify the implied warranty of merchantability, however, to do so, the language of any such exclusion or modification "must mention merchantability and in case of a writing must be conspicuous…" N.Y. UCC § 2-316(2). See also § 2-316(2) cmt. (3): "Disclaimer of the implied warranty of merchantability is permitted under subsection (2) but with the safeguard that such disclaimers must mention merchantability and in case of a writing must be conspicuous."); Carbo Industries Inc. v. Becker Chevrolet, Inc., 112 A.D.2d 336, 491 N.Y.S.2d 786 (Second Dep't. 1985); Bazzini v. Garrant, 116 Misc.2d 119, 455 N.Y.S.2d 77 (D.C. Suffolk 1982); Potler v. MCP Facilities Corp., 471 F.Supp. 1344 (E.D.N.Y. 1979); Pay Tel Systems, Inc. v. Seiscor Technologies, Inc., 850 F.Supp. 276 (S.D.N.Y. 1994).

[Respondent's] Confirmation "Quality" term reads: "No quality parameter is guaranteed…"

To the extent this term may be construed as a disclaimer of warranties of merchantability and of fitness for a particular purpose, it would constitute a proposal for an additional material term which requires, and did not receive, the express approval of [Claimant]. In re Chateaugay Corp., 22 U.C.C. Rep. Serv. 2d 1012, 1024 n. 8 (Bankr. S.D.N.Y. 1994); see also Tuck Industries, Inc. v. Reichhold Chemicals, Inc., 151 A.D.2d 566, 542 N.Y.S.2d 676 (Second Dep't. 1989); N.Y. UCC § 2-207 cmt. 4.

N.Y. UCC § 2-316(1) provides: "Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other…"

Here, the "quality parameters" were set out in [Respondent]'s Data Sheet which contained the following language: "… values reported are typical, and not guaranteed…" [Claimant]'s Revised Order reproduced the Data Sheet "values", describing them as "Typical Spe[c]s". The Quality term of [Claimant]'s Confirmation provided: "no quality parameter is guaranteed". I find these documents consistent, i.e. the "values" set out on the Data Sheet were "typical", but they were not "guaranteed". The "values" were provided by [Respondent] as "a guide to determine possible applications", but the [product] sold to [Claimant] may have "values" not conforming to the "values" as stated on the Data Sheet. That the parties understood this to be the case is demonstrated by the revision of the colour value …

However, although the quality parameters were not guaranteed, the [product] was sold for use in the making of [specified objects]. On the record here, that appears to be the "ordinary use" for [the product], and no matter what the actual "values", to be of "merchantable" quality, the [product] must be fit for that use.

………

I find the [laboratory] report establishes the volatile content of the [product] sold to [Claimant] was substantially in excess of the typical spec of 0.2%, and that such excess rendered [it] unfit for the ordinary purpose for which it is used … In sum, [Respondent]is in breach of its implied warranty of merchantability.

C. The implied warranty of fitness for a particular purpose: UCC § 2-315

N.Y. UCC § 2-315 provides:

Where 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, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

Of course, a contract "may include both a warranty of merchantability and one of fitness for a particular purpose". N.Y. UCC § 2-315 cmt. 2.

Statements made during negotiations prior to and concerning the sale may be considered on the question of whether the seller had knowledge of the particular use to which the buyer intended to put the goods. Kahn v. J.C. Management Corp., 59 N.Y.S.2d 547 (Sup.Ct. 1944), aff'd, 269 App.Div. 1055, 59 N.Y.S.2d 625 (Second Dep't. 1945); see also In re A.W. Cowen & Bros., 11 F.2d 692 (2d Cir. 1926) (on sale of silk, with knowledge that it is to be used for the manufacture of neckties, there is an implied warranty that it is fit for that purpose); Emerald Painting, Inc. v. PPG Industries, Inc., 99 A.D.2d 891, 472 N.Y.S.2d 485 (Third Dep't. 1984); Cohen v. Bratt & Doxey Supply Co., 51 A.D.2d 719, 379 N.Y.S.2d 155 (Second Dep't. 1976).

As explained in N.Y. UCC § 2-315 cmt. 1:

Whether or not this warranty arises in any individual case is basically a question of fact to be determined by the circumstances of the contracting. Under this section the buyer need not bring home to the seller actual knowledge of the particular purpose for which the goods are intended or of his reliance on the seller's skill and judgment, if the circumstances are such that the seller has reason to realize the purpose intended or that the reliance exists. The buyer, of course, must actually be relying on the seller.

