57 Cal.App.4th 354 (Cal. Ct. App. 1997)

SONDRA LOCKE et al., Plaintiffs and Appellants, v. WARNER BROS., INC., Defendant and Respondent

Court of Appeal of California, Second District, Division Three

August 25, 1997

KLEIN, P.J.

Plaintiffs and appellants Sondra Locke (Locke) and Caritas Films, a California corporation (Caritas) (sometimes collectively referred to as Locke) appeal a judgment following a grant of summary judgment in favor of defendant and respondent Warner Bros., Inc. (Warner).

The essential issue presented is whether triable issues of material fact are present which would preclude summary judgment.

We conclude triable issues are present with respect to whether Warner breached its development deal with Locke by categorically refusing to work with her, and whether Warner fraudulently entered into said agreement without the intention to work with Locke. The judgment therefore is reversed as to the second and fourth causes of action and otherwise is affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

1. Locke's dispute with Eastwood.

In 1975, Locke came to Warner to appear with Clint Eastwood in THE OUTLAW JOSEY WALES (Warner Bros. 1976). During the filming of the movie, Locke and Eastwood began a personal and romantic relationship. For  the next dozen years, they lived in Eastwood's Los Angeles and Northern California homes. Locke also appeared in a number of Eastwood's films. In 1986, Locke made her directorial debut in RATBOY (Warner Bros. 1986).

In 1988, the relationship deteriorated, and in 1989 Eastwood terminated it. Locke then brought suit against Eastwood, alleging numerous causes of action. That action was resolved by a November 21, 1990, settlement agreement and mutual general release. Under said agreement, Eastwood agreed to pay Locke additional compensation in the sum of $450,000 "on account of past employment and Locke's contentions" and to convey certain real property to her.

2. Locke's development deal with Warner.

According to Locke, Eastwood secured a development deal for Locke with Warner in exchange for Locke's dropping her case against him. Contemporaneously with the Locke/Eastwood settlement agreement, Locke entered into a written agreement with Warner, dated November 27, 1990. It is the Locke/Warner agreement which is the subject of the instant controversy.

The Locke/Warner agreement had two basic components. The first element states Locke would receive $250,000 per year for three years for a "non-exclusive first look deal." It required Locke to submit to Warner any picture she was interested in developing before submitting it to any other studio. Warner then had 30 days either to approve or reject a submission.

The second element of the contract was a $750,000 "pay or play" directing deal. The provision is called "pay or play" because it gives the studio a choice: It can either "play" the director by using the director's services, or pay the director his or her fee.

Unbeknownst to Locke at the time, Eastwood had agreed to reimburse Warner for the cost of her contract if she did not succeed in getting projects produced and developed. Early in the second year of the three-year contract, Warner charged $975,000 to an Eastwood film, UNFORGIVEN (Warner Bros. 1992).

Warner paid Locke the guaranteed compensation of $1.5 million under the agreement. In accordance with the agreement, Warner also provided Locke with an office on the studio lot and an administrative assistant. However, Warner did not develop any of Locke's proposed projects or hire her to direct any films. Locke contends the development deal was a sham, that Warner never intended to make any films with her, and that Warner's sole  motivation in entering into the agreement was to assist Eastwood in settling his litigation with Locke.

3. Locke's action against Warner.

On March 10, 1994, Locke filed suit against Warner, alleging four causes of action.

The first cause of action alleged sex discrimination in violation of public policy. Locke alleged Warner denied her the benefit of the bargain of the development deal on account of her gender.

The third cause of action, captioned "Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing in Violation of Public Policy," alleged a similar claim. Locke pled that in denying her the benefits of the Warner/Locke agreement, Warner was "motivated by [its] discriminatory bias against women in violation of . . . public policy."

We construe both the first and third causes of action as purporting to allege a claim for tortious wrongful discharge in violation of the public policy against sex discrimination. ( Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 665-671 [ 254 Cal.Rptr. 211, 765 P.2d 373]; Rojo v. Kliger (1990) 52 Cal.3d 65, 88-91 [ 276 Cal.Rptr. 130, 801 P.2d 373].)

The second cause of action alleged that Warner breached the contract by refusing to consider Locke's proposed projects and thereby deprived her of the benefit of the bargain of the Warner/Locke agreement.

Lastly, the fourth cause of action alleged fraud. Locke pled that at the time Warner entered into the agreement with her, it concealed and failed to disclose it had no intention of honoring the agreement.

Warner answered, denied each and every allegation and asserted various affirmative defenses.

4. Warner's motion for summary judgment and opposition thereto.

On January 6, 1995, Warner filed a motion for summary judgment. Warner contended it did not breach its contract with Locke because it did consider all the projects she presented, and the studio's decision not to put any of those projects into active development or "hand" Locke a script which it already owned was not a breach of any express or implied contractual duty. Warner asserted the odds are slim a producer can get a project into development and even slimmer a director will be hired to direct a film. During the term of Locke's deal, Warner had similar deals with numerous other producers and directors, who fared no better than Locke. 

As for Locke's sex discrimination claims, Warner averred there was no evidence it ignored Locke's projects or otherwise discriminated against her on account of her gender. Finally, Warner urged the fraud claim was meritless because Locke had no evidence that when Warner signed the contract, it did not intend to honor the deal, and moreover, Warner had fulfilled its contractual obligations to Locke.

In opposing summary judgment, Locke contended Warner breached the agreement in that it had no intention of accepting any project regardless of its merits. Locke also asserted Warner committed fraud by entering into the agreement without any intention of approving any project with Locke or allowing Locke to direct another film.

Locke's opposition papers cited the deposition testimony of Joseph Terry, who recounted a conversation he had with Bob Brassel, a Warner executive, regarding Locke's projects. Terry had stated to Brassel: "`Well, Bob, this woman has a deal on the lot. She's a director that you want to work with. You have a deal with her. . . . I've got five here that she's interested in.' [¶] And then I would get nothing. [¶] . . . [¶] I was told [by Brassel], `Joe, we're not going to work with her,' and then, `That's Clint's deal.' And that's something I just completely did not understand."

Similarly, the declaration of Mary Wellnitz stated: She worked with Locke to set up projects at Warner, without success. Shortly after she began her association with Locke, Wellnitz submitted a script to Lance Young, who at the time was a senior vice-president of production at Warner. After discussing the script, Young told Wellnitz, "Mary, I want you to know that I think Sondra is a wonderful woman and very talented, but, if you think I can go down the hall and tell Bob Daly that I have a movie I want to make with her he would tell me to forget it. They are not going to make a movie with her here."

5. Trial court's ruling.

On February 17, 1995, the trial court granted summary judgment in favor of Warner. Thereafter, the trial court signed an extensive order granting summary judgment. The order stated:

"Under the contract, Warner had no obligation either to put into development any of the projects submitted to the studio for its consideration, or to `hand off' to Locke any scripts for her to direct that it previously had acquired from someone else. The implied covenant of good faith and fair dealing cannot be imposed to create a contract different from the one the  parties negotiated for themselves. Warner had the option to pass on each project Locke submitted. Warner was not required to have a `good faith' or `fair' basis for declining to exercise its right to develop her material. Such a requirement would be improper and unworkable. A judge or jury cannot and should not substitute its judgment for a film studio's when the studio is making the creative decision of whether to develop or produce a proposed motion picture. Such highly subjective artistic and business decisions are not proper subjects for judicial review. Moreover, Warner had legitimate commercial and artistic reasons for declining to develop the projects Locke submitted."

With respect to Locke's claim she was defrauded by Warner when it entered into the agreement with the undisclosed intention not to honor its contractual obligations, the trial court ruled that because Warner did not breach its contractual obligations to Locke, the fraud claim was meritless. Also, it could not be inferred from the statements by Young and Brassel that two years earlier, when Warner entered into agreement, it had no intention of working with Locke.

As for the two causes of action alleging sex discrimination, the trial court found no evidence Warner declined to develop the projects Locke submitted, and declined to use her directing services, on account of her gender.

Locke filed a timely notice of appeal from the judgment.

CONTENTIONS

Locke contends: The trial court erred by granting Warner's motion for summary judgment based on its conclusion there were no disputed issues of material fact; the trial court erred in weighing the evidence, resolving doubts against Locke, the nonmoving party, and adopting only those inferences favorable to Warner where the evidence supported contrary inferences; and the trial court committed reversible error first by failing to make any findings or evidentiary rulings and then by adopting Warner's defective ruling.

DISCUSSION

1. Standard of appellate review.

(1) As we recently stated in PMC, Inc. v. Saban Entertainment, Inc. (1996) 45 Cal.App.4th 579, 590 [ 52 Cal.Rptr.2d 877], summary judgment "motions are to expedite litigation and eliminate needless trials. [Citation.]  They are granted `if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.' [Citations.]"

(2) A defendant meets its burden upon such a motion if it negates an essential element of the plaintiff's cause of action, or establishes a complete defense, or if it demonstrates the absence of evidence to support the plaintiff's case. Once the moving defendant has met its initial burden, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists. ( PMC, Inc. v. Saban Entertainment, Inc., supra, 45 Cal.App.4th at p. 590; Leslie G. v. Perry Associates(1996) 43 Cal.App.4th 472, 482 [ 50 Cal.Rptr.2d 785] .)

(3) On appeal, "we exercise `an independent assessment of the correctness of the trial court's ruling, applying the same legal standard as the trial court. . . .' [Citations.] `[W]e construe the moving party's affidavits strictly, construe the opponent's affidavits liberally, and resolve doubts about the propriety of granting the motion in favor of the party opposing it.' [Citations.]" ( PMC, Inc., v. Saban Entertainment, Inc., supra, 45 Cal.App.4th at p. 590.)

Our review is guided by the foregoing principles.

Warner interposed extensive evidentiary objections, including objections to portions of Wellnitz's declaration and Terry's deposition testimony. However, we specifically note the absence of any objection by Warner to Terry's statement, "I was told, `Joe, we're not going to work with her,' and then, `That's Clint's deal.'" Also, the only objection below to Wellnitz's assertion that Young told her "if you think I can go down the hall and tell Bob Daly that I have a movie I want to make with her he would tell me to forget it. They are not going to make a movie with her here," is that Young's statement was irrelevant. The trial court disposed of all the objections by ruling: "To the extent the parties' evidentiary objections are pertinent to the Court's decision on the motion for summary judgment, the defendant's evidentiary objections are sustained and the plaintiffs' objections are overruled." This sweeping ruling was erroneous because, inter alia, the relevancy objection was meritless and should have been overruled. Therefore, the subject statements are properly before this court.

2. A triable issue exists as to whether Warner breached its contract with Locke by failing to evaluate Locke's proposals on their merits.

(4a) As indicated, the second cause of action alleged Warner breached the contract by "refusing to consider the projects prepared by [Locke] and  depriving [Locke] of the benefit of the bargain of the Warner-Locke agreement."

Contrary to Warner's contention Locke is raising an unpled claim for breach of the implied covenant of good faith and fair dealing, the second cause of action for breach of contract adequately alleges Warner deprived Locke of the benefit of the bargain of the development deal by refusing to consider her projects. Such conduct by Warner, if proven, would amount to a breach of the covenant, implied "in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. [Citation.]" ( Comunale v. Traders General Ins. Co. (1958) 50 Cal.2d 654, 658 [ 328 P.2d 198, 68 A.L.R.2d 883]; accord, Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36 [ 44 Cal.Rptr.2d 370, 900 P.2d 619].)

In granting summary judgment on this claim, the trial court ruled "[a] judge or jury cannot and should not substitute its own judgment for a film studio's when the studio is making the creative decision of whether to develop or produce a proposed motion picture. Such highly-subjective artistic and business decisions are not proper subjects for judicial review."

The trial court's ruling missed the mark by failing to distinguish between Warner's right to make a subjective creative decision, which is not reviewable for reasonableness, and the requirement the dissatisfaction be bona fide or genuine.

a. General principles.

(5) "`[W]here a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.' [Citations.]" ( Perdue v. Crocker National Bank(1985) 38 Cal.3d 913, 923 [ 216 Cal.Rptr. 345, 702 P.2d 503]; accord, Kendall v. Ernest Pestana, Inc. (1985) 40 Cal.3d 488, 500 [ 220 Cal.Rptr. 818, 709 P.2d 837].) It is settled that in "`every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. . . .'" ( Kendall, supra, at p. 500; accord, Waller, v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 36.)

Therefore, when it is a condition of an obligor's duty that he or she be subjectively satisfied with respect to the obligee's performance, the subjective standard of honest satisfaction is applicable. (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 729, p. 659; Rest.2d Contracts, § 228, coms. a, b, pp. 182-183.) "Where the contract involves matters of fancy, taste or judgment, the promisor is the sole judge of his satisfaction. If he asserts in good faith that he is not satisfied, there can be no inquiry into the reasonableness of his attitude. [Citations.] [¶] Traditional examples are employment contracts . . . and agreements to paint a portrait, write a literary or  scientific article, or produce a play or vaudeville act. [Citations.]" (1 Witkin, Summary of Cal. Law, supra, § 730, p. 660; accord, Schuyler v. Pantages(1921) 54 Cal.App. 83, 85-87 [ 201 P. 137].) In such cases, "the promisor's determination that he is not satisfied, when made in good faith, has been held to be a defense to an action on the contract. [Citations.]" ( Mattei v. Hopper (1958) 51 Cal.2d 119, 123 [ 330 P.2d 625], italics added.)

(4b) Therefore, the trial court erred in deferring entirely to what it characterized as Warner's "creative decision" in the handling of the development deal. If Warner acted in bad faith by categorically rejecting Locke's work and refusing to work with her, irrespective of the merits of her proposals, such conduct is not beyond the reach of the law.

b. Locke presented evidence from which a trier of fact reasonably could infer Warner breached the agreement by refusing to consider her proposals in good faith.

Merely because Warner paid Locke the guaranteed compensation under the agreement does not establish Warner fulfilled its contractual obligation. As pointed out by Locke, the value in the subject development deal was not merely the guaranteed payments under the agreement, but also the opportunity to direct and produce films and earn additional sums, and most importantly, the opportunity to promote and enhance a career.

