Under Article 2 of the Uniform Commercial Code (“UCC”), a product seller (which includes anyone in the chain of distribution who contracts to sell goods) may be liable for the breach of any warranty it made to the buyer relating to the product.1 However, within certain parameters, the UCC allows the seller to disclaim warranties, in whole or part, and to limit remedies for breach.
In a recent decision, City of New York v. Bell Helicopter Textron, Inc.,2 the US District Court for the Eastern District of New York enforced such disclaimers and limitations in connection with claims against a helicopter manufacturer for the loss of a $12.5 million helicopter caused by alleged defects in the helicopter’s engine, which was manufactured and warranted separately by Pratt & Whitney Corp.
The City of New York entered into a contract in March 2009 to purchase a Bell 412 air-sea rescue helicopter from Bell, through former sales subsidiary Edwards & Associates, and accepted delivery that December.3 The helicopter was sold with three express warranties that are relevant here: (1) a warranty from Bell as helicopter manufacturer; (2) a warranty from Edwards as helicopter seller; and (3) an engine warranty from Pratt & Whitney. Bell and Edwards each disclaimed all warranties other than the helicopter warranty, and expressly disclaimed warranties for the engine as well as the implied warranties of merchantability and fitness for a particular purpose. Bell and Edwards also disclaimed all grounds for liability related to defective parts except as provided in the express helicopter warranty, for which the repair or replacement of defective parts was made the sole remedy. Liability for consequential damages (defined broadly to include “damage to the helicopter or other property”) was also expressly disclaimed.
On September 22, 2010, within the warranty periods, six New York City Police Department officers were conducting a security patrol flight aboard the helicopter when the engine lost power and was forced to make an emergency landing in Jamaica Bay. The crew sustained non-fatal injuries and the helicopter was a total loss.
One month later, Pratt & Whitney issued a recall notice for gearboxes installed in certain of its helicopter engines, including on the Bell 412 accident helicopter. The notice advised that “‘[a]n anomaly may exist’ in the engines’ gearshaft, which causes the gearshaft to ‘fracture, resulting in loss of power.’” The National Transportation Safety Board later attributed the Probable Cause of this accident to such a failure.
The City sued Bell (the alleged assignee of dissolved Edwards) in the Eastern District of New York, alleging breach of contract for non-conforming goods in violation of the express and implied warranties and seeking damages equal, at least, to the approximately $12.5 million helicopter replacement cost. Pratt & Whitney was later added as a defendant. Bell moved to dismiss on the grounds that: (1) the helicopter warranties did not cover engine defects and indeed disclaimed all engine warranties; (2) the helicopter warranties disclaimed all implied warranties; and (3) alternatively, the warranties disclaimed all consequential damages, including damage to the helicopter.
The court agreed with Bell on all counts and dismissed the action against Bell for failure to state a claim on which relief could be granted.
Under UCC §2-719(2), a limited warranty remedy that “fails of its essential purpose” is not enforceable, and in such cases “remedy may be had as provided” in the UCC.4 Typically, this means that if non-conformities cannot be corrected during the warranty period despite repeated repair attempts (or if the seller is unwilling to attempt repairs), the buyer can demand expectation damages or revoke acceptance and receive a substantial refund of amounts paid. The City argued that the Bell and Edwards warranties had “failed of their essential purpose” because “repair or replacement” of the failed gearshaft, by itself, would deprive the City of the “substantial value of its bargain”—that is, a functional $12.5 million air-sea rescue helicopter.
The court noted competing lines of cases that might favor either side if a helicopter part had failed, but since the failed part belonged to an engine that Bell did not warrant at all, it agreed with Bell that both lines of cases were inapplicable. Instead, the key question was whether Bell had properly disclaimed warranties in accordance with UCC §2-316(2). The court noted that the disclaimers appeared in normal-sized font and in all capital letters, from which it concluded that they were “adequately clear and conspicuous” to be enforceable under §2-316(2).
Furthermore, under New York law and UCC §2-719(3), a disclaimer of liability for consequential damages is enforceable unless “unconscionable,” even if a limited “repair or replace” remedy has failed of its essential purpose. Agreed terms in contracts between sophisticated parties are almost never held as unconscionable. Although the City did not argue this point, it was cited by the court in sustaining Bell’s third argument for dismissal.
The City made a final attempt to avoid dismissal with arguments based on certain General Conditions of the contract, all of which were rejected by the Court.
The court ultimately concluded that the City had failed to state any actionable claim for breach of contract, based on the pleadings and the language of that the contracts themselves, which were inextricably intertwined with the pleadings and could therefore be considered in deciding the motion. The action against Bell was dismissed and the case is proceeding against Pratt & Whitney only.
1 The main UCC provisions relating to product warranties (other than title warranties) begin at §2-313, and the principal remedy is in §2-714(2), with important provisions on limitations and disclaimers in §2-719.
2 No. 13 Civ. 6848 (E.D.N.Y. June 16, 2015) (slip opinion).
3 According to the Amended Complaint, Bell was the “assignee and successor-in-interest” to seller Edwards & Associates, Inc., as the surviving entity in a merger of the two companies.
4 NY UCC §2-719(2).