Distributor Awarded Damages After Contract Provision Limiting Damages Voided — Chicago Franchise and Dealer Termination Lawyers Near Naperville and Evanston

A manufacturer of dairy silos and a distributor of such silos entered into an exclusive distribution agreement covering 13 Latin American countries. The agreement specified that the manufacturer would refrain from selling silos to third parties in the covered countries. Despite this, the manufacturer completed almost $4 million in direct sales in the covered countries during the time of the agreement. When the distributor sued, the manufacturer argued that the agreement expressly prohibited recovery of lost profits. The district court and appellate court found that this portion of the contract was unconscionable under Wisconsin’s interpretation of the Uniform Commercial Code, and awarded damages to the distributor as a result.

Walker Stainless Equipment, Co., LLC, and its affiliates, manufacture dairy silos. Sanchelima International, Inc. and its affiliate, sell dairy silos in Latin America. After decades of doing business together, Walker and Sanchelima entered into an agreement in 2013 providing that Sanchelima would be the exclusive distributor of Walker’s products in 13 Latin American countries. Walker agreed not to sell silos directly to third parties in those thirteen countries.

After the agreement was signed, Sanchelima began to market Walker silos in Mexico. Sanchelima hired sales representatives for its Mexico office and attended Mexican trade shows. Walker assigned a representative to work with Sanchelima in Mexico, but otherwise took no steps to market its products in the thirteen countries covered by the agreement. Despite not making any overtures in the countries covered by the agreement, Walker still made substantial direct sales in Latin America, totaling over $600,000 in 2014 alone. In 2015, Walker sold silos to a Nestle plant in Mexico for almost $3 million.

Sanchelima eventually learned of the sale to Nestle and notified Walker that it considered the sale to be a breach of the distribution agreement. When mediation talks broke down, Sanchelima sued. Six months later, Walker notified Sanchelima that it was terminating their agreement without cause. Sanchelima sought damages of more than $600,000. Walker denied the breach and also raised several affirmative defenses, including referencing the limited remedies provision of its distribution agreement with Sanchelima, noting that the agreement explicitly precluded recovery for any lost profits.

Walker moved for summary judgment based on this provision. The district court denied the motion and held that the provision violated Wisconsin’s version of the Uniform Commercial Code § 2-719, codified as Wis. Stat. § 402.719. The Wisconsin statute provided that limited remedies provisions in contracts could be voided if they failed their essential purpose or were unconscionable. The district court found that because the provision in the agreement provided for no remedy in the event of Walker’s breach of the exclusivity arrangement, the provision both failed its essential purpose and was also unconscionable. After a bench trial, the court found that Walker breached the parties’ contract and that, but for the breach, Sanchelima would have made all of the sales that Walker made in Mexico. The district court awarded Sanchelima $778,306.70 in damages for lost profits. Walker then appealed.

The 7th Circuit panel began by stating that, in Wisconsin, the Wisconsin Supreme Court had adopted the “dependent” approach to the interpretation of UCC § 2-719. This approach holds that if a litigant proves that a limited remedy fails of its essential purpose under UCC § 2-719(2), any accompanying consequential damages disclaimer is per se unconscionable under the code. The panel noted that the Wisconsin Supreme Court’s decision was issued in 1978, and in the intervening decades, many state supreme courts have shifted to the “independent” approach, where consequential damages provisions are not necessarily unconscionable in the event that a limited remedies provision fails of its essential purpose.

Walker argued in the appellate court that the 7th Circuit should use the independent approach when applying Wisconsin law. The panel rejected that argument. The panel found that, even if it were the case that the Wisconsin Supreme Court would rule differently on the appropriate approach today, it lacked the power to overturn existing state court precedent. The panel further stated that it was unable to certify the question to the Wisconsin Supreme Court, as the issue was not one that was unresolved under state law. Because the issue was not unresolved, the panel reasoned, the Wisconsin Supreme Court would have no jurisdiction to answer the question was it certified. The panel then concluded that Walker had admitted that no other damages were available in its agreement with Sanchelima, and it, therefore, affirmed the decision of the district court.

You can view the full decision here.

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