Here, [Respondent] knew the use to which [Claimant] intended to put the [product]. At [Claimant]'s request, [Respondent] provided its Data Sheet setting out the typical specs of its product, affirming it is for use in making [specified objects]. The [product] was made, packed, and shipped from Mexico without any involvement of [Claimant]. [Respondent's Confirmation provided: "INSPECTION: Quantity and quality of product to be inspected at …plant by [Respondent's] personnel." Both parties were knowledgeable with respect to characteristics of [the product], but on the basis of the structure of this sale, I find [Claimant] relied upon [Respondent] to provide [the product] fit for use in the manufacture of [specified objects]. As discussed in connection with the implied warranty of merchantability, this was not done. Therefore, [Respondent] is in breach of its implied warranty of fitness for a particular purpose.

D. The effect of the limitation of liability term: UCC § 2-719

N.Y. UCC § 2-719(1)(a) provides: "The agreement may … limit or alter the measure of damages recoverable under this Article…"

N.Y. UCC § 2-719(3) provides: "Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable."

A limitation of consequential damages in commercial, as opposed to consumer, transactions is rarely considered unconscionable. Long Island Lighting Co. v. Transamerica Delaval, 646 F.Supp. 1442, 1458 (S.D.N.Y. 1986). However, even where a limitation of damages provision is not unconscionable on its face, "it may … be circumvented upon a showing that the defendant's conduct bars it from invoking the shield of this damage limitation". Long Island Lighting Co. v. Transamerica Delaval, 646 F.Supp. 1442, 1458 (S.D.N.Y. 1986); County Asphalt, Inc. v. Lewis Welding & Engineering Corp., 323 F.Supp. 1300, 1308-09 (S.D.N.Y. 1970), aff'd, 444 F.2d 372 (2d Cir.), cert. denied, 404 U.S. 939 (1971).

There is nothing in the record indicating the Limitation of Liability term is "unconscionable", or that [Respondent] should be estopped from invoking it.

However, in New York, where the contract does not effectively disclaim the implied warranty of merchantability, it has been found clauses purporting to limit liability for the seller's breach do not limit damages for sale of unmerchantable goods unless the word "merchantability" appears in the limitation provision:

Section 2-316(2) states that the warranty of merchantability not only may not be excluded without specific mention but may not be modified in any of its parts. Section 2-719(1)(a) and (3) would not appear to counter the requirements that modification of the warranty requires specific mention of merchantability.

Zicari v. Joseph Harris Co., 33 A.D.2d 918, 304 N.Y.S.2d 918, 925 (Fourth Dep't. 1969); Stream v. Sportscar Salon, Ltd., 91 Misc.2d 99, 397 N.Y.S.2d 677, 683 (City Ct. 1977); Polter v. MCP Facilities Corp., 471 F.Supp. 1344, 1351 (E.D.N.Y. 1979).

Here the Limitation of Liability term makes no mention of "merchantability".

Therefore, [Claimant] is not barred by the Limitation of Liability term from pursuing damages sustained as a consequence of the sale of unmerchantable goods.

The Limitation of Liability term excludes "consequential, indirect or special losses or damages of any kind…"

Insofar as relevant here, consequential damages include "injury to … property proximately resulting from any breach of warranty". N.Y. UCC § 2-715(2)(b).

The UCC does not refer to "indirect or special damages". It does refer to "incidental damages". defined as including "expenses reasonably incurred in … receipt … and care and custody of goods…" N.Y. UCC § 2-715(2). [Respondent's] Limitation of Liability term does not exclude recovery for "incidental damages". See S&R Metals, Inc. v. C. Itoh & Co. (America), Inc., 859 F.2d 814, 818 (9th Cir. 1988). [Claimant]'s damage claim No. 2 (storing the defective [product) falls within the definition of incidental damages, and thus is not excluded. [Claimant's damage claim No. 3 (property damage and costs caused by the tank fires) falls within the definition of consequential damages. However, as the Limitation of Liability term failed to mention "merchantability", the attempt to exclude [Claimant]'s consequential damages from a breach of the warranty of merchantability is ineffective.'