Attorneys for Appellee
Robert A. Garelick
Bryan S. Redding
Cohen, Garelick & Glazier
Appellant (Defendant below),PHELPS HEATING & AIR CONDITIONING, INC.,
) Supreme Court No.
) Court of Appeals No.
May 9, 2001
During the early 1990s, several types of Rheem furnaces malfunctioned after Phelps installed
them. A Phelps executive testified that from late 1989 until 1993, Rheem
had virtually no high efficiency furnaces on the market that were not experiencing
. (R. at 326.) While Rheem issued numerous
technical service bulletins offering instructions on how to fix these problems, Phelps customers
experienced difficulties for another three to four years.
Phelps executives met with a Rheem service representative on May 11, 1994.
At this meeting, Phelps requested between $40,000 and $65,000 to compensate it for
the cost involved in servicing the furnaces. Rheem rejected this request.
Phelps brought suit against Rheem and Federated on August 8, 1994, claiming that
Rheem breached its express and implied warranties and was negligent in its manufacture
of the furnaces. Underlying all of these claims is Phelpss assertion that
the furnaces shut down and were not operational after installation. Among other
things, the pilot assemblies, hot surface ignitors, flame sensors and ignition controls failed.
(R. at 26.) The complaint first contended that Rheem breached the
implied warranty of fitness for a particular purpose because Rheem and Federated knew
that Phelps intended to use the furnaces and install them in properties serviced
by Phelps (R. at 21) but the furnaces were defective, and after they
had been installed
they failed to function properly. (Id.) Similarly, Phelps
sought damages for breach of the implied warranty of merchantability, contending that Rheem
and Federated were merchants but that the defects in the furnaces made them
unsuitable and posed a risk of personal injury and property damages to customers
serviced by Phelps
. (R. at 23.) Phelps also asserted a
claim under the express warranty, arguing that it incurred substantial expenses and other
damages in remedying the problems caused by the defective furnaces. (R. at
25.) Finally, Phelps claimed that Rheem and Federated Supply were negligent and
careless in their design and sale of the furnaces by failing to manufacture
and provide furnaces which were operational and in reasonable working order. (R.
Phelps described its damages as including but not limited to, lost customers, lost
profits, and the additional cost of servicing the defective furnaces and remedying the
defects therein. (R. at 22.) In answers to interrogatories, Phelps listed
its warranty damages as lost service charges, lost labor charges, lost profits from
two customers who would no longer do business with Phelps, and the approximate
value of office time spent
comput[ing] damages. (R. at 225.)
Rheem moved for summary judgment on all of these claims. Rheems brief in support of its motion asserted that the damages Phelps sought on the warranty theories were precluded by the limitations in the express warranty and by lack of privity on the implied warranties. Rheem also argued that Phelps could not claim tort damages for the purely economic injuries that resulted from the failure of the furnaces to operate as intended. The trial court granted Rheems motion for summary judgment in regards to negligence, but denied it as to the warranties.
Rheem sought an interlocutory appeal on the warranty claims and the trial court
certified its order. The Court of Appeals affirmed the denial of summary
judgment. Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714
N.E.2d 1218 (Ind. Ct. App. 1999). As for the express warranties, the
Court of Appeals found a genuine issue of material fact as to whether
the cumulative effect of Rheems actions was commercially reasonable. Id. at 1228
(emphasis in original). On the implied warranty claims, the court stated that
the evidence establishing privity was slight. The court nevertheless held that perfect
vertical privity is not necessary in this case and then found a genuine
issue of material fact as to whether Rheem breached its implied warranties and
whether its conduct in doing so was reasonable. Id. at 1231.
Rheems appeal raises three issues which require us to analyze the operation of
express and implied warranties under Indianas version of the Uniform Commercial Code (the
In light of the depth of disagreement among the courts that have faced
this issue, it is evident that the UCC is ambiguous on this point.
See Clark v. International Harvester Co., 581 P.2d 784, 800 (Idaho 1978)
(The UCC is ambiguous with respect to the effect that a failure of
a limited remedy under [§ 2-719(2)] has on other contractual provisions.). The
UCC subsections at issue are susceptible to two interpretations one dependent, one
independent and as such we have no plain language to apply.
Faced with an ambiguous statute, we turn next to other applicable canons of constru ction. First, we note that [o]ur main objective in statutory construction is to determine, effect and implement the intent of the legislature. Melrose v. Capitol City Motor Lodge, Inc., 705 N.E.2d 985, 989 (Ind. 1998). See also Seifert v. Bland, 587 N.E.2d 1317, 1319 (Ind. 1992), rehg denied. In ascertaining this intent, we presume that the legislature did not enact a useless provision such that [w]here statutory provisions are in conflict, no part of a statute should be rendered meaningless but should be reconciled with the rest of the statute. Robinson v. Wroblewski, 704 N.E.2d 467, 474-75 (Ind. 1998). See also Spaulding v. International Bakers Services, Inc., 550 N.E.2d 307, 309 (Ind. 1990) (Where possible, every word must be given effect and meaning, and no part is to be held meaningless if it can be reconciled with the rest of the statute.).
Several aspects of Indiana Code §§ 26-1-2-719(2) and (3) point to a legislative intent consistent with the independent view. First, as many independent courts have noted, the drafters of the UCC inserted distinct legal standards into each provision. A limited remedy will be struck when it fails of its essential purpose; an exclusion of consequential damages fails when it is unconscionable. Moreover, these subsections are distinct in who applies the standards they set out. Whether a limited remedy fails of its essential purpose is an issue of fact that a jury may determine. See, e.g., Delhomme Indus., Inc. v. Houston Beechcraft, Inc., 669 F.2d 1049, 1063 (5th Cir. 1982). Conversely, an exclusion of consequential damages stands unless it is unconscionable, and unconscionability is determined by a court as a matter of law. See Ind. Code § 26-1-2-302 (1993). See footnote These facial distinctions between §§ 2-719(2) and (3) suggest a legislative intent that the provisions should function independently of one another.
Second, the independent view is consistent with the principle of statutory interpretation that [w]here possible, we interpret a statute such that every word receives effect and meaning and no part is rendered meaningless if it can be reconciled with the rest of the statute. Bagnall v. Town of Beverly Shores, 726 N.E.2d 782, 786 (Ind. 2000) (quoting Spaulding, 550 N.E.2d at 309). See also Schurtz v. BMW of North America, Inc., 814 P.2d 1108, 1114 (Utah 1991) (This independent reading of the two provisions also conforms to the general rule that we should construe statutory provisions so as to give full effect to all their terms, where possible.). The dependent view renders § 2-719(3) inoperative by deleting an exclusion of consequential damages without any analysis of its unconscionability. See id. (If we were to read subparts (2) and (3) as dependent, we would effectively read out the unconscionability test of subpart (3) .). Cf. Middletown Concrete Prod. v. Black Clawson Co., 802 F. Supp. 1135, 1151 (D.Del. 1992) (noting that dependent courts award consequential damages by [f]ocusing solely on the language of subsection (2) .). On the other hand, the independent view allows both provisions to operate: § 2-719(2) will strike a failed limited remedy, allowing the buyer to claim damages, but not consequential damages if a valid clause excludes them under § 2-719(3). This construction harmonizes the language in § 2-719(2) that remedy may be had as provided in IC 26-1 with the unconscionability test imposed by § 2-719(3). The remedy clause in § 2-719(2), which is crucial to the dependent argument, must be taken in its fullest sense. See, e.g., Ind. Code § 26-1-1-102 cmt. 1 (West 1995). On its face, the phrase refers to all of the UCC, not merely its remedy provisions. See footnote Therefore remedy may be had under subsection (2) only to the extent that it is not limited by subsection (3), which is part of IC 26-1. Cf. Clark v. International Harvester Co., 581 P.2d 784, 800 (Idaho 1978) (The official comment states that if a remedy fails of its purpose, it must give way to the general remedy provisions of this article ... . The remedy provisions of that [article] not only provide for the recovery of consequential damages, but also for their exclusion where not unconscionable.) (citations omitted).