Unquestionably, Warner was entitled to reject Locke's work based on its subjective judgment, and its creative decision in that regard is not subject to being second-guessed by a court. However, bearing in mind the requirement that subjective dissatisfaction must be an honestly held dissatisfaction, the evidence raises a triable issue as to whether Warner breached its agreement with Locke by not considering her proposals on their merits.

As indicated, the deposition testimony of Joseph Terry recounted a conversation he had with Bob Brassel, a Warner executive, regarding Locke's projects. In that conversation, Brassel stated "`Joe, we're not going to work with her,' and then, `That's Clint's deal.'"

Similarly, the declaration of Mary Wellnitz recalled a conversation she had with Lance Young, a senior vice-president of production at Warner. After discussing the script with Wellnitz, Young told her: "Mary, I want you to know that I think Sondra is a wonderful woman and very talented, but, if  you think I can go down the hall and tell Bob Daly that I have a movie I want to make with her he would tell me to forget it. They are not going to make a movie with her here."

The above evidence raises a triable issue of material fact as to whether Warner breached its contract with Locke by categorically refusing to work with her, irrespective of the merits of her proposals. While Warner was entitled to reject Locke's proposals based on its subjective dissatisfaction, the evidence calls into question whether Warner had an honest or good faith dissatisfaction with Locke's proposals, or whether it merely went through the motions of purporting to "consider" her projects.

c. No merit to Warner's contention Locke seeks to rewrite the instant agreement to limit Warner's discretionary power.

Warner argues that while the implied covenant of good faith and fair dealing is implied in all contracts, it is limited to assuring compliance with the express terms of the contract and cannot be extended to create obligations not contemplated in the contract. ( Racine Laramie, Ltd. v. Department of Parks Recreation (1992) 11 Cal.App.4th 1026, 1032 [ 14 Cal.Rptr.2d 335] .)

This principle is illustrated in Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 351-352 [ 6 Cal.Rptr.2d 467, 826 P.2d 710], wherein the parties entered into a lease agreement which stated that if the tenant procured a potential sublessee and asked the landlord for consent to sublease, the landlord had the right to terminate the lease, enter into negotiations with the prospective sublessee, and appropriate for itself all profits from the new arrangement. Carma recognized "[t]he covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another." ( Id., at p. 372.) The court expressed the view that "[s]uch power must be exercised in good faith." ( Ibid.) At the same time, Carmaupheld the right of the landlord under the express terms of the lease to freely exercise its discretion to terminate the lease in order to claim for itself — and deprive the tenant of — the appreciated rental value of the premises. ( Id., at p. 376.)

In this regard, Carma stated: "We are aware of no reported case in which a court has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement. On the contrary, as a general matter, implied terms should never be read to vary  express terms. [Citations.] `The general rule [regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing. . . . [¶] This is in accord with the general principle that, in interpreting a contract "an implication . . . should not be made when the contrary is indicated in clear and express words." 3 Corbin, Contracts, § 564, p. 298 (1960). . . . [¶] As to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct. And if defendants were given the right to do what they did by the express provisions of the contract there can be no breach.' [Citation.]" ( Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., supra, 2 Cal.4th at p. 374, italics added.)

In Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 801 [ 48 Cal.Rptr.2d 747], the issue presented was "whether a promise to market music, or to refrain from doing so, at the election of the promisor is subject to the implied covenant of good faith and fair dealing where substantial consideration has been paid by the promisor."

In that case, Warner Communications obtained from Third Story Music (TSM) the worldwide right to manufacture, sell, distribute and advertise the musical output of singer/songwriter Tom Waits. ( Third Story Music, Inc. v. Waits, supra, 41 Cal.App.4th at pp. 800-801.) The agreement also specifically stated that Warner Communications "`may at our election refrain from any or all of the foregoing.'" ( Id., at p. 801.) TSM sued Warner Communications for contract damages based on breach of the implied covenant of good faith and fair dealing, claiming Warner Communications had impeded TSM's receiving the benefit of the agreement. ( Id.,at p. 802.) Warner Communications demurred to the complaint, alleging the clause in the agreement permitting it to "`at [its] election refrain' from doing anything to profitably exploit the music is controlling and precludes application of any implied covenant." ( Ibid.) The demurrer was sustained on those grounds. ( Ibid.)

The reviewing court affirmed, holding the implied covenant was unavailing to the plaintiff. ( Third Story Music, Inc. v. Waits, supra, 41 Cal.App.4th at pp. 808-809.) Because the agreement expressly provided Warner Communications had the right to refrain from marketing the Waits recordings, the implied covenant of good faith and fair dealing did not limit the discretion given to Warner Communications in that regard. ( Ibid.; Carma Developers  (Cal.), Inc. v. Marathon Development California, Inc., supra, 2 Cal.4th at p. 374.)

Warner's reliance herein on Third Story Music, Inc., is misplaced. The Locke/Warner agreement did not give Warner the express right to refrain from working with Locke. Rather, the agreement gave Warner discretion with respect to developing Locke's projects. The implied covenant of good faith and fair dealing obligated Warner to exercise that discretion honestly and in good faith.

In sum, the Warner/Locke agreement contained an implied covenant of good faith and fair dealing, that neither party would frustrate the other party's right to receive the benefits of the contract. ( Comunale v. Traders General Ins. Co., supra, 50 Cal. 2d at p. 658; Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 36.) Whether Warner violated the implied covenant and breached the contract by categorically refusing to work with Locke is a question for the trier of fact.

3. A triable issue exists as to whether Warner made a fraudulent promise.

(6) In the fourth cause of action, Locke pled at the time Warner entered into the agreement with her, it concealed and failed to disclose it had no intention of honoring the agreement.

Although Warner contends Locke has an unalleged claim for fraudulent concealment, the fourth cause of action adequately pled a cause of action for fraud. In addition to pleading a promise was made and was not fulfilled, Locke alleged Warner did not intend to perform when it made the promise. (Civ. Code, § 1710, subd. 4; Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 30 [ 216 Cal.Rptr. 130, 702 P.2d 212]; 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 685, pp. 786-787.)

The trial court held that because Warner did not breach any express or implied obligations owed to Locke, she could not prevail on the fraud claim. However, as explained above, a triable issue exists as to whether Warner breached the agreement with Locke. Therefore, the trial court's rationale for disposing of the fraud claim is undermined.

The trial court also ruled Locke could not prevail on the fraud claim because there was no evidence Warner had a fraudulent intent at the time the parties entered into the contract. The trial court acknowledged Locke "filed a declaration of her development assistant, Mary Wellnitz, in which Ms.  Wellnitz states that a Warner Bros. executive, Lance Young, remarked in late 1992 that Warner Bros. was `not going to make a movie' with Ms. Locke. [Locke] also offered the deposition testimony of a third party, Joe Terry, in which he recalled a 1993 conversation with another Warner Bros. production executive, Bob Brassel, in which Mr. Brassel said that the studio was not going to work with Ms. Locke. However, the Court does not believe that these statements would permit a jury to infer that two years earlier, when plaintiffs and the defendant entered into their contract, Warner Bros. intended to breach its obligations."

We disagree. Fraudulent intent must often be established by circumstantial evidence, and may be "inferred from such circumstances as defendant's . . . failure even to attempt performance, . . ." ( Tenzer v. Superscope, Inc., supra, 39 Cal. 3d at p. 30.) Based on the above evidence that Warner had expressed an absolute unwillingness to work with Locke, a trier of fact reasonably could infer Warner never intended to give Locke's proposals a good faith evaluation and that Warner entered into the agreement with Locke solely as an accommodation to Eastwood, who had promised to reimburse Warner for any losses under the agreement. The trial court erred in concluding such an inference could not be drawn from the evidence. We conclude the issue of fraudulent intent is one for the trier of fact.

4. Locke waived any error in the trial court's ruling with respect to her causes of action alleging gender bias.

Locke's opening brief does not assert any error in the trial court's disposition of her two causes of action alleging sex discrimination. Accordingly, this court may treat the claims as having been waived.

Belatedly, Locke's reply brief contends she presented evidence which raised the inference she was discriminated against because of her gender. "Ordinarily, [appellants'] failure to raise an issue in their opening brief waives the issue on appeal. [Citation.]" ( Tisher v. California Horse Racing Bd. (1991) 231 Cal.App.3d 349, 361 [ 282 Cal.Rptr. 330]; accord, 1119 Delaware v. Continental Land Title Co. (1993) 16 Cal.App.4th 992, 1004 [ 20 Cal.Rptr.2d 438]; Regency Outdoor Advertising, Inc. v. Carolina Lanes, Inc. (1995) 31 Cal.App.4th 1323, 1333 [ 37 Cal.Rptr.2d 552].) Locke has not shown good cause for the untimely contention. Therefore, we disregard Locke's argument the trial court erred in granting summary judgment on the first and third causes of action. 

5. Remaining issues not reached.

Because we find triable issues are present with respect to the second and fourth causes of action, it is unnecessary to address Locke's remaining contentions.

DISPOSITION

The judgment is reversed with respect to the second and fourth causes of action and is otherwise affirmed. Locke to recover costs on appeal.

Kitching, J., and Aldrich, J., concurred.

A petition for a rehearing was denied September 24, 1997, and respondent's petition for review by the Supreme court was denied November 19, 1997.

173 Cal. App. 3d 13

BRIAN KEITH, Plaintiff and Appellant, v. JAMES BUCHANAN et al., Defendants and Respondents.

No. B004734

Court of Appeals of California, Second Appellate District, Division Six

October 9, 1985

Charles C. McCarthy, McCarthy, Bullis & Post and McCarthy & Bullis for Plaintiff and Appellant.

Jessup & Beecher, Keith D. Beecher, William R. Alvin, Fairfield, McDonald, Sullard & Lane and William M. Slaughter for Defendants and Respondents.

OCHOA, J.

This breach of warranty case is before this court after the trial court granted defendants' motion for judgment at the close of plaintiff's [173 Cal. App. 3d 18] case during the trial proceedings. We hold that an express warranty under section 2313 of the California Uniform Commercial Code was created in this matter, and that actual reliance on the seller's factual representation need not be shown by the buyer. The representation is presumed to be part of the basis of the bargain, and the burden is on the seller to prove that the representation was not a consideration inducing the bargain. We affirm all other aspects of the trial court's judgment but reverse in regard to its finding that no express warranty was created and remand for further proceedings consistent with this opinion.

Statement of Facts

Plaintiff, Brian Keith, purchased a sailboat from defendants in November 1978 for a total purchase price of $75,610. Even though plaintiff belonged to the Waikiki Yacht Club, had attended a sailing school, had joined the Coast Guard Auxiliary, and had sailed on many yachts in order to ascertain his preferences, he had not previously owned a yacht. He attended a boat show in Long Beach during October 1978 and looked at a number of boats, speaking to sales representatives and obtaining advertising literature. In the literature, the sailboat which is the subject of this action, called an "Island Trader 41," was described as a seaworthy vessel. In one sales brochure, this vessel is described as "a picture of sure-footed seaworthiness." In another, it is called "a carefully well-equipped, and very seaworthy live-aboard vessel." Plaintiff testified he relied on representations in the sales brochures in regard to the purchase. Plaintiff and a sales representative also discussed plaintiff's desire for a boat which was ocean-going and would cruise long distances.

Plaintiff asked his friend, Buddy Ebsen, who was involved in a boat building enterprise, to inspect the boat. Mr. Ebsen and one of his associates, both of whom had extensive experience with sailboats, observed the boat and advised plaintiff that the vessel would suit his stated needs. A deposit was paid on the boat, a purchase contract was entered into, and optional accessories for the boat were ordered. After delivery of the vessel, a dispute arose in regard to its seaworthiness.

Plaintiff filed the instant lawsuit alleging causes of action in breach of express warranty and breach of implied warranty. The trial court granted defendants' Code of Civil Procedure section 631.8 motion for judgment at the close of plaintiff's case. The court found that no express warranty was established by the evidence because none of the defendants had undertaken in writing to preserve or maintain the utility or performance of the vessel, nor to provide compensation for any failure in utility or performance. It found that the written statements produced at trial were opinions or commendations [173 Cal. App. 3d 19] of the vessel. The court further found that no implied warranty of fitness was created because the plaintiff did not rely on the skill and judgment of defendants to select and furnish a suitable vessel, but had rather relied on his own experts in selecting the vessel.

Discussion

I. Express Warranty

[1] California Uniform Commercial Code section 2313 fn. 1 provides, inter alia, that express warranties are created by (1) any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain, and (2) any description of the goods which is made part of the basis of the bargain. Formal words such as "warranty" or "guarantee" are not required to make a warranty, but the seller's affirmation of the value of the goods or an expression of opinion or commendation of the goods does not create an express warranty.

[2] In addition, the Song-Beverly Consumer Warranty Act (Civ. Code, § 1790 et seq.) establishes broad statutory control over warranties in consumer sales where consumer goods are used or bought for use primarily for personal, family, or household purposes. Provisions of the Civil Code relating to warranties do not affect the rights and obligations of parties under the Commercial Code, except that where conflicts exist between the code provisions, the rights guaranteed to buyers of consumer goods under the provisions of the Consumer Warranty Act prevail. (Civ. Code, § 1790.3.)

The act defines an express warranty, in pertinent part, as "[a] written statement arising out of a sale to the consumer of a consumer good pursuant to which the manufacturer, distributor, or retailer undertakes to preserve or maintain the utility or performance of the consumer good or provide compensation if there is a failure in utility or performance ...." (Civ. Code, § 1791.2, subd. (a)(1).) Again, formal words are not required in order to [173 Cal. App. 3d 20] create an express warranty, but statements of value, opinion, or commendation do not create a warranty.

The trial court appropriately found that there was no written undertaking to preserve or maintain the utility or performance of a consumer good or to provide compensation if there was a failure in utility or performance at the time the purchase contract for the sailboat was made. No claim, therefore, is cognizable that an express warranty existed in this action pursuant to the provisions of the Song-Beverly Consumer Warranty Act. However, at the time of argument on the motion for judgment, plaintiff's counsel had argued claims based on express warranty under the provisions of both the Civil Code and the Commercial Code, and no analysis was undertaken in regard to express warranty under the provisions of the California Uniform Commercial Code.

California Uniform Commercial Code section 2313, regarding express warranties, was enacted in 1963 and consists of the official text of Uniform Commercial Code section 2-313 without change. [3] In deciding whether a statement made by a seller constitutes an express warranty under this provision, the court must deal with three fundamental issues. First, the court must determine whether the seller's statement constitutes an "affirmation of fact or promise" or "description of the goods" under California Uniform Commercial Code section 2313, subdivision (1)(a) or (b), or whether it is rather "merely the seller's opinion or commendation of the goods" under section 2313, subdivision (2). Second, assuming the court finds the language used susceptible to creation of a warranty, it must then be determined whether the statement was "part of the basis of the bargain." Third, the court must determine whether the warranty was breached. (See Sessa v. Riegle (E.D.Pa. 1977) 427 F. Supp. 760, 765.)

[4] A warranty relates to the title, character, quality, identity, or condition of the goods. The purpose of the law of warranty is to determine what it is that the seller has in essence agreed to sell. (A. A. Baxter Corp. v. Colt Industries, Inc. (1970) 10 Cal. App. 3d 144, 153 [88 Cal. Rptr. 842].) "Express warranties are chisels in the hands of buyers and sellers. With these tools, the parties to a sale sculpt a monument representing the goods. Having selected a stone, the buyer and seller may leave it almost bare, allowing considerable play in the qualities that fit its contours. Or the parties may chisel away inexactitudes until a well-defined shape emerges. The seller is bound to deliver, and the buyer to accept, goods that match the sculpted form. [Fn. omitted] (Special Project: Article Two Warranties in Commercial Transactions, Express Warranties--Section 2-313 (1978-79) 64 Cornell L.Rev. 30 (hereafter cited as Warranties in Commercial Transactions) at pp. 43-44.) [173 Cal. App. 3d 21]

A. Affirmation of fact, promise or description versus statement of opinion, commendation or value.

[5] "The determination as to whether a particular statement is an expression of opinion or an affirmation of a fact is often difficult, and frequently is dependent upon the facts and circumstances existing at the time the statement is made." (Willson v. Municipal Bond Co. (1936) 7 Cal. 2d 144, 150 [59 P.2d 974].) Recent decisions have evidenced a trend toward narrowing the scope of representations which are considered opinion, sometimes referred to as "puffing" or "sales talk," resulting in an expansion of the liability that flows from broad statements of manufacturers or retailers as to the quality of their products. Courts have liberally construed affirmations of quality made by sellers in favor of injured consumers. (Hauter v. Zogarts (1975) 14 Cal. 3d 104, 112 [120 Cal. Rptr. 681, 534 P.2d 377, 7 A.L.R.3d 1282]; see also 55 Cal.Jur.3d, Sales, § 74, p. 580.) It has even been suggested "that in an age of consumerism all seller's statements, except the most blatant sales pitch, may give rise to an express warranty." (1 Alderman and Dole, A Transactional Guide to the Uniform Commercial Code (2d ed. 1983) p. 89.)

Courts in other states have struggled in efforts to create a formula for distinguishing between affirmations of fact, promises, or descriptions of goods on the one hand, and value, opinion, or commendation statements on the other. fn. 2 The code comment indicates that the basic question is: "What statements of the seller have in the circumstances and in objective judgment become part of the basis of the bargain?" The commentators indicated that the language of subsection (2) of the code section was included because "common experience discloses that some statements or predictions cannot fairly be viewed as entering into the bargain." (See U. Com. Code com. 8 to Cal. U. Com. Code, § 2313, West's Ann. Com. Code (1964) p. 250, Deering's Cal. Codes Ann. p. 143.)

Statements made by a seller during the course of negotiation over a contract are presumptively affirmations of fact unless it can be demonstrated that the buyer could only have reasonably considered the statement as a statement of the seller's opinion. Commentators have noted several factors which tend to indicate an opinion statement. These are (1) a lack of specificity in the statement made, (2) a statement that is made in an equivocal manner, or (3) a statement which reveals that the goods are experimental in nature. (See Warranties in Commercial Transactions, supra, at pp. 61-65.) [173 Cal. App. 3d 22]

[6] It is clear that statements made by a manufacturer or retailer in an advertising brochure which is disseminated to the consuming public in order to induce sales can create express warranties. (Fundin v. Chicago Pneumatic Tool Co. (1984) 152 Cal. App. 3d 951, 957 [199 Cal. Rptr. 789]; see also Community Television Services v. Dresser Industries (8th Cir. 1978) 586 F.2d 637, 640, cert. den. 1979; Fargo Mach. & Tool Co. v. Kearney & Trecker Corp. (E.D.Mich. 1977) 428 F. Supp. 364, 370-371; Colorado-Ute Elec. Ass'n, Inc. v. Envirotech Corp. (D.Colo. 1981) 524 F. Supp. 1152, 1156; Neville Const. Co. v. Cook Paint and Varnish Co. (8th Cir. 1982) 671 F.2d 1107, 1110.) In the instant case, the vessel purchased was described in sales brochures as "a picture of sure-footed seaworthiness" and "a carefully well-equipped and very seaworthy vessel." The seller's representative was aware that appellant was looking for a vessel sufficient for long distance ocean-going cruises. The statements in the brochure are specific and unequivocal in asserting that the vessel is seaworthy. Nothing in the negotiation indicates that the vessel is experimental in nature. In fact, one sales brochure assures prospective buyers that production of the vessel was commenced "after years of careful testing." The representations regarding seaworthiness made in sales brochures regarding the Island Trader 41 were affirmations of fact relating to the quality or condition of the vessel.

B. "Part of the basis of the bargain" test.

[7] Under former provisions of law, a purchaser was required to prove that he or she acted in reliance upon representations made by the seller. (Grinnell v. Charles Pfizer & Co. (1969) 274 Cal. App. 2d 424, 440 [79 Cal. Rptr. 369].) California Uniform Commercial Code section 2313 indicates only that the seller's statements must become "part of the basis of the bargain." According to official comment 3 to this Uniform Commercial Code provision, "no particular reliance ... need be shown in order to weave [the seller's affirmations of fact] into the fabric of the agreement. Rather, any fact which is to take such affirmations, once made, out of the agreement requires clear affirmative proof." (See U. Com. Code com. 3 to Cal. U. Com. Code, § 2313, 23A West's Ann. Com. Code (1964 ed.) p. 249, Deering's Ann. Cal. U. Com. Code (1970 ed.) p. 142.)

The California Supreme Court, in discussing the continued viability of the reliance factor, noted that commentators have disagreed in regard to the impact of this development. Some have indicated that it shifts the burden of proving nonreliance to the seller, and others have indicated that the code eliminates the concept of reliance altogether. (Hauter v. Zogarts, supra, 14 Cal.3d at pp. 115-116.) The court did not resolve this issue, but noted that decisions of other states prior to that time had "ignored the significance of the new standard and have held that consumer reliance still is a vital ingredient [173 Cal. App. 3d 23] for recovery based on express warranty." (Id, at p. 116, fn. 13; see also Fogo v. Cutter Laboratories, Inc. (1977) 68 Cal. App. 3d 744, 760 [137 Cal. Rptr. 417].)

The shift in language clearly changes the degree to which it must be shown that the seller's representation affected the buyer's decision to enter into the agreement. A buyer need not show that he would not have entered into the agreement absent the warranty or even that it was a dominant factor inducing the agreement. A warranty statement is deemed to be part of the basis of the bargain and to have been relied upon as one of the inducements for the purchase of the product. In other words, the buyer's demonstration of reliance on an express warranty is "not a prerequisite for breach of warranty, as long as the express warranty involved became part of the bargain. See White & Summers, Uniform Commercial Code (2d ed. 1980) § 9-4. If, however, the resulting bargain does not rest at all on the representations of the seller, those representations cannot be considered as becoming any part of the 'basis of the bargain.' ..." (Allied Fidelity Ins. Co. v. Pico (1983) 99 Nev. 15 [656 P.2d 849, 850].)

The official Uniform Commercial Code comment in regard to section 2-313 "indicates that in actual practice affirmations of fact made by the seller about the goods during a bargain are regarded as part of the description of those goods; hence no particular reliance on such statements need be shown in order to weave them into the fabric of the agreement." (Young & Cooper, Inc. v. Vestring (1974) 214 Kan. 311 [521 P.2d 281, 291]; Brunner v. Jensen (1974) 215 Kan. 416 [524 P.2d 1175, 1185].) It is clear from the new language of this code section that the concept of reliance has been purposefully abandoned. (Interco Inc. v. Randustrial Corp. (Mo.App. 1976) 533 S.W.2d 257, 261; see also Winston Industries, Inc. v. Stuyvesant Insurance Co., Inc. (1975) 55 Ala.App. 525 [317 So. 2d 493, 497].)

The change of the language in section 2313 of the California Uniform Commercial Code modifies both the degree of reliance and the burden of proof in express warranties under the code. The representation need only be part of the basis of the bargain, or merely a factor or consideration inducing the buyer to enter into the bargain. A warranty statement made by a seller is presumptively part of the basis of the bargain, and the burden is on the seller to prove that the resulting bargain does not rest at all on the representation.

[8] The buyer's actual knowledge of the true condition of the goods prior to the making of the contract may make it plain that the seller's statement was not relied upon as one of the inducements for the purchase, but the burden is on the seller to demonstrate such knowledge on the part of the [173 Cal. App. 3d 24] buyer. Where the buyer inspects the goods before purchase, he may be deemed to have waived the seller's express warranties. But, an examination or inspection by the buyer of the goods does not necessarily discharge the seller from an express warranty if the defect was not actually discovered and waived. (Doak Gas Engine Co. v. Fraser (1914) 168 Cal. 624, 627 [143 P. 1024]; Munn v. Earle C. Anthony, Inc. (1918) 36 Cal. App. 312, 315 [171 P. 1082]; Capital Equipment Enter., Inc. v. North Pier Terminal Co. (1969) 117 Ill.App.2d 264 [254 N.E.2d 542, 545].)

[9] Appellant's inspection of the boat by his own experts does not constitute a waiver of the express warranty of seaworthiness. Prior to the making of the contract, appellant had experienced boat builders observe the boat, but there was no testing of the vessel in the water. fn. 3 Such a warranty (seaworthiness) necessarily relates to the time when the vessel has been put to sea (Werner v. Montana (1977) 117 N.H. 721 [378 A.2d 1130, 1134-1135]) and has been shown to be reasonably fit and adequate in materials, construction, and equipment for its intended purposes (Daly v. General Motors Corp. (1978) 20 Cal. 3d 725, 739 [144 Cal. Rptr. 380, 575 P.2d 1162]; Vittone v. American President Lines (1964) 228 Cal. App. 2d 689, 693-694 [39 Cal.Rptr. 758]).

In this case, appellant was aware of the representations regarding seaworthiness by the seller prior to contracting. He also had expressed to the seller's representative his desire for a long distance ocean-going vessel. Although he had other experts inspect the vessel, the inspection was limited and would not have indicated whether or not the vessel was seaworthy. It is clear that the seller has not overcome the presumption that the representations regarding seaworthiness were part of the basis of this bargain.

II. Implied Warranty

Appellant also claimed breach of the implied warranty of fitness for a particular purpose fn. 4 in regard to the sale of the subject vessel. An implied [173 Cal. App. 3d 25] warranty of fitness for a particular purpose arises when a "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," which are fit for such purpose. (Cal. U. Com. Code, § 2315.) The Consumer Warranty Act makes such an implied warranty applicable to retailers, distributors, and manufacturers. (Civ. Code, §§ 1791.1, 1792.1, 1792.2, subd. (a).) [10] An implied warranty of fitness for a particular purpose arises only where (1) the purchaser at the time of contracting intends to use the goods for a particular purpose, (2) the seller at the time of contracting has reason to know of this particular purpose, (3) the buyer relies on the seller's skill or judgment to select or furnish goods suitable for the particular purpose, and (4) the seller at the time of contracting has reason to know that the buyer is relying on such skill and judgment. (Metowski v. Traid Corp. (1972) 28 Cal. App. 3d 332, 341 [104 Cal. Rptr. 599].)

The reliance elements are important to the consideration of whether an implied warranty of fitness for a particular purpose exists. "If the seller had no reason to know that he was being relied upon, his conduct in providing goods cannot fairly be deemed a tacit representation of their suitability for a particular purpose. And if the buyer did not in fact rely, then the principal justification for imposing a fitness warranty disappears." (See Warranties in Commercial Transactions, supra, at p. 89.) The major question in determining the existence of an implied warranty of fitness for a particular purpose is the reliance by the buyer upon the skill and judgment of the seller to select an article suitable for his needs. (Bagley v. International Harvester Co. (1949) 91 Cal. App. 2d 922, 925 [206 P.2d 43]; Drumar M. Co. v. Morris Ravine M. Co. (1939) 33 Cal. App. 2d 492, 495-496 [92 P.2d 424].)

[11a] The trial court found that the plaintiff did not rely on the skill and judgment of the defendants to select a suitable vessel, but that he rather relied on his own experts. [12] "Our sole task is to determine 'whether the evidence, viewed in the light most favorable to [respondent], sustains [these] findings.' [Citations.] Moreover, 'in examining the sufficiency of the evidence to support a questioned finding an appellate court must accept as true all evidence tending to establish the correctness of the finding as made, taking into account, as well, all inferences which might reasonably have been thought by the trial court to lead to the same conclusion.' [Citations.] If appellate scrutiny reveals that substantial evidence supports the trial court's findings and conclusions, the judgment must be affirmed." (Board of Education v. Jack M. (1977) 19 Cal. 3d 691, 697 [139 Cal. Rptr. 700, 566 P.2d 602].)

[11b] A review of the record reveals ample evidence to support the trial court's finding. Appellant had extensive experience with sailboats at the [173 Cal. App. 3d 26] time of the subject purchase, even though he had not previously owned such a vessel. He had developed precise specifications in regard to the type of boat he wanted to purchase. He looked at a number of different vessels, reviewed their advertising literature, and focused on the Island Trader 41 as the object of his intended purchase. He also had friends look at the boat before making the final decision to purchase. The trial court's finding that the buyer did not rely on the skill or judgment of the seller in the selection of the vessel in question is supported by substantial evidence.

The trial court's judgment that no express warranty existed in this matter is reversed. The trial court's judgment is affirmed in all other respects. Since considerable contradictory evidence was elicited at trial relating to the asserted breach of warranty of seaworthiness of the subject vessel, and since the trial court made no finding in regard to that issue, the matter is remanded to the trial court for further proceedings consistent with this opinion. Each party is to bear his own costs on appeal.

Stone, P. J., and Gilbert, J., concurred.

FN 1. Section 2313: "(1) Express warranties by the seller are created as follows:

"(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

"(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

"(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

"(2) It is not necessary to the creation of an express warranty that the seller use formal words such as 'warrant' or 'guarantee' or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty."

FN 2. See Wedding v. Duncan (1949) 310 Ky. 374 [220 S.W.2d 564, 567]; Boehm v. Fox (Kan.App.1973) 12 U.Com.Code Rep.Ser. 32, 40; Pake v. Byrd (1982) 55 N.C.App. 551 [286 S.E.2d 588, 589-590].

FN 3. Evidence was presented of examination or inspection of the boat after the making of the contract of sale and prior to delivery and acceptance of the vessel. Such an inspection would be irrelevant to any issue of express warranty. Although it deals with implied warranties as opposed to express warranties, the Uniform Commercial Code comment 8 to section 2-316 (Cal.U. Com. Code, § 2316) is instructive: "Under paragraph (b) of subsection (3) warranties may be excluded or modified by the circumstances where the buyer examines the goods or a sample or model of them before entering into the contract. 'Examination' as used in this paragraph is not synonymous with inspection before acceptance or at any other time after the contract has been made. It goes rather to the nature of the responsibility assumed by the seller at the time of the making of the contract." (See U. Com. Code com. 8 to Cal. U. Com. Code, § 2316, 23A West's Ann. Com. Code (1964 ed.) p. 308, Deering's Ann. Cal. U. Com. Code (1970 ed.) p. 193, italics added.)

FN 4. No claim of breach of implied warranty of merchantability has been presented in this action.

708 F.2d 385

36 UCC Rep.Serv. 59

CONSOLIDATED DATA TERMINALS, a California corporation, Plaintiff, Appellee and Cross-Appellant, v. APPLIED DIGITAL DATA SYSTEMS, INC., a corporation, Defendant, Appellant and Cross-Appellee.

Nos. 81-4152, 81-4176.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 13, 1982.
Decided May 10, 1983.

Perez & McNabb Law Offices, Richard L. Perez, Orinda, Cal., for plaintiff, appellee and cross-appellant.

Alan R. Wentzel, New York City, Craig H. Casebeer, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, Cal., for defendant, appellant and cross-appellee.

Appeal from the United States District Court for the Northern District of California.

Before FLETCHER and BOOCHEVER, Circuit Judges, and EAST, Senior District Judge.

FLETCHER, Circuit Judge:

Applied Digital Data Systems, Inc. (ADDS), a manufacturer, appeals from a district court judgment for $585,489.61 entered against it and in favor of Consolidated Data Terminals (CDT), a distributor, for damages arising from transactions involving computer terminals. The district court awarded these compensatory and punitive damages based on ADDS's negligent manufacture and sale of defective terminals to CDT, its fraudulent misrepresentations concerning the terminals, and also based on its tortious interference with a contract between CDT and Intel, a purchaser of computer terminals. We affirm the district court's conclusion that ADDS was liable to CDT for compensatory damages based on breach of contractual warranty; however, we find that these damages were calculated and awarded in part upon an erroneous theory, and reduce the amount of the award. Further, we conclude that ADDS was denied a fair trial on the tort issues of fraud and interference with contract, and remand the case for a new trial limited to these issues. We likewise vacate and remand the district court's award of punitive damages since they are dependent upon the outcome of the retrial on the tort issues.

BACKGROUND

ADDS is a manufacturer of computer equipment, including cathode-ray computer terminals (CRT's). CDT distributes such terminals in California. In December, 1976, ADDS and CDT entered into a written distributorship agreement that made CDT a non-exclusive sales outlet for ADDS terminals. Under the agreement, ADDS promised to accept CDT purchase orders according to a fixed schedule of prices, while CDT promised to use "best efforts" to promote the lease and sale of ADDS products. CDT further promised to refrain from selling any other terminals deemed "competitive" by ADDS. Paragraph 2 of the contract provided that it was subject to cancellation by either party at any time upon 90-day notice. Paragraph 22 contained a merger clause stating in effect that no agreements between the parties existed outside of the written agreement, and specified that New York law would govern the agreement. The terms of this distributorship agreement were incorporated by reference into the sales contracts covering every item of equipment sold by ADDS to CDT.

For a time, relations between ADDS and CDT were satisfactory. But in late 1977, CDT ordered for the first time some of ADDS's newest and supposedly most advanced terminals, the Regent 100's. In written specifications, ADDS stated that these rather inexpensive CRT's would operate at the relatively high speed of 19,200 baud (1920 characters per second). In promotional literature, ADDS also claimed that the Regents would be "inherently reliable." In fact, as it turned out, none of the Regent 100 terminals was capable of attaining the 19,200 baud performance rate. Also, the Regent 100's were plagued by design errors and production problems that caused many of them to malfunction seriously. The district court found that "as many as 25%" were totally inoperative upon delivery. "When introduced, the terminals did not operate properly at any level above 4,800 baud and occasionally did not operate properly at 1,200 baud." CDT received a steady stream of complaints and returns from the customers to whom it distributed Regent 100's.

When informed of the problems with the Regent 100 terminals, ADDS attempted to perform its warranty obligations. ADDS distributed "releases" with proposed solutions for specific problems encountered with the terminals, established a repair depot where CDT customers could ship the defective equipment for service, and on one occasion, sent a special team of engineers to customer sites to work on the malfunctioning terminals. As a result of these efforts, all or most of the Regent 100's became functional within a year after the first terminal deliveries, but these terminals never operated at rates approaching 19,200 baud. According to testimony by a former ADDS salesman, the specifications on the Regent 100 model were eventually lowered to 1,900 baud.

Due in part to the continuing problems with Regent terminals, CDT discontinued efforts to sell Regent 100 terminals to its customers. For several months, CDT placed no additional orders for Regents. But in June, 1978, Intel Co., a large user of computer terminals, asked for bids to supply 127 Regent terminals and other computer equipment. ADDS, which had previously sold Regents directly to Intel, submitted a bid to supply terminals for the order. CDT submitted a bid to fill the entire order, including other equipment in addition to the Regent terminals. Upon receiving the initial bids, Intel informed CDT that its bid was successful because it was lowest, and notified ADDS that its bid was too high. Afterwards, ADDS learned the amount of CDT's bid on the terminals, lowered its asking price, and was awarded the final contract to supply the terminals. CDT was awarded the contract to supply the remainder of the equipment specified in the bid. When it learned of the ADDS-Intel terminal contract, CDT ceased dealing with ADDS. It entered into a new agreement to distribute terminals made by Hazeltine, another manufacturer whose products CDT could not previously sell under the ADDS distributorship agreement, since ADDS deemed Hazeltine terminals to be "competitive" with its models. Later, in 1979, CDT entered into another such agreement with Televideo, another "competitive" concern. CDT enjoyed considerable success selling these terminals, and also increased its sales of Lear-Siegler CRT products, which it had been permitted to sell under the ADDS distributorship agreement.

In December, 1978, CDT filed this diversity action against ADDS, alleging several breaches of contract, breach of an implied covenant of good faith and fair dealing, unlawful interference with prospective business advantage, and fraud in the inducement to enter the distributorship agreement. ADDS answered and counterclaimed against CDT for $68,117.17, the unpaid balance owed by CDT to ADDS upon terminals delivered to CDT. Upon ADDS's motion before trial, District Judge Spencer Williams dismissed the breach of covenant of good faith and fair dealing cause of action. CDT's other claims were tried before District Judge Daniel H. Thomas. On the third day of the four-day bench trial, CDT was permitted to amend its complaint to add new claims for fraud and negligence by ADDS in its design, manufacture, and sale of Regent 100 terminals.

At the close of trial, the district court concluded that ADDS had breached its warranties contained in the sales contracts governing the Regent 100 terminals that it sold to CDT. The court ruled that the purported limitation on remedies contained in the distributorship agreement did not absolve ADDS from either direct or consequential damages stemming from this breach. The court also found that ADDS had negligently designed and sold the Regent 100 line of terminals, fraudulently representing that they were "inherently reliable" while knowing that the Regent terminals it had already sold were experiencing operational problems. Finally, the court ruled that ADDS, by submitting its second, lower bid to Intel, tortiously interfered with CDT's economic relationship with Intel. (N.D.Cal.1981).

By way of damages, the court found that CDT had incurred $15,000.00 in expenses and lost sales time because of the services it had provided customers who had bought defective Regent terminals. The court also concluded that ADDS's breaches of warranty caused the termination of the ADDS-CDT distributorship agreement. Absent the Regent controversy, the court reasoned, CDT would have continued to realize profits through 1980 on sales of ADDS products. Therefore, the court awarded the projected profits on these sales as consequential damages in the amount of $11,842.50. Further, the court refused to deduct profits earned by CDT on sales of Hazeltine and Televideo equipment between 1978 and 1980 in mitigation of these damages, since it found that this equipment was not "in actuality" competitive with ADDS terminals. Next, the court found that CDT would have realized a profit of $266 on each of the 127 terminals it should have sold to Intel, and awarded $28,702.00 in compensatory tort damages. Finally, the court found that ADDS's "fraudulent conduct and wrongful interference with CDT's advantageous economic relationship with Intel was in knowing and conscious disregard of CDT's rights and interests," and awarded CDT punitive damages of $500,000.00. .

From the total liability of $655,544.50 imposed upon ADDS, the court subtracted $70,054.89 to satisfy ADDS's counterclaim. The district court accordingly entered judgment for CDT in the amount of $585,489.61.

Pursuant to Federal Rule of Civil Procedure 59(a), ADDS filed a motion requesting the district court to amend its judgment. ADDS specifically objected to the finding of liability for tortious interference, arguing that a business is always free to "interfere" with negotiations of a competitor by lowering its bid. The district court responded by entering an amended finding that an actual contract had been formed between CDT and Intel before ADDS lowered its bid on the 127 Regent terminals. It ruled that since "competition" for the bid had already ended when ADDS submitted its revised bid, the submission constituted an unlawful interference with contract.

ADDS appeals from this ruling and from the original judgment of the district court. CDT cross-appeals from the dismissal of its claim for breach of covenant of good faith and fair dealing.

DISCUSSION

A. Breach of Warranty.

The evidence adduced at trial revealed no substantial dispute concerning the quality of the Regent 100 terminals sold by ADDS to CDT. The terminals were poorly designed, and failed to perform according to specifications. The specifications represented that the Regent 100's would operate at a speed of 19,200 baud; because CDT relied on the specifications when ordering the terminals, this statement constituted an express warranty. In fact, none of the terminals ever operated at 19,200 baud, and the specification on the terminal was ultimately reduced to 1,900 baud, less than one-tenth the speed originally promised. This by itself supports the district court's conclusion that ADDS breached a warranty covering the Regent 100 terminals it sold. We affirm that ruling.

ADDS contends that even if the Regent 100's failed to perform as promised, the warranty disclaimer clause incorporated into each Regent 100 contract negatives any other ADDS promise contained in oral or written descriptions of the goods or in promotional literature. Paragraph 6 of the "Terms and Conditions" incorporated into each terminal sale states that "ADDS makes no warranty, express or implied," other than a ninety-day guarantee covering materials and workmanship. We do not need to consider whether the Regent problems constituted defects in "materials" or "workmanship" because we conclude that the disclaimer cannot be permitted to override the highly particularized warranty created by the specifications.

Where a contract includes both specific warranty language and a general disclaimer of warranty liability, the former prevails over the latter where the two cannot be reasonably reconciled. N.Y. U.C.C. Sec. 2-316(1) (McKinney's 1964). According to the New York Court of Appeals,

An attempt to both warrant and refuse to warrant goods creates an ambiguity which can only be resolved by making one term yield to the other .... Section 2-316 (subd. of the Uniform Commercial Code provides that warranty language prevails over the disclaimer, if the two cannot be reasonably reconciled.

(1968) (citation omitted). Thus, we conclude that the express statements warranting that the Regent 100's would perform at a 19,200 baud rate prevail over the general warranty disclaimer, and properly formed the basis for CDT's breach of warranty action.

B. Contractual Limitation on Remedies.

The contract term governing CDT's warranty rights (quoted in note 5, above) contained two important limitations: (1) the buyer's remedies were restricted to repair of the defective equipment, and (2) the recovery of certain consequential damages was excluded. ADDS contends that each of these limitations should preclude CDT from recovering contract damages in this case.

Turning first to the remedy limitation, we conclude that it does not restrict ADDS's liability in this case because it did not leave CDT with any effective remedy. Despite ADDS's good faith efforts to correct the continuing problems with the Regent 100 terminals, none of the terminals ever operated at the rate of 19,200 baud as warranted. In this situation, the remedy limitation was negated by N.Y. U.C.C. Sec. 2-719(2) (McKinney's 1964), which states that "[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act." Where warranted goods fail to perform according to specifications as warranted despite the seller's efforts to repair, a limited "repair" remedy fails of its essential purpose. (9th Cir.1978) (construing substantially identical California statute). For this reason, CDT is entitled to other remedies available for breach of contract under the New York U.C.C. (1968); (N.Y.Cir.Ct.1977).

Among the breach of contract remedies ordinarily available to a buyer are incidental and consequential damages. N.Y. U.C.C. Sec. 2-715 (McKinney's 1964). ADDS contends, however, that even if the remedy limitation does not apply, CDT should still be precluded from recovering consequential damages by the separate exclusion of such damages incorporated in the distributorship agreement. ADDS bases this argument on N.Y. U.C.C. Sec. 2-719(3) (McKinney's 1964), which permits the exclusion of consequential damages unless unconscionable, and , in which this court held that recovery of consequential damages may be excluded even though a limited remedy fails of its essential purpose. We conclude that these authorities do not control the present case, because the contract did not in fact preclude recovery of the consequential damages suffered by CDT.

The limiting language incorporated in the contract was that "ADDS will not be liable for any consequential damages, loss or expense arising in connection with the use of or the inability to use its products or goods for any purpose whatsoever." As we read it, this provision does not exclude all consequential damages, but rather only such damages as result from loss of use of defective equipment. Under this provision, a buyer could not, for example, recover profits lost because of business impairment resulting from the inability to use a Regent 100 terminal for a period of time. The consequential damages suffered by CDT were of a wholly different nature, however. As discussed below, these damages consisted of a loss of customer goodwill resulting from CDT's sale of shoddy ADDS terminals, together with the expenses incurred by CDT in trying to recapture that goodwill. These consequential damages did not arise "in connection with the use of or the inability to use [ADDS] products or goods," but were instead caused by the wholesale failure of ADDS Regent terminals to operate properly and to conform to specifications. Since the contract did not exclude recovery of this type of consequential damages, it is unnecessary for us to consider whether under U.C.C. Sec. 2-719(3) or the analysis of S.M. Wilson & Co. the failure of a limited remedy to achieve its essential purpose may vitiate an exclusion of recovery for consequential damages.

C. Measure of Damages.

The district court awarded damages totalling $15,000 to CDT to cover "additional costs" caused by the problems with the Regent 100 terminals. In addition, the court awarded damages based on estimated profits on sales of ADDS products that CDT "lost" because the dispute precipitated the end of the ADDS-CDT distributorship agreement. The court ruled that the distributorship arrangement would have continued for three years after 1978, and that CDT would have earned net profits of $111,842.50 on sales of ADDS products during that period. The court refused to deduct from this sum the net profits realized by CDT on sales of other products distributed in place of ADDS equipment. We sustain the district court's award of $15,000 as proper direct, incidental, and consequential damages, but reverse its additional award of $111,842.50.

The measure of damages under the U.C.C., which follows the common law of contracts, is straightforward:

The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

N.Y. U.C.C. Sec. 2-714(2) (McKinney's 1964). N.Y. U.C.C. Sec. 2-714(3) (McKinney's 1964), states that "[i]n a proper case any incidental and consequential damages under [U.C.C. Sec. 2-715] may also be recovered." N.Y. U.C.C. Sec. 2-715 (McKinney's 1964) provides that

(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expenses incident to the delay or other breach.

(2) Consequential damages resulting from the seller's breach include

(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) injury to person or property proximately resulting from any breach of warranty.

Under these rules CDT was entitled to recover as direct damages the difference in value between the Regent 100 terminals as warranted and as delivered. As incidental damages, CDT could recover all reasonable expenses it incurred in inspecting, shipping, handling and storing the defective Regent units. As consequential damages, CDT could recover all losses that ADDS had reason to know CDT would incur as a result of a wholesale breach of warranty on the Regent units. Knowing that CDT was a distributor of computer equipment, ADDS had reason to know that if it supplied poor quality merchandise that failed to conform to product specifications, CDT would suffer a loss of goodwill with its customers because the customers would blame CDT for the product failures, and would become more reluctant to buy equipment from CDT in the future.

Testimony at trial indicated that many of CDT's customers were quite unhappy about the Regent 100 terminals, and that CDT devoted considerable time and expense to an effort to placate these customers. However, the district court did not find that CDT was forced to make price concessions to its customers on the Regent 100 terminals it sold. Thus, CDT established no "direct" damages within the meaning of section 2-714(2). The court did find that "[t]he Regent defects caused CDT to incur $15,000 in additional costs and lost profits because of the numerous service calls which they necessitated," and it awarded this $15,000 to CDT as damages. We uphold this award as properly measured incidental and consequential damages pursuant to section 2-715.

The district court awarded an additional $111,842.50 based on a much more unusual theory of consequential damages. It ruled that because CDT chose to end the distributorship agreement as a joint result of the defects in the Regent 100 CRT's and ADDS's interference with its Intel contract, CDT was entitled to recover the profits it would have realized had the distributorship arrangement continued. We seriously doubt whether these damages were a sufficiently foreseeable result of a breach of warranty to be recoverable as consequential damages. See N.Y. U.C.C. Sec. 2-715(2)(a) (McKinney's 1964); (A.D.1978); Hadley v. Baxendale, 9 Exch. 341, 156 Eng.Rep. 145 (1854). We need not reach this issue, however, because CDT did not in fact sustain any lost profits on ADDS equipment sales as a result of either the breach of warranty or the interference with contract.

First, the district court's findings specifically state that CDT voluntarily stopped selling ADDS products in July, 1978, following the disputed Intel transaction. CDT was not forced to take this action because of a loss of goodwill among its customers caused by problems with Regent 100 terminals. Instead, the findings imply that CDT chose to end the distributorship so it could be free to deal in the products of Hazeltine, an ADDS competitor. Profits "lost" from a completely voluntary and independent business decision are not "caused" in a legally cognizable sense by conduct that merely supplies some contributing factors underlying the decision. (N.Y.Civ.Ct.1955).

Moreover, CDT did not in fact lose any profits as a result of the termination of the ADDS distributorship agreement. The district court concluded that CDT would have realized $111,842.50 on ADDS equipment sales by taking 10 percent of the estimated sales CDT would have made between 1978 and 1980. During the same period, CDT entered distributorship agreements with both Hazeltine and Televideo. Applying the same 10 percent formula to CDT's actual and estimated sales of these products, CDT should have realized profits of $123,250 on sales of $1,232,500. CDT would not have been permitted to sell Hazeltine or Televideo products under the ADDS distributorship agreement, since ADDS deemed the products of both firms to be "competitive." Therefore, CDT (according to the court's formula) realized estimated profits of $123,250.00 as a result of the termination of the ADDS contract; this more than offset the $111,842.50 that the court estimated CDT lost due to the termination. The cancellation of the distributorship agreement did not cause CDT to lose any profits, and the lower court should not have awarded any damages for such "losses" in this case.

D. Tort Liability Issues.

In addition to its conclusion that ADDS breached its warranties covering the Regent 100 terminals, the district court ruled that ADDS was guilty of fraudulent misrepresentation respecting those terminals. Also, it ultimately ruled that ADDS tortiously interfered with CDT's contract with Intel. We conclude that ADDS was denied a fair trial as to these issues because each issue was introduced by an extremely late change in the pleadings and neither was tried by consent. ADDS sought a continuance which was taken under advisement by the court until after the trial was completed. This in effect constituted a denial of the motion for continuance and prevented ADDS from having an adequate opportunity to respond to the changed pleadings. For this reason, we must remand these issues for a new trial.

1. Fraud.

CDT's original complaint presented six causes of action. Among these claims was only one that alleged fraud. The gravamen of this claim was that ADDS, by falsely promising to supply CDT with sales leads and marketing assistance, fraudulently induced CDT to enter the distributorship agreement. Concerning the substandard quality of the Regent 100 computer terminals, CDT alleged only a breach of contract cause of action. CDT's pretrial statement did not mention fraud at all. On the third day of the four-day bench trial, CDT introduced a pleading amendment that for the first time alleged that ADDS had fraudulently misrepresented the capabilities of the Regent 100 line of terminals. The court allowed CDT to so amend its pleadings. ADDS now challenges the amendment, contending that it was introduced and allowed so late that ADDS did not have a fair opportunity to contest CDT's fraud allegation. CDT argues that because some evidence relevant to its new fraud claim was introduced at trial without objection from ADDS, the fraud issue was tried by consent, and the district court's allowance of the pleading amendment and subsequent judgment of liability on the issue were proper.

Federal Rule of Civil Procedure 15(b) embodies a liberal policy in favor of allowing pleading amendments at any time during and even after trial. Also, even if the pleadings are never amended, the rule allows a judgment on an issue to stand if the issue has been tried by express or implied consent. However, late pleading amendments are improper under the rule if they cause substantial prejudice to the opposing party. (1971); (3d Cir.1963). (9th Cir.1981) (party may be permitted to alter legal theory through late pleading amendments only if other party is not prejudiced in its defense upon the merits).

Under the circumstances of the present case, where the pleading amendment was allowed after the purportedly relevant evidence had already been admitted, the question whether the defendant was prejudiced by the amendment is no different from the question whether the issue introduced by the amendment was tried by consent. As we have observed in (9th Cir.1971), the purpose of pleading amendments under the second sentence of Federal Rule 15(b) is to "align the pleadings to conform to issues actually tried." The rule does not permit amendments to include issues which may be "inferentially suggested by incidental evidence in the record." See also Gonzalez v. United States, (9th Cir.1979); (6th Cir.1974); (5th Cir.1973); (8th Cir.1965). An adverse party cannot be expected to object to the introduction of evidence that is only tangentially related to the issues actually pleaded prior to trial unless the party has notice that the evidence is being introduced as proof on some other unpleaded issue. See 6 C. Wright & A. Miller, Federal Practice & Procedure Sec. 1493, at 466-67 (1971).

Our review of the record convinces us that ADDS suffered substantial prejudice as a result of the pleading amendment that introduced the fraud cause of action. Under California law, fraud in the sale of substandard equipment is established when a seller knowingly makes a misrepresentation with an intent to induce reliance, and justifiable reliance results, causing damage to the plaintiff. (9th Cir.1982). Thus, the significant factual issue for purposes of CDT's fraud claim was whether ADDS knew that its statements concerning the Regent 100 terminals were false at the time they were made. ADDS had no notice of CDT's intent to pursue this issue, and thus no reason to object to evidence bearing on the issue. ADDS's knowledge of the defect had but marginal relevancy to the question whether the terminals failed to perform as warranted. Under the original pleadings and pretrial statement, the evidence was of no importance. While trial by consent might properly be found in other situations where evidence irrelevant to the pleadings is introduced, in this case the trial transcript demonstrates that ADDS did not know CDT would seek to assert its fraud claim until the time of the motion to amend. Had ADDS been aware that its knowledge of the Regent defects would be an important issue in the case, it would have elicited testimony concerning that topic from its witnesses, and might have called additional witnesses. The one remaining day of trial following the amendment did not afford the defendant an adequate opportunity to defend against the new fraud claim. Had the district court granted ADDS's request for a continuance, the prejudice to ADDS from the surprise pleading amendment might have been cured. See Robbins v. Jordan, 181 F.2d 793, 795 (D.C.Cir.1950). But the district court in effect denied the motion by reserving its ruling on both the amendment and the continuance request until the end of trial, when it allowed the amendment. The lateness of CDT's pleading amendment, coupled with the denial of ADDS's motion for a continuance, thus caused substantial prejudice to ADDS's defense. (9th Cir.1981); (2d Cir.1977); 3 J. Moore, Moore's Federal Practice p 15.13(2), at 15-173 (1978 supp. to 2d ed. 1966).

The Sixth Circuit dealt with a situation similar to the one presented here in (6th Cir.1974). In that case, the defendant was a nationwide distributor of Lotus automobiles, and the plaintiff was a local Lotus dealer. Four Lotuses sold by the defendant to the plaintiff developed substantial mechanical defects that required repeated servicing by the plaintiff. . The plaintiff's complaint represented the converse of CDT's in the present case; it alleged misrepresentation by the defendant but not a breach of warranty. Id. The pretrial order likewise did not mention a breach of warranty theory. At the close of the bench trial, the district judge ruled that the defendant had not misrepresented the nature and vintage of the automobiles. However, he concluded that the issue of warranty liability had been tried by implied consent, and allowed the plaintiff to recover for breach of warranty pursuant to Federal Rule 15(b). .

The Sixth Circuit Court of Appeals reversed. The court acknowledged that Rule 15(b) allows recovery on a theory tried fully by the parties, even though not set forth in the pleadings or in the pretrial order. (citing (9th Cir.1967)). But it held that a trial court may not "base its decision upon an issue that was tried inadvertently." Id. It concluded that the evidence on which the district court based its warranty decision, while relevant to that issue, had been introduced for the purpose of proving misrepresentation. Finding that the defendant never consented to trial of the unpleaded warranty issue, the court ruled that the defendant had lacked an opportunity to counter the new theory, and reversed the judgment. . A similar result is required here. As the court observed in "[i]mplied consent to the trial of an unpleaded issue is not established merely because evidence relevant to that issue was introduced without objection. At least it must appear that the parties understood the evidence to be aimed at the unpleaded issue." .

We conclude that we must vacate the district court's judgment on the fraud issue and remand for retrial on that issue. .

2. Interference with Contract.

Turning to the district court's award of $28,702 for tortious interference with contract, we find that a similar analysis applies. CDT's complaint did not allege that ADDS had interfered with a CDT-Intel contract; rather, it alleged that ADDS had interfered with CDT's prospective business advantage in connection with the Intel transaction. Nor did CDT's pretrial statement mention inducement to breach a contract. Instead, it stated CDT's theory to be that "ADDS interfered with CDT's prospective economic relationship with Intel Corporationby depriving CDT of a sale to that corporation by using means which were inconsistent with the distributorship relationship between CDT and ADDS." The district court rendered its initial judgment in favor of CDT on this basis. On a Rule 59 motion to alter or amend judgment, ADDS argued that the liability imposed for interference with prospective business advantage could not stand, because ADDS, like any competitor, was privileged to submit a sales offer to Intel at any time prior to the formation of a binding contract between Intel and CDT. The district court, in its supplemental findings and conclusions entered in response to CDT's motion, agreed with this reasoning. However, for the first time it found that a contract between CDT and Intel had been formed prior to the submission of ADDS's second bid, and that the submission of that bid constituted a tortious interference with contract. .

Because the interference with contract theory was not pleaded and was not tried by consent as required by Federal Rule 15(b), we conclude that the district court's judgment on this issue cannot stand. The evidence at trial focused primarily upon ADDS's pricing policies and the question whether ADDS's second bid breached some express or implied obligation not to engage in price cutting running from ADDS to CDT. By contrast, the parties never appear to have focused upon the question whether a binding contract between CDT and Intel ever existed. For example, CDT called as a witness Steve Abreu, Intel's purchasing agent, who would presumably have been in the best position of any non-party to testify concerning the existence of such a contract. Yet Abreu was not asked anything about the existence of a contract; instead the questioning focused upon whether or not Intel could properly be classified as an original equipment manufacturer of computers. The only testimony cited by CDT to support its contention that the interference with contract issue was tried by consent was that of Douglas Cole, CDT's own salesman. This testimony is not sufficient to show that the question whether a CDT-Intel contract existed was fully tried by consent. We conclude that ADDS never received a proper opportunity to contest the existence of the contract, and therefore suffered substantial prejudice as a result of the district court's post-trial ruling premised upon Rule 15(b). We conclude that we must reverse the district court's judgment on the interference with contract issue, and must remand for retrial to determine whether a valid contract between CDT and Intel was ever formed, and if so, whether ADDS tortiously interfered with that contract.

E. Punitive Damages.

The district court awarded CDT $500,000 in punitive damages based on ADDS's fraud and tortious interference with contract. Because we vacate and remand the judgment on both of these issues, we must vacate and remand the award of punitive damages as well. Punitive damages are not available under California law for mere breaches of contract, no matter how gross or willful. Cal.Civ.Code Sec. 3294(a) (West Supp.1982); (1976). Without tort liability, the punitive damages award cannot stand. If CDT upon remand can establish that ADDS was guilty of fraud, malice, or oppression within the meaning of section 3294(a), then the district court may award punitive damages upon that basis in such amount as shall seem reasonably appropriate. (9th Cir.1982).

F. Covenant of Good Faith and Fair Dealing.

The second cause of action listed in CDT's complaint asserted a claim in tort for breach of the covenant of good faith and fair dealing inherent in the ADDS-CDT distributorship agreement. In response to ADDS's pretrial motion, District Judge Spencer Williams dismissed this cause of action. CDT now cross-appeals from that dismissal.

We affirm this ruling. While the California Supreme Court has stated that an implied covenant of good faith and fair dealing exists in "every contract," (1981), it has discussed tort liability on this theory only in connection with breaches of insurance and employment contracts, where a special fiduciary duty runs between the parties. (1980); (1979). A California court recently reversed a trial court's decision imposing such tort liability upon a party who breached a commercial contract, where the "dominant purpose" of the contract was to obtain "commercial advantage" and the contract involved "no particular aspect of protection against mental distress, no special relationship giving rise to public policy or public interest considerations and no lack of balance in the contractual relationship as is characteristic in contracts of adhesion." Seamen's Direct Buying Service v. Standard Oil Co. of California, 129 Cal.App.3d 416, 432, 181 Cal.Rptr. 126, 135 (1982). In the absence of further guidance from California courts concerning the scope of this potentially expansive new theory of tort liability, we conclude that District Judge Williams was justified in dismissing CDT's claim for breach of the covenant of good faith and fair dealing.

CONCLUSION

The judgment of the district court is affirmed insofar as it awarded CDT $15,000.00 in direct, incidental, and consequential damages for ADDS's breach of warranty with respect to the Regent 100 terminals. The award of $111,842.50 to compensate CDT for profits on ADDS terminals it would have sold had not the distributorship agreement been terminated is vacated. The award of $70,054.89 to ADDS on its counterclaim has not been challenged by CDT on this appeal.

The district court's judgment for CDT on its fraud and tortious interference with contract claims is vacated and remanded for retrial, along with the $28,702.00 and $500,000.00 awards for interference and punitive damages. On remand, the district court should allow such additional pleadings by both parties as are necessary to flesh out their claims and defenses on these issues, and such additional discovery as it deems necessary prior to trial on those claims and defenses. (10th Cir.1966).

AFFIRMED in part, REVERSED in part, and REMANDED in part.

Senior United States District Judge for the Southern District of Alabama, sitting by designation.

The Honorable William G. East, Senior United States District Judge for the District of Oregon, sitting by designation.

According to findings 35-37 made by the district court, CDT's actual and estimated sales of these products during the years 1978-81 were as follows:

      Hazeltine       Televideo       Lear-Siegler
      --------------  --------------  -----------------
1978  $ 37,500        $ -             $   574,000
1979   136,250         136,250          1,121,250
1980   187,500         735,000          1,650,000
1981   237,500         882,000          1,925,000

CDT's original complaint alleged that ADDS had fraudulently induced CDT to enter the distributorship agreement by promising to provide CDT with sales leads, a promise that it never intended to perform and did not perform. Although considerable evidence concerning this issue was introduced at trial, the district court denied recovery on this claim.

The new fraud claim introduced by CDT during trial was distinct, since it related not to alleged misrepresentations concerning the distributorship agreement, but to misrepresentations concerning specific CRT's sold by ADDS to CDT.

As a threshold question, we must consider what law applies to the various issues in this diversity action. For purposes of this inquiry, we apply the choice of law rules of California, the forum state. Under California law, the intention of the parties to apply New York law to the contract would be permitted to govern; therefore, we apply New York law to all of the contract issues in this case. (1975) (court applied New York law to govern contract containing choice of law provision quite similar to choice of law provision contained in the ADDS-CDT contract). Other issues in this case, which involve tort law and the law of punitive damages, are not controlled by the contract choice of law provision. California law requires an analysis of the interests of states involved to determine the law that most appropriately applies to each issue. (1976); (1974). Because most of the statements and events that gave rise to this case occurred in California, one party is a resident of California, and California is the forum state, the district court correctly concluded that California interests predominate and that California law should govern all non-contractual issues in this case.

N.Y. U.C.C. Sec. 2-313(1)(a) (McKinney's 1964) defines an express warranty to include "[a]ny affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain."

The provision stated in full that:

6. WARRANTY

ADDS warrants each new communications and terminal product manufactured by it to be free from defects in material and workmanship under normal use and service for a period of 90 days from the date of shipment. ADDS' sole obligation under this warranty is limited to making good, at its factory, any product or any part or parts thereof found to be defective, provided the buyer bears the cost of shipping charges in connection with the repair or replacement of the defective equipment.

ADDS MAKES NO WARRANTY, EXPRESS OR IMPLIED; AND ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE WHICH EXCEEDS THE FOREGOING WARRANTY IS HEREBY DISCLAIMED BY ADDS AND EXCLUDED FROM ANY AGREEMENT MADE BY ACCEPTANCE OF ANY ORDER PURSUANT TO THIS AGREEMENT. ADDS will not be liable for any consequential damages, loss or expense arising in connection with the use of or the inability to use its products or goods for any purpose whatsoever. ADDS' maximum liability shall not in any case exceed the contract price for the products.

CDT's contention that the remedy limitation should be disregarded because "unconscionable" within the meaning of N.Y. U.C.C. Sec. 2-302 (McKinney's 1964) is meritless. A remedy limited to repair is not unconscionable per se. (1976). Also, the district court specifically found that there was "no material disparity in bargaining power between ADDS and CDT" at the time the distributorship agreement was created. Unconscionability rarely exists in a commercial setting involving parties of equal bargaining power. . (6th Cir.1975).

Under the view we take in this case, we likewise find it unnecessary to consider whether the final clause of the warranty limitation, that "ADDS' maximum liability should not in any case exceed the contract price for its products," should be given effect. The $15,000 in damages that we allow under the contract is less than the contract price of the Regent 100 terminals that failed to meet specifications.

The court concluded that

16. ADDS is liable for the damages its negligent design, introduction and sale of the Regents and its fraudulent conduct in regard to the Regents caused CDT in additional costs. The Court finds these costs to be $15,000.00. In addition, the Court finds that a reasonable time for the duration of the agreement to be three years rather than five. The Court further finds that CDT's projected sales for the year 1978 must be reduced by the amount of actual sales. CDT projected sales of $289,350.00 for the year 1978. This figure must be reduced by the actual sales of $103,125.00 or $186,225.00. Therefore, the net profit for the year 1978 which was not achieved would be $18,622.50. This is derived from Williams' testimony that CDT's profit margin was 10% of sales. The Court finds that the CDT's loss of profits for the years 1978-1980 inclusive, to be $111,842.50, for which ADDS is liable.

The district court found that

32. CDT finally stopped selling ADDS products completely in July 1978 following the Intel transaction because of the continuing problems with the Regents, ADDS' failure to provide leads, ADDS' competition in all aspects of the market, ADDS' failure to properly motivate its salesmen to aid distributors and ADDS' conduct in the Intel transaction. CDT entered at that time into an agreement to distribute Hazeltine products to replace the ADDS line of terminals which it had stopped selling.

See supra note 1.

The district court found that "neither the Hazeltine products nor the Televideo products were competitive in price or in actuality with the ADDS' products during the years 1978-1980, inclusive." . This finding, however, was not determinative of the contract issue, because paragraph 3 of the distributorship agreement prohibited CDT from acting as sales agent for any other CRT product "deemed by ADDS to be competitive with ADDS equipment" (emphasis added). Since ADDS deemed the Hazeltine and Televideo products to be competitive, CDT was prohibited from dealing in those products under the agreement, regardless of whether the products were "competitive" with ADDS products under some objective test.

In its pretrial statement, CDT summarized its claims as follows:

(a) Defendant Applied Digital Data Systems, Inc. [ADDS] breached a contract pursuant to which CDT became a distributor of its products, including Regent 100 and 200 cathode ray tube terminals, by providing such defective products that CDT was ultimately rendered unable to market ADDS' products and by competing with CDT for sales of ADDS' products in a manner inconsistent with the contract, thereby depriving CDT of its reasonably expected profits under the contract.

(b) ADDS interferred [sic] with CDT's prospective economic relationship with Intel Corporation by depriving CDT of a sale to that corporation by using means which were inconsistent with the distributorship relationship between CDT and ADDS.

(c) CDT is also seeking recovery for the damages it suffered as a result of ADDS providing it with defective products.

Had the district court granted ADDS's request for a continuance, the prejudice to ADDS from the surprise pleading amendment might have been cured. (D.C.Cir.1950). But the district court in effect denied the motion by reserving its ruling on both the amendment and the continuance request until the end of trial, when it allowed the amendment.

CDT will be entitled to prevail on remand if it can establish the elements of fraud or negligent misrepresentation under California law. We note, however, that the practical significance of the issue may be limited to deciding whether CDT is entitled to recover punitive damages. We have already ruled that CDT was correctly permitted to recover full compensatory damages on a contract theory. Although the "out-of-pocket" measure of damages for fraud under California law is different from the contract "benefit-of-the-bargain" measure, see Cal.Civ.Code Sec. 3343 (West supp. 1982); (1978), the record contains no basis for supposing that CDT could recover additional compensatory damages for the Regent 100 defects in the Regent 100's under a tort theory beyond those we have upheld under a breach of warranty theory.

See supra note 12.

According to CDT, ADDS customarily maintained three sets of prices. The highest prices were quoted by ADDS to "end-users" of computer equipment. A discount was given to distributors such as CDT who resold ADDS products to end-users. An even larger discount (resulting in the lowest prices) was offered by ADDS to original equipment manufacturers (OEM's) who purchased direct from ADDS. ADDS lowered its second Intel bid because it reclassified Intel from an "end-user" to an "OEM." Much of the trial was devoted to an exploration of the propriety of this reclassification in light of what CDT contended was an obligation assumed by ADDS to adhere to its fixed schedule of prices.

We find this evidence to have been completely irrelevant to the validity of an interference with contract claim.

CDT cited the following:

Q. (CDT's counsel) Did you get a response to this letter that you are looking at, exhibit 7?

A. (Cole) Yes.

Q. What response did you get?

A. I got a phone call from Steve Abreu telling me I had won the bid for all the terminals and he congratulated me.

Q. Following that conversation, did you take any action in connection with that transaction?

A. Sure, I jumped for joy. I thought it was one of the best sales I had ever made in my career, and I let my superiors at CDT know exactly what happened, and they were all happy and we started ordering equipment.

* * *

Q. (Cross-examination by ADDS's counsel) When you say you were awarded the bid, what do you mean?

A. (Cole) We had the order.

Q. Did you get a purchase order, a hard copy?

A. The hard copy was on its way.

To prevail, CDT will have to show that such a contract existed. The theory asserted by CDT at trial in reliance upon an alleged price agreement was insufficient as a matter of California law to establish tortious interference with prospective business advantage. The freedom to negotiate and to attempt to underbid a competitor is an integral part of American economic life, and therefore a "competition" privilege to interfere with the prospective business advantages of others in this way should always be upheld. In the recent case of (9th Cir.1982), decided under California law, we recognized that the existence and scope of such a privilege is determined by reference to the societal interests it is designed to protect. (1976). Here, society is certainly concerned with ensuring vigorous competition to promote the most efficient possible allocation of resources, goods and services. Furthermore, the type of pricing arrangement urged by CDT as the basis for its tort action offends the spirit if not the letter of the antitrust laws. Under these circumstances, only the existence of a binding contract creates a countervailing societal interest that may overcome ADDS's competitive justification.

We accord District Judge Williams deference in his ruling that no cause of action under California law was stated for breach of the covenant of good faith and fair dealing, as an interpretation of state law in the state in which he normally sits. (9th Cir.1982). We have accorded no such deference to the trial judge's rulings in the case, however, since that judge was from the Southern District of Alabama and was sitting only by designation. (9th Cir.1982).

Francis X. Clark (argued), John H. Kiefel, Ronald H. Silverman, Silverman, Clark & Van Galen, King of Prussia, Pa., for appellant.

Jay P. Hendrickson (argued), Hendrickson, Higbie & Cole, San Francisco, Cal., Joseph Schumacher, Abraham, Pressman & Bauer, Philadelphia, Pa., for appellee, Wyse Technology.

Debra G. Buster (argued), Stephen M. Dorvee, Arnall, Golden & Gregory, Atlanta, Ga., Frederick C. Fletcher, II, Swartz, Campbell & Detweiler, Philadelphia, Pa., for appellee, The Software Link, Inc.

Before SLOVITER, Chief Judge, and COWEN and WISDOM,^[*] Circuit Judges.

WISDOM, Circuit Judge:

The "Limited Use License Agreement" printed on a package containing a copy of a computer program raises the central issue in this appeal. The trial judge held that the terms of the Limited Use License Agreement governed the purchase of the package, and, therefore, granted the software producer, The Software Link, Inc. ("TSL"), a directed verdict on claims of breach of warranty brought by a disgruntled purchaser, Step-Saver Data Systems, Inc. We disagree with the district court's determination of the legal effect of the license, and reverse and remand the warranty claims for further consideration.

Step-Saver raises several other issues, but we do not find these issues warrant reversal. We, therefore, affirm in all other respects.

I. FACTUAL AND PROCEDURAL BACKGROUND

The growth in the variety of computer hardware and software has created a strong market for these products. It has also created a difficult choice for consumers, as they must somehow decide which of the many available products will best suit their needs. To assist consumers in this decision process, some companies will evaluate the needs of particular groups of potential computer users, compare those needs with the available technology, and develop a package of hardware and software to satisfy those needs. Beginning in 1981, Step-Saver performed this function as a value added retailer for International Business Machine (IBM) products. It would combine hardware and software to satisfy the word processing, data management, and communications needs for offices of physicians and lawyers. It originally marketed single computer systems, based primarily on the IBM personal computer.

As a result of advances in micro-computer technology, Step-Saver developed and marketed a multi-user system. With a multi-user system, only one computer is required. Terminals are attached, by cable, to the main computer. From these terminals, a user can access the programs available on the main computer.^[1]

After evaluating the available technology, Step-Saver selected a program by TSL, entitled Multilink Advanced, as the operating system for the multi-user system. Step-Saver selected WY-60 terminals manufactured by Wyse, and used an IBM AT as the main computer. For applications software, Step-Saver included in the package several off-the-shelf programs, designed to run under Microsoft's Disk Operating System ("MS-DOS"),^[2] as well as several programs written by Step-Saver. Step-Saver began marketing the system in November of 1986, and sold one hundred forty-two systems mostly to law and medical offices before terminating sales of the system in March of 1987. Almost immediately upon installation of the system, Step-Saver began to receive complaints from some of its customers.^[3]

Step-Saver, in addition to conducting its own investigation of the problems, referred these complaints to Wyse and TSL, and requested technical assistance in resolving the problems. After several preliminary attempts to address the problems, the three companies were unable to reach a satisfactory solution, and disputes developed among the three concerning responsibility for the problems. As a result, the problems were never solved. At least twelve of Step-Saver's customers filed suit against Step-Saver because of the problems with the multi-user system.

Once it became apparent that the three companies would not be able to resolve their dispute amicably, Step-Saver filed suit for declaratory judgment, seeking indemnity from either Wyse or TSL, or both, for any costs incurred by Step-Saver in defending and resolving the customers' law suits. The district court dismissed this complaint, finding that the issue was not ripe for judicial resolution. We affirmed the dismissal on appeal.^[4] Step-Saver then filed a second complaint alleging breach of warranties by both TSL and Wyse and intentional misrepresentations by TSL.^[5] The district court's actions during the resolution of this second complaint provide the foundation for this appeal.

On the first day of trial, the district court specifically agreed with the basic contention of TSL that the form language printed on each package containing the Multilink Advanced program ("the box-top license") was the complete and exclusive agreement between Step-Saver and TSL under § 2-202 of the Uniform Commercial Code (UCC).^[6] Based on § 2-316 of the UCC, the district court held that the box-top license disclaimed all express and implied warranties otherwise made by TSL. The court therefore granted TSL's motion in limine to exclude all evidence of the earlier oral and written express warranties allegedly made by TSL. After Step-Saver presented its case, the district court granted a directed verdict in favor of TSL on the intentional misrepresentation claim, holding the evidence insufficient as a matter of law to establish two of the five elements of a prima facie case: (1) fraudulent intent on the part of TSL in making the representations; and (2) reasonable reliance by Step-Saver. The trial judge requested briefing on several issues related to Step-Saver's remaining express warranty claim against TSL. While TSL and Step-Saver prepared briefs on these issues, the trial court permitted Wyse to proceed with its defense. On the third day of Wyse's defense, the trial judge, after considering the additional briefing by Step-Saver and TSL, directed a verdict in favor of TSL on Step-Saver's remaining warranty claims, and dismissed TSL from the case.

The trial proceeded on Step-Saver's breach of warranties claims against Wyse. At the conclusion of Wyse's evidence, the district judge denied Step-Saver's request for rebuttal testimony on the issue of the ordinary uses of the WY-60 terminal. The district court instructed the jury on the issues of express warranty and implied warranty of fitness for a particular purpose. Over Step-Saver's objection, the district court found insufficient evidence to support a finding that Wyse had breached its implied warranty of merchantability, and refused to instruct the jury on such warranty. The jury returned a verdict in favor of Wyse on the two warranty issues submitted.

Step-Saver appeals on four points. (1) Step-Saver and TSL did not intend the box-top license to be a complete and final expression of the terms of their agreement. (2) There was sufficient evidence to support each element of Step-Saver's contention that TSL was guilty of intentional misrepresentation. (3) There was sufficient evidence to submit Step-Saver's implied warranty of merchantability claim against Wyse to the jury. (4) The trial court abused its discretion by excluding from the evidence a letter addressed to Step-Saver from Wyse, and by refusing to permit Step-Saver to introduce rebuttal testimony on the ordinary uses of the WY-60 terminal.

II. THE EFFECT OF THE BOX-TOP LICENSE

The relationship between Step-Saver and TSL began in the fall of 1984 when Step-Saver asked TSL for information on an early version of the Multilink program. TSL provided Step-Saver with a copy of the early program, known simply as Multilink, without charge to permit Step-Saver to test the program to see what it could accomplish. Step-Saver performed some tests with the early program, but did not market a system based on it.

In the summer of 1985, Step-Saver noticed some advertisements in Byte magazine for a more powerful version of the Multilink program, known as Multilink Advanced. Step-Saver requested information from TSL concerning this new version of the program, and allegedly was assured by sales representatives that the new version was compatible with ninety percent of the programs available "off-the-shelf" for computers using MS-DOS. The sales representatives allegedly made a number of additional specific representations of fact concerning the capabilities of the Multilink Advanced program.

Based on these representations, Step-Saver obtained several copies of the Multilink Advanced program in the spring of 1986, and conducted tests with the program. After these tests, Step-Saver decided to market a multi-user system which used the Multilink Advanced program. From August of 1986 through March of 1987, Step-Saver purchased and resold 142 copies of the Multilink Advanced program. Step-Saver would typically purchase copies of the program in the following manner. First, Step-Saver would telephone TSL and place an order. (Step-Saver would typically order twenty copies of the program at a time.) TSL would accept the order and promise, while on the telephone, to ship the goods promptly. After the telephone order, Step-Saver would send a purchase order, detailing the items to be purchased, their price, and shipping and payment terms. TSL would ship the order promptly, along with an invoice. The invoice would contain terms essentially identical with those on Step-Saver's purchase order: price, quantity, and shipping and payment terms. No reference was made during the telephone calls, or on either the purchase orders or the invoices with regard to a disclaimer of any warranties.

Printed on the package of each copy of the program, however, would be a copy of the box-top license. The box-top license contains five terms relevant to this action:

(1) The box-top license provides that the customer has not purchased the software itself, but has merely obtained a personal, non-transferable license to use the program.^[7]

(2) The box-top license, in detail and at some length, disclaims all express and implied warranties except for a warranty that the disks contained in the box are free from defects.

(3) The box-top license provides that the sole remedy available to a purchaser of the program is to return a defective disk for replacement; the license excludes any liability for damages, direct or consequential, caused by the use of the program.

(4) The box-top license contains an integration clause, which provides that the box-top license is the final and complete expression of the terms of the parties's agreement.

(5) The box-top license states: "Opening this package indicates your acceptance of these terms and conditions. If you do not agree with them, you should promptly return the package unopened to the person from whom you purchased it within fifteen days from date of purchase and your money will be refunded to you by that person."

The district court, without much discussion, held, as a matter of law, that the box-top license was the final and complete expression of the terms of the parties's agreement. Because the district court decided the questions of contract formation and interpretation as issues of law, we review the district court's resolution of these questions de novo.^[8]

Step-Saver contends that the contract for each copy of the program was formed when TSL agreed, on the telephone, to ship the copy at the agreed price.^[9] The box-top license, argues Step-Saver, was a material alteration to the parties's contract which did not become a part of the contract under UCC § 2-207.^[10]Alternatively, Step-Saver argues that the undisputed evidence establishes that the parties did not intend the box-top license as a final and complete expression of the terms of their agreement, and, therefore, the parol evidence rule of UCC § 2-202 would not apply.^[11]

TSL argues that the contract between TSL and Step-Saver did not come into existence until Step-Saver received the program, saw the terms of the license, and opened the program packaging. TSL contends that too many material terms were omitted from the telephone discussion for that discussion to establish a contract for the software. Second, TSL contends that its acceptance of Step-Saver's telephone offer was conditioned on Step-Saver's acceptance of the terms of the box-top license. Therefore, TSL argues, it did not accept Step-Saver's telephone offer, but made a counteroffer represented by the terms of the box-top license, which was accepted when Step-Saver opened each package. Third, TSL argues that, however the contract was formed, Step-Saver was aware of the warranty disclaimer, and that Step-Saver, by continuing to order and accept the product with knowledge of the disclaimer, assented to the disclaimer.

In analyzing these competing arguments, we first consider whether the license should be treated as an integrated writing under UCC § 2-202, as a proposed modification under UCC § 2-209, or as a written confirmation under UCC § 2-207. Finding that UCC § 2-207 best governs our resolution of the effect of the box-top license, we then consider whether, under UCC § 2-207, the terms of the box-top license were incorporated into the parties's agreement.

A. Does UCC § 2-207 Govern the Analysis?

As a basic principle, we agree with Step-Saver that UCC § 2-207 governs our analysis. We see no need to parse the parties's various actions to decide exactly when the parties formed a contract. TSL has shipped the product, and Step-Saver has accepted and paid for each copy of the program. The parties's performance demonstrates the existence of a contract. The dispute is, therefore, not over the existence of a contract, but the nature of its terms.^[12] When the parties's conduct establishes a contract, but the parties have failed to adopt expressly a particular writing as the terms of their agreement, and the writings exchanged by the parties do not agree, UCC § 2-207 determines the terms of the contract.

As stated by the official comment to § 2-207:

1. This section is intended to deal with two typical situations. The one is the written confirmation, where an agreement has been reached either orally or by informal correspondence between the parties and is followed by one or more of the parties sending formal memoranda embodying the terms so far as agreed upon and adding terms not discussed....

2. Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, any additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms.

Although UCC § 2-202 permits the parties to reduce an oral agreement to writing, and UCC § 2-209 permits the parties to modify an existing contract without additional consideration, a writing will be a final expression of, or a binding modification to, an earlier agreement only if the parties so intend.^[13] It is undisputed that Step-Saver never expressly agreed to the terms of the box-top license, either as a final expression of, or a modification to, the parties's agreement. In fact, Barry Greebel, the President of Step-Saver, testified without dispute that he objected to the terms of the box-top license as applied to Step-Saver. In the absence of evidence demonstrating an express intent to adopt a writing as a final expression of, or a modification to, an earlier agreement, we find UCC § 2-207 to provide the appropriate legal rules for determining whether such an intent can be inferred from continuing with the contract after receiving a writing containing additional or different terms.^[14]

To understand why the terms of the license should be considered under § 2-207 in this case, we review briefly the reasons behind § 2-207. Under the common law of sales, and to some extent still for contracts outside the UCC,^[15] an acceptance that varied any term of the offer operated as a rejection of the offer, and simultaneously made a counteroffer.^[16] This common law formality was known as the mirror image rule, because the terms of the acceptance had to mirror the terms of the offer to be effective.^[17] If the offeror proceeded with the contract despite the differing terms of the supposed acceptance, he would, by his performance, constructively accept the terms of the "counteroffer", and be bound by its terms. As a result of these rules, the terms of the party who sent the last form, typically the seller, would become the terms of the parties's contract. This result was known as the "last shot rule".

The UCC, in § 2-207, rejected this approach. Instead, it recognized that, while a party may desire the terms detailed in its form if a dispute, in fact, arises, most parties do not expect a dispute to arise when they first enter into a contract. As a result, most parties will proceed with the transaction even if they know that the terms of their form would not be enforced.^[18] The insight behind the rejection of the last shot rule is that it would be unfair to bind the buyer of goods to the standard terms of the seller, when neither party cared sufficiently to establish expressly the terms of their agreement, simply because the seller sent the last form. Thus, UCC § 2-207 establishes a legal rule that proceeding with a contract after receiving a writing that purports to define the terms of the parties's contract is not sufficient to establish the party's consent to the terms of the writing to the extent that the terms of the writing either add to, or differ from, the terms detailed in the parties's earlier writings or discussions.^[19] In the absence of a party's express assent to the additional or different terms of the writing, section 2-207 provides a default rule that the parties intended, as the terms of their agreement, those terms to which both parties have agreed,^[20] along with any terms implied by the provisions of the UCC.

The reasons that led to the rejection of the last shot rule, and the adoption of section 2-207, apply fully in this case. TSL never mentioned during the parties's negotiations leading to the purchase of the programs, nor did it, at any time, obtain Step-Saver's express assent to, the terms of the box-top license. Instead, TSL contented itself with attaching the terms to the packaging of the software, even though those terms differed substantially from those previously discussed by the parties. Thus, the box-top license, in this case, is best seen as one more form in a battle of forms, and the question of whether Step-Saver has agreed to be bound by the terms of the box-top license is best resolved by applying the legal principles detailed in section 2-207.

B. Application of § 2-207

TSL advances several reasons why the terms of the box-top license should be incorporated into the parties's agreement under a § 2-207 analysis. First, TSL argues that the parties's contract was not formed until Step-Saver received the package, saw the terms of the box-top license, and opened the package, thereby consenting to the terms of the license. TSL argues that a contract defined without reference to the specific terms provided by the box-top license would necessarily fail for indefiniteness. Second, TSL argues that the box-top license was a conditional acceptance and counter-offer under § 2-207(1). Third, TSL argues that Step-Saver, by continuing to order and use the product with notice of the terms of the box-top license, consented to the terms of the box-top license.

1. Was the contract sufficiently definite?

TSL argues that the parties intended to license the copies of the program, and that several critical terms could only be determined by referring to the box-top license. Pressing the point, TSL argues that it is impossible to tell, without referring to the box-top license, whether the parties intended a sale of a copy of the program or a license to use a copy. TSL cites Bethlehem Steel Corp. v. Litton Industries in support of its position that any contract defined without reference to the terms of the box-top license would fail for indefiniteness.^[21]

From the evidence, it appears that the following terms, at the least, were discussed and agreed to, apart from the box-top license: (1) the specific goods involved; (2) the quantity; and (3) the price. TSL argues that the following terms were only defined in the box-top license: (1) the nature of the transaction, sale or license; and (2) the warranties, if any, available. TSL argues that these two terms are essential to creating a sufficiently definite contract. We disagree.

Section 2-204(3) of the UCC provides:

Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

Unlike the terms omitted by the parties in Bethlehem Steel Corp., the two terms cited by TSL are not "gaping holes in a multi-million dollar contract that no one but the parties themselves could fill."^[22] First, the rights of the respective parties under the federal copyright law if the transaction is characterized as a sale of a copy of the program are nearly identical to the parties's respective rights under the terms of the box-top license.^[23] Second, the UCC provides for express and implied warranties if the seller fails to disclaim expressly those warranties.^[24] Thus, even though warranties are an important term left blank by the parties, the default rules of the UCC fill in that blank.

We hold that contract was sufficiently definite without the terms provided by the box-top license.^[25]

2. The box-top license as a counter-offer?

TSL advances two reasons why its box-top license should be considered a conditional acceptance under UCC § 2-207(1). First, TSL argues that the express language of the box-top license, including the integration clause and the phrase "opening this product indicates your acceptance of these terms", made TSL's acceptance "expressly conditional on assent to the additional or different terms".^[26] Second, TSL argues that the box-top license, by permitting return of the product within fifteen days if the purchaser^[27] does not agree to the terms stated in the license (the "refund offer"), establishes that TSL's acceptance was conditioned on Step-Saver's assent to the terms of the box-top license, citing Monsanto Agricultural Products Co. v. Edenfield.^[28] While we are not certain that a conditional acceptance analysis applies when a contract is established by performance,^[29] we assume that it does and consider TSL's arguments.

To determine whether a writing constitutes a conditional acceptance, courts have established three tests. Because neither Georgia nor Pennsylvania has expressly adopted a test to determine when a written confirmation constitutes a conditional acceptance, we consider these three tests to determine which test the state courts would most likely apply.^[30]

Under the first test, an offeree's response is a conditional acceptance to the extent it states a term "materially altering the contractual obligations solely to the disadvantage of the offeror".^[31] Pennsylvania, at least, has implicitly rejected this test. In Herzog Oil Field Service, Inc.,^[32] a Pennsylvania Superior Court analyzed a term in a written confirmation under UCC § 2-207(2), rather than as a conditional acceptance even though the term materially altered the terms of the agreement to the sole disadvantage of the offeror.^[33]

Furthermore, we note that adopting this test would conflict with the express provision of UCC § 2-207(2)(b). Under § 2-207(2)(b), additional terms in a written confirmation that "materially alter [the contract]" are construed "as proposals for addition to the contract", not as conditional acceptances.

A second approach considers an acceptance conditional when certain key words or phrases are used, such as a written confirmation stating that the terms of the confirmation are "the only ones upon which we will accept orders".^[34] The third approach requires the offeree to demonstrate an unwillingness to proceed with the transaction unless the additional or different terms are included in the contract.^[35]

Although we are not certain that these last two approaches would generate differing answers,^[36] we adopt the third approach for our analysis because it best reflects the understanding of commercial transactions developed in the UCC. Section 2-207 attempts to distinguish between: (1) those standard terms in a form confirmation, which the party would like a court to incorporate into the contract in the event of a dispute; and (2) the actual terms the parties understand to govern their agreement. The third test properly places the burden on the party asking a court to enforce its form to demonstrate that a particular term is a part of the parties's commercial bargain.^[37]

Using this test, it is apparent that the integration clause and the "consent by opening" language is not sufficient to render TSL's acceptance conditional. As other courts have recognized,^[38] this type of language provides no real indication that the party is willing to forego the transaction if the additional language is not included in the contract.

The second provision provides a more substantial indication that TSL was willing to forego the contract if the terms of the box-top license were not accepted by Step-Saver. On its face, the box-top license states that TSL will refund the purchase price if the purchaser does not agree to the terms of the license.^[39] Even with such a refund term, however, the offeree/counterofferor may be relying on the purchaser's investment in time and energy in reaching this point in the transaction to prevent the purchaser from returning the item. Because a purchaser has made a decision to buy a particular product and has actually obtained the product, the purchaser may use it despite the refund offer, regardless of the additional terms specified after the contract formed. But we need not decide whether such a refund offer could ever amount to a conditional acceptance; the undisputed evidence in this case demonstrates that the terms of the license were not sufficiently important that TSL would forego its sales to Step-Saver if TSL could not obtain Step-Saver's consent to those terms.

As discussed, Mr. Greebel testified that TSL assured him that the box-top license did not apply to Step-Saver, as Step-Saver was not the end user of the Multilink Advanced program. Supporting this testimony, TSL on two occasions asked Step-Saver to sign agreements that would put in formal terms the relationship between Step-Saver and TSL. Both proposed agreements contained warranty disclaimer and limitation of remedy terms similar to those contained in the box-top license. Step-Saver refused to sign the agreements; nevertheless, TSL continued to sell copies of Multilink Advanced to Step-Saver.

Additionally, TSL asks us to infer, based on the refund offer, that it was willing to forego its sales to Step-Saver unless Step-Saver agreed to the terms of the box-top license. Such an inference is inconsistent with the fact that both parties agree that the terms of the box-top license did not represent the parties's agreement with respect to Step-Saver's right to transfer the copies of the Multilink Advanced program. Although the box-top license prohibits the transfer, by Step-Saver, of its copies of the program, both parties agree that Step-Saver was entitled to transfer its copies to the purchasers of the Step-Saver multi-user system. Thus, TSL was willing to proceed with the transaction despite the fact that one of the terms of the box-top license was not included in the contract between TSL and Step-Saver. We see no basis in the terms of the box-top license for inferring that a reasonable offeror would understand from the refund offer that certain terms of the box-top license, such as the warranty disclaimers, were essential to TSL, while others such as the non-transferability provision were not.

Based on these facts, we conclude that TSL did not clearly express its unwillingness to proceed with the transactions unless its additional terms were incorporated into the parties's agreement. The box-top license did not, therefore, constitute a conditional acceptance under UCC § 2-207(1).

3. Did the parties's course of dealing establish that the parties had excluded any express or implied warranties associated with the software program?

TSL argues that because Step-Saver placed its orders for copies of the Multilink Advanced program with notice of the terms of the box-top license, Step-Saver is bound by the terms of the box-top license. Essentially, TSL is arguing that, even if the terms of the box-top license would not become part of the contract if the case involved only a single transaction, the repeated expression of those terms by TSL eventually incorporates them within the contract.

Ordinarily, a "course of dealing" or "course of performance" analysis focuses on the actions of the parties with respect to a particular issue.^[40] If, for example, a supplier of asphaltic paving material on two occasions gives a paving contractor price protection, a jury may infer that the parties have incorporated such a term in their agreement by their course of performance.^[41] Because this is the parties's first serious dispute, the parties have not previously taken any action with respect to the matters addressed by the warranty disclaimer and limitation of liability terms of the box-top license. Nevertheless, TSL seeks to extend the course of dealing analysis to this case where the only action has been the repeated sending of a particular form by TSL. While one court has concluded that terms repeated in a number of written confirmations eventually become part of the contract even though neither party ever takes any action with respect to the issue addressed by those terms,^[42] most courts have rejected such reasoning.^[43]

For two reasons, we hold that the repeated sending of a writing which contains certain standard terms, without any action with respect to the issues addressed by those terms, cannot constitute a course of dealing which would incorporate a term of the writing otherwise excluded under § 2-207. First, the repeated exchange of forms by the parties only tells Step-Saver that TSL desires certain terms. Given TSL's failure to obtain Step-Saver's express assent to these terms before it will ship the program, Step-Saver can reasonably believe that, while TSL desires certain terms, it has agreed to do business on other terms — those terms expressly agreed upon by the parties. Thus, even though Step-Saver would not be surprised^[44] to learn that TSL desires the terms of the box-top license, Step-Saver might well be surprised to learn that the terms of the box-top license have been incorporated into the parties's agreement.

Second, the seller in these multiple transaction cases will typically have the opportunity to negotiate the precise terms of the parties's agreement, as TSL sought to do in this case. The seller's unwillingness or inability to obtain a negotiated agreement reflecting its terms strongly suggests that, while the seller would like a court to incorporate its terms if a dispute were to arise, those terms are not a part of the parties's commercial bargain. For these reasons, we are not convinced that TSL's unilateral act of repeatedly sending copies of the box-top license with its product can establish a course of dealing between TSL and Step-Saver that resulted in the adoption of the terms of the box-top license.

With regard to more specific evidence as to the parties's course of dealing or performance, it appears that the parties have not incorporated the warranty disclaimer into their agreement. First, there is the evidence that TSL tried to obtain Step-Saver's express consent to the disclaimer and limitation of damages provision of the box-top license. Step-Saver refused to sign the proposed agreements. Second, when first notified of the problems with the program, TSL spent considerable time and energy attempting to solve the problems identified by Step-Saver.

Course of conduct is ordinarily a factual issue. But we hold that the actions of TSL in repeatedly sending a writing, whose terms would otherwise be excluded under UCC § 2-207, cannot establish a course of conduct between TSL and Step-Saver that adopted the terms of the writing.

4. Public policy concerns.

TSL has raised a number of public policy arguments focusing on the effect on the software industry of an adverse holding concerning the enforceability of the box-top license. We are not persuaded that requiring software companies to stand behind representations concerning their products will inevitably destroy the software industry. We emphasize, however, that we are following the well-established distinction between conspicuous disclaimers made available before the contract is formed and disclaimers made available only after the contract is formed.^[45] When a disclaimer is not expressed until after the contract is formed, UCC § 2-207 governs the interpretation of the contract, and, between merchants, such disclaimers, to the extent they materially alter the parties's agreement, are not incorporated into the parties's agreement.

If TSL wants relief for its business operations from this well-established rule, their arguments are better addressed to a legislature than a court. Indeed, we note that at least two states have enacted statutes that modify the applicable contract rules in this area,^[46] but both Georgia and Pennsylvania have retained the contract rules provided by the UCC.

C. The Terms of the Contract

Under section 2-207, an additional term detailed in the box-top license will not be incorporated into the parties's contract if the term's addition to the contract would materially alter the parties's agreement.^[47] Step-Saver alleges that several representations made by TSL constitute express warranties, and that valid implied warranties were also a part of the parties's agreement. Because the district court considered the box-top license to exclude all of these warranties, the district court did not consider whether other factors may act to exclude these warranties. The existence and nature of the warranties is primarily a factual question that we leave for the district court,^[48] but assuming that these warranties were included within the parties's original agreement, we must conclude that adding the disclaimer of warranty and limitation of remedies provisions from the box-top license would, as a matter of law, substantially alter the distribution of risk between Step-Saver and TSL.^[49] Therefore, under UCC § 2-207(2)(b), the disclaimer of warranty and limitation of remedies terms of the box-top license did not become a part of the parties's agreement.^[50]

Based on these considerations, we reverse the trial court's holding that the parties intended the box-top license to be a final and complete expression of the terms of their agreement. Despite the presence of an integration clause in the box-top license, the box-top license should have been treated as a written confirmation containing additional terms.^[51] Because the warranty disclaimer and limitation of remedies terms would materially alter the parties's agreement, these terms did not become a part of the parties's agreement. We remand for further consideration the express and implied warranty claims against TSL.

III. THE INTENTIONAL MISREPRESENTATION CLAIM AGAINST TSL

We review the trial court's decision to grant a directed verdict on the intentional misrepresentation claim de novo.^[52] We ask whether, considering the evidence in the light most favorable to Step-Saver, a reasonable jury could find, by clear and convincing evidence,^[53] each essential element of Step-Saver's fraud claim: (1) a material misrepresentation; (2) an intention to deceive; (3) an intention to induce reliance; (4) justifiable reliance by the recipient upon the representation; and (5) damage to the recipient proximately caused by the misrepresentation.^[54]

To support its intentional misrepresentation claim, Step-Saver argues that TSL made specific claims, in its advertisement and in statements by its sales representatives, that the Multilink Advanced program was compatible with various MS-DOS application programs and with the Wyse terminal. To demonstrate that TSL made these compatibility representations with an intent to deceive, Step-Saver refers to several statements made in deposition testimony by the co-founders of TSL, and argues that these statements are sufficient to establish that TSL knew these compatibility representations were false at the time they were made. In particular, Step-Saver points to the statement by Mr. Robertson, one of TSL's co-founders, that he did not know of any programs "completely compatible" with Multilink Advanced.

In determining whether Mr. Robertson's testