The Court of Appeals for the Seventh Circuit recently drove home a point that lawyers tell clients all the time when drafting contracts: choice of law provisions matter.
They can matter immensely, in fact, as in the case of Sanchelima International, Inc. v. Walker Stainless Equipment Co., LLC1 – to the tune of $778,306.70.
In Sanchelima, the court was required to apply Wisconsin law that – while established in 1978 and contrary to a majority of others states’ view on limitations of consequential damages – remained binding Wisconsin precedent.
Sanchelima v. Walker: Background
Sanchelima sued Walker for an alleged breach of an exclusive distribution agreement. Pursuant to the contract, Sanchelima would be Walker’s exclusive distributor of dairy silos in 13 Latin American countries. Walker agreed not to sell silos to third parties in those countries. However, Walker did exactly that – and Sanchelima sued.
Steve Mroczkowski, Chicago Kent 2010, is an attorney with Carlson Dash, Pleasant Prairie, where he concentrates his practice in commercial and business litigation, construction law, mechanic’s liens, and bond claims.
The contract contained certain limited remedies provisions through which (i) Sanchelima’s remedies against Walker were limited to the amounts paid under purchase orders and, (ii) Sanchelima waived any liability for consequential damages.
It also stated that Wisconsin law would apply.
Walker claimed that the limited remedies provisions were fatal to Sanchelima’s claims. Sanchelima argued that the limited remedies provisions violated UCC §2-719 and its Wisconsin corollary, Wis. Stat. section 402.719, which provides:
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in chs. 401 to 411.
(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
Wisconsin’s Dependent Approach Still the Law
Wisconsin follows the dependent approach when analyzing contractual limited remedy provisions. A minority of jurisdictions follow this approach, and there has been a trend away from it. However, it is still the law in Wisconsin.
Under the dependent approach, if a litigant proves that a limited remedy fails of its essential purpose under UCC §2-719, any accompanying disclaimer of consequential damages is per se unconscionable.
The district court held that because the limited remedy provisions in the contract provided, essentially, no relief for Walker’s breach of the exclusivity provision, it failed of its essential purpose – and was thus unconscionable. Therefore, the court could consider other UCC remedies – i.e., consequential damages for lost profits (which was specifically disclaimed in the voided contract provisions). After a bench trial, the court entered judgment against Walker, and Walker appealed.
A Try for the Independent Approach
Walker asked the Seventh Circuit to review the Wisconsin Supreme Court’s decision in Murray v. Holiday Rambler, Inc.2 and deviate from it. In the alternative, Walker asked the court to certify a question to the Wisconsin Supreme Court so it could revisit its decision in Murray, given the modern trend away from the approach adopted by the Murray court.
Walker wanted – and would likely have benefited from – a shift to the more-popular independent approach to contractual limited remedy provisions.
Under this approach, even if a limited remedy fails of its essential purpose, a consequential damages disclaimer is not automatically unconscionable. The litigant asserting so must still prove procedural and substantive unconscionability to invalidate it.
Thus, Sanchelima would have had to demonstrate not only that the limited remedy provision in the contract at issue was substantively no good and deprived it of a remedy against Walker, but also that something procedurally (during contract negotiations or the like) was unconscionable. This would have put more of an onus on Sanchelima, and, while we do not know, may have resulted in a different case outcome.
Trendy is not Unsettled
However, the Seventh Circuit did not need to go there. Generally, federal courts sitting in diversity can decide cases involving unresolved issues of state law by predicting how a state’s high court would rule.
Because Murray is good law in Wisconsin, the issue presented to the Seventh Circuit was not unresolved. It may be contrary to a current and recent national trend, but the Court noted, it was not unsettled.
The court also could not (as demanded by Walker) certify a question to the Wisconsin Supreme Court requesting that it revisit its holding in Murray. Such certification is allowed only where there is no controlling precedent in the decisions of the state appellate and supreme courts. Clearly, that was not the situation faced by the Seventh Circuit. The Seventh Circuit noted, “If Wisconsin is to adopt the independent approach, its own courts must do so.”
Lesson: Time on Front-end Negotiations Is Well Spent
Hindsight is always 20-20, but the Sanchelima case is a good reminder that spending time to negotiate contractual terms on the front end, and that, as lawyers, explaining their consequences to our clients is time well spent.
1 No. 18-1823 (April 10, 2019)
2 265 N.W.2d 513 (Wis. 1978)