Third, the UCC instructs us to construe its provisions with three specific legislative purposes in mind, all of which comport with the independent view:
(1) IC 26-1 shall be liberally construed and applied to promote its underlying purposes and policies.
(2) Underlying purposes and policies of IC 26-1 are:
(a) to simplify, clarify, and modernize the law governing commercial transactions;
(b) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties;
(c) to make uniform the law among the various jurisdictions.
Ind. Code § 26-1-1-102 (1993) (emphasis added) (Purposes; rules of construction; variation by agreement). See also id. cmt. 1 (The Act should be construed in accordance with its underlying purposes and policies. The text of each subsection should be read in the light of the purpose and policy of the rule or principle in question, as also of the Act as a whole .); Kearney & Trecker Corp. v. Master Engraving Co., 527 A.2d 429, 432 (N.J. 1987) (relying on § 1-102 to apply independent view). The independent view serves all of the enumerated purposes. The independent view supplies simplicity and clarity by allowing a clearly expressed agreement to control a transaction. See Ind. Code § 26-1-1-102(2)(a) (1993). The independent view is also the modern trend. See Middletown Concrete, 802 F. Supp. at 1152. The independent view aids sound commercial practice by allowing the parties to anticipate clearly the results of their transaction, while the dependent view retains the specter of unknown damages for the seller despite the parties explicit understanding to the contrary. See Ind. Code § 26-1-1-102(2)(b) (1993). See footnote The fact that courts are divided on this issue indicates that precise uniformity is impossible. See Ind. Code § 26-1-1-102(2)(c) (1993). See, e.g., Chatlos, 635 F.2d at 1086 (noting that as of 1980 neither view carried a majority). However, as we have noted, the modern trend is towards the independent view. See Riegel Power Corp. v. Voith Hydro, 888 F.2d 1043, 1047 (4th Cir. 1989).
Finally, the legislatures intent to follow the independent view is also supported by the UCCs general policy favoring the parties freedom of contract. The UCC tells us that one of its paramount concerns is enabling contracting parties to control their own relationships. See, e.g., Ind. Code § 26-1-1-102(3) (1993) (The effect of provisions of IC 26-1 may be varied by agreement, except as otherwise provided in IC 26-1 .); Id. cmt. 2 (Subsection (3) states affirmatively at the outset that freedom of contract is a principle of the [UCC] .). Official Comment One to Indiana Code § 26-1-2-719 states that [u]nder this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect. However, the dependent view ignores the intent of the parties and allows a buyer to recover consequential damages despite an explicit contract term excluding them. The dependent courts essentially presume that the parties intended the exclusion of consequential damages to depend on the limited remedy. See, e.g., Kathryn I. Murtagh, Note, UCC Section 2-719: Limited Remedies and Consequential Damage Exclusions, 74 Cornell L.Rev. 359, 369 (1989) (Dependent courts begin by presuming that the parties intended to link the consequential damage exclusion and limited remedy.). See footnote On the other hand, the independent view refuses to override categorically an exclusion of consequential damages and will give effect to the terms of the contract. Indeed, consistent with the principle of freedom of contract, the independent view allows the parties to agree to a dependent arrangement.
This freedom to set contract terms is especially important in the context of a commercial transaction. Sophisticated commercial actors should be free to allocate risks as they see fit, and courts should not interfere simply because such risks have materialized. This is the view shared by Professors White and Summers:
In general we favor the [independent] line of cases. Those cases seem most true to the Codes general notion that the parties should be free to contract as they please. When the state intervenes to allocate the risk of consequential loss, we think it more likely that the loss will fall on the party who cannot avoid it at the lowest cost. This is particularly true when a knowledgeable buyer is using an expensive machine in a business setting. It is the buyer who operates the machine, adjusts it, and understands the consequences of its failure. Sometimes flaws in such machines are inherent and attributable to the sellers faulty design or manufacture. But the fault may also lie in buyer neglect, in inadequate training and supervision of the operators or even in intentional use in ways forbidden by the seller. Believing the parties to know their own interests best, we would leave the risk allocation to the parties.
White & Summers, Uniform Commercial Code § 12-10, at 605 (3rd ed. 1988) (hereinafter White & Summers). See also S.M. Wilson & Co. v. Smith Intern., Inc., 587 F.2d 1363, 1375 (9th Cir. 1978) (Risk-shifting is socially expensive and should not be undertaken in the absence of a good reason. An even better reason is required when to so shift is contrary to a contract freely negotiated.); Polycon Indus., Inc. v. Hercules, Inc., 471 F. Supp. 1316, 1325 (E.D.Wisc. 1979) ([T]he exclusion of consequential and special damages was an allocation of risks agreed to between two commercial parties of equal strength and should be given effect.).
Phelps attempts to escape this conclusion by arguing that the furnace sales were
not a sophisticated commercial transaction worthy of such deference. Appellees Br. in
tion to Transfer at 8. Phelps notes that the warranties were simply
found inside of the furnace box and were not the product of detailed
negations. Cf. American Electric Power Co. v. Westinghouse Elec. Corp., 418 F. Supp.
435 (S.D.N.Y. 1976). Phelpss argument here may prove too much, i.e., that
only the ultimate customer, and not Phelps at all, was to benefit from
the warranty. If Phelps is a beneficiary of the warranty (as we
have noted both parties appear to assume), Phelps cannot escape the conclusion that
these goods were relatively sophisticated and flowed between businesses entities. See, e.g.,
S.M. Wilson, 587 F.2d at 1375 (Parties of relatively equal bargaining
power negotiated an allocation of their risks of loss.
The machine was
a complex piece of equipment designed for the buyers purposes.). This context
is far different than those confronted in the many dependent cases that focus
on losses suffered by consumers at the hands of large commercial entities.
See, e.g., Kelynack v. Yamaha Motor Corp., 394 N.W.2d 17, 21 (Mich. App.
1986); Goddard v. General Motors Corp., 396 N.E.2d 761, 765 (Ohio 1979).
The Court of Appeals applied the independent view, but found a genuine issue of m aterial fact as to whether the cumulative effect of Rheems actions was commercially reasonable. Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218, 1228 (Ind. Ct. App. 1999). The court pointed to no statutory authority that requires these exclusions or limitations to be commercially reasonable, nor did it define this term. See footnote The court did make some passing references to Official Comment One to § 2-719, which assures a buyer an adequate remedy in the face of a breach of warranty. Id. at 1228 (We remain mindful that even as Comment 1 to Ind. Code § 26-1-2-719 advises that reasonable agreements limiting or modifying remedies are to be given effect, the next sentence also cautions that it is of the very essence of a sales contract that at least minimum adequate remedies be available.). This comment, however, makes no reference to commercial reasonableness. Indeed, the court stated frankly that its primary concern was with the fairness of the outcome and reaching an equitable result. Id. In light of our conclusion that the legislature intended the independent view to apply to these circumstances, See footnote we are constrained to reject the commercial reasonableness test applied by the Court of Appeals and to reverse the trial courts denial of summary judgment on Phelpss claims for incidental and consequential damages. See footnote
Even if we were to find that this remedy failed of its essential
purpose, Phelps would not be entitled to the damages it seeks under the
warranty. The parties characterize these service repair costs as either consequential damages
or direct damages. In either event, Phelps is not entitled to recovery
under the warranty and summary judgment should be e
The parties characterize the service labor as a form of consequential damage because
Rheem should have foreseen that its failure to provide functioning furnaces would have
caused Rheem to make multiple repairs under its service warranty. See Ind.
Code § 26-1-2-715 (1993). To the extent these repair costs were consequential
damages, they are excluded by Rheems warranty as discussed in Part I, supra.
The parties also characterize the repair costs as a form of direct damages.
A buyers remedy for breach of warranty is typically the difference between
the goods as warranted and the goods as accepted. See Ind. Code
§ 26-1-2-714(2) (1993). However, the cost of repair may serve as a
proxy for direct damages. See, e.g., Jones v. Abriani, 169 Ind.App.
556, 350 N.E.2d 635, 646 (1976) (In this case, one reasonable way of
measuring the difference in the value of the goods between what was actually
delivered (a defective mobile home) and what was warranted (a mobile home with
the defects repaired) is the cost of repairing the defects.), Schroeder v. Barth,
Inc., 969 F.2d 421, 424 (7th Cir. 1992) (applying Indiana law).
See footnote Phelps
argues that it should be able to recover the cost of repairing the
rnaces in the event that the limited remedy failed of its essential purpose.
We hold, however, that Phelps is not in a position to claim this form of remedy. Typically, a buyer claiming repair damages is suing its immediate seller. See, e.g., Abriani, 350 N.E.2d at 646. Recovering the repair cost replicates the typical warranty damages value of goods as warranted minus value of goods as delivered by awarding the amount spent to put the goods in the warranted condition. See White and Summers, § 10-2 at 504. This measure of damages reflects the fact that a properly functioning market would deduct from the price of the item the cost of repairs a purchaser would have to make. The repair costs that Phelps seeks to recoup serve no such purpose because Phelps is not in possession of the goods.
We conclude by noting that, while Phelps, as an intermediate seller, is not
entitled to these
direct warranty damages, it may have a claim sounding in
indemnity or subrogation for damages suffered by those with which it shared privity.
See, e.g., Black v. Don Schmid Motor, Inc., 657 P.2d 517, 529
(A right of
exists where a party is compelled to
that rightfully should have been paid by another party. 41 Am.Jur.2d,
, § 20. Thus, a seller that is liable for
purchaser of defective goods may seek
from the manufacturer where the
were the proximate result of the manufacturers breach of warranty.). Whether or
not Phelps can recover on an indemnity theory is an issue to be
decided on remand.
May 9, 2001
I am persuaded that Indiana Code § 26-1-2-719(2) should be construed to invalidate
an exclusion of cons
equential damages when a limitation of remedy fails of its
essential purpose. I further conclude that the trial court properly denied Rheem's
motion for summary judgment as to Phelps's claims for labor expenses incurred in
fixing its customers' furnaces. Phelps is entitled to a trial on whether
Rheem's "service labor exclusion" failed of its essential purpose, an issue of fact
and not law.
Footnote: While Phelps seeks both consequential and incidental damages, the same analysis applies to each and we will discuss only consequential damages.
Footnote: The first section of the same statute expressly allows such limitations and exclusions:
(1) Subject to the provisions of subsections (2) and (3) and of IC 26-1-2-718 on liquidation and limitation of damages:
(a) the agreement may provide for remedies in addition to or in substitution for those provided in IC 26-1-2 and may limit or alter the measure of damages recoverable under IC 26-1-2, as by limiting the buyers remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is e xpressly agreed to be exclusive, in which case it is the sole remedy.
Ind. Code § 26-1-2-719(1) (1993).
Footnote: The trial court did not certify the question of whether the remedy actually failed of its essential purpose and Rheem concedes that this issue is not in debate. Appellants Reply Br. at 11. See also Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218, 1223 (Ind. Ct. App. 1999) (Rheems argument seems to be that the failure of essential purpose vel non is irrelevant.). We express no opinion as to this issue here. See generally Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078, 1085-88 (Ind. 1993), Hahn v. Ford Motor Co., Inc., 434 N.E.2d 943, 948 (Ind. Ct. App. 1982). Similarly, both parties appear to assume that the warranty and its remedy limitations are applicable and we also express no opinion on this issue.
Footnote: Phelps does not argue that the clause at issue was unconscionable. See, e.g., Appellees Br. at 25-28.
Footnote: The two sections also aim at distinct contractual functions:
A contract may well contain no limitation on breach of warranty damages but specif ically exclude consequential damages. Conversely, it is quite conceivable that some limitation might be placed on a breach of warranty award, but consequential damages would expressly be permitted.
The limited remedy of repair and consequential damages exclusion are two discrete ways of attempting to limit recovery for breach of warranty. The Code, moreover, tests each by a different standard. We therefore see no reason to hold, as a general proposition, that the failure of the limited remedy provided in the co ntract, without more, invalidates a wholly distinct term in the agreement excluding consequential damages. The two are not mutually exclusive.
Chatlos Systems v. National Cash Register Corp., 635 F.2d 1081, 1086 (3rd Cir. 1980) .
Footnote: If the drafters of the UCC intended to refer only to buyers remedies, they would have referred to IC § 26-1-2-711 et seq. or a similar designation.
Footnote: Sound commercial practice may require sellers in certain industries to exclude exposure to possibly expansive consequential damages:
[T]he potential significance of liability for consequential damages in comme rcial transactions undoubtedly prompted the Codes drafters, consistent with the Codes endorsement of the principle of freedom of contract, to make express provision for the limitation or exclusion of such damages. For certain sellers, exposure to liability for consequential damages could drastically affect the conduct of their business, causing them to increase their prices or limit their markets. In a commercial setting, the sellers right to exclusion of consequential damages is recognized as a beneficial risk-allocation device that reduces the sellers exposure in the event of breach.
Kearney, 527 A.2d at 433. A Rheem executive testified that such exclusions of consequential damages are standard in the gas-powered furnace industry. (R. at 102.)
Footnote: Phelps argues that the dependent view more accurately reflects the parties intent because it is what a rational buyer would expect. Appellees Br. in Opposition to Transfer at 6. However, this type of presumed intent is no substitute for an analysis of the parties actual expectations.
Footnote: The UCC does refer to reasonable commercial standards in defining what is good faith for a merchant. Ind. Code § 26-1-2-103(b) (1993). The UCC in turn imposes an obligation of good faith in [a contracts] performance or enforcement. Id. § 26-1-1-203. However, the limitations and exclusions at issue here were added to the contract during formation, and § 1-203, which covers only performance or enforcement, is inapplicable. No other UCC provision purports to place a duty of commercial reasonableness on a partys ability to contract.
We note, however, that some language in Professors Pratter and Townsends Indiana Comments to Indiana Code § 26-1-2-719 arguably suggests that the commentators subscribed to the dependant view: A statutory scheme of remedies, if well drafted, should be adequate for a great variety of situations. But the parties substitute arrangement may fail, in unusual circumstances. If so, the statutory remedies will still be available. Indiana Comment to Ind. Code § 26-1-2-719 (Burns 1974) (emphasis added).
As a final matter, we note that our holding today is consistent with a pre- UCC Indiana case that arguably gave effect to an exclusion of consequential damages when a limited remedy failed of its essential purpose. Nave v. Powell centered on the sale of a stallion named Major McKinley. 52 Ind.App. 496, 96 N.E. 395, 399 (1911). Although Powell purchased the horse for breeding, Major McKinley proved to be barren and unprolific after 60 fruitful mares were bred to him ... none of which were gotten in foal. Id. at 397. Powell argued that Nave had impliedly warranted said horse to be fit and suitable for breeding purposes and a reasonably sure foal-getter because Nave knew the horse was purchased for breeding. Id. Nave countered with contractual language that he claimed limited Powells remedy to a substitute horse:
In the event that the above-named stallion, in perfect health, with proper usage, and the mares to him regularly returned and tried or bred on one full service se asons trial does not get with foal 50 [percent] of the producing mares regularly tried and bred to him, then on return of the said stallion to me ... I agree to furnish the above-named purchaser without further charge, another imported or pure bred stallion of equal quality in exchange.
Id. at 397. The contract also stated that [s]hould the above-named stallion hereafter become injured or disabled through accident or disease ... this warranty shall be null and void and of no effect and all obligations incurred by me herein shall be considered fulfilled and ended. Id. at 400. These clauses arguably limited the damages Powell could claim for breach of the warranty. Unfortunately, Major McKinley died before Powell could return him to Nave and request a replacement, as the warranty required. Id. at 398. Despite the contracts limited remedy and exclusion of damages, Powell sued for the expense of feeding and stabling Major McKinley and the cost of advertising the stallions services. Powell also sought compensatory damages in the form of the difference in value between the sterile stallion he received and the fair market price of a fertile stallion. Id. The Court of Appeals recognized that contracting parties may limit the remedies available for the breach of warranty:
It must not be forgotten that in contracts of warranty, the same as in all other co ntracts, the contracting parties have a perfect right to put into such contract all its terms and conditions, and provide all and entire the remedies contemplated and agreed upon by the parties. ... When the parties do agree upon such remedies and their contract by its terms expresses a clear intent and purpose in that respect, they are bound thereby and limited to the remedies, or remedy, so provided.
Id. at 398. The court then held that the warranty limited Powells remedies to a replacement horse and reversed the trial courts refusal to dismiss the complaint. Id.
Footnote: Evidence in the record suggests that the repairs may have been made to help Phelps maintain goodwill with its customers and not to comply with its warranties. Phelps argued in its brief that its warranty did not cover the quality of the furnaces, but merely warranted the quality of the services it provided. Rheem replied that this characterization by Phelps means that the repairs were made gratuitously and Indiana law precludes indemnification for voluntary payments. See Vernon Fire & Cas. Ins. Co. v. Graham, 166 Ind.App. 509, 510, 336 N.E.2d 829, 830 (1975) (Indemnity does not cover losses for which the indemnitee is not liable, but which he voluntarily pays.). Rheem points to testimony that the warranties were only part of the reason Phelps made the repairs and that customer goodwill was also a factor. (R. at 172-73.) However, other evidence shows that Phelps gave one-year labor warranties on all new installations of furnaces (R. at 166) which included a one-year warranty on labor and a one-year warranty on parts. The complaint itself stated that Phelps had a contractual obligation [to its customers] to remedy the defects of the furnaces. In reviewing a summary judgment order, we view the facts in the light most favorable to the nonmoving party. See Havens v. Ritchey, 582 N.E.2d 792, 795 (Ind. 1991). Therefore we must assume that Phelps did in fact fix the furnaces in order to comply with its warranties and not as a means of preserving customer goodwill.
Footnote: The UCC applies to these service labor issues because the predominant thrust of the entire transaction was clearly a sale of goods. See Insul-Mark Midwest, Inc. v. Modern Materials, Inc., 612 N.E.2d 550, 554 (Ind. 1993) (holding that to determine whether a contract is for the sale of goods or the rendition of services, courts must look to the predominant thrust of the transaction).
Footnote: In fact, the Court of Appeals rendered no holding as to the service labor issues, even though it attempted to set out the arguments involved. See Rheem, 714 N.E.2d at 1231.
Footnote: There is nothing in the record to suggest that Rheem failed to deliver replacement parts.
Footnote: The New Mexico Court of Appeals explained this process in Manouchehri v. Heim:
[Although 2-714] sets the measure of direct damages for breach of warranty as the difference between the value of the goods as warranted and the value of the goods as accepted, often that difference can be approximated by the cost to repair the goods so that they conform to the warranty. For example, if it costs $200 to fix [a] machine so that it performed as a 100/100 machine, then one could assume that the unrepaired machine (the goods accepted) was worth $200 less than the repaired machine (the goods as warranted). Thus, the cost of repair is commonly awarded as the direct damages.
941 P.2d 978, 981 (N.M. Ct. App. 1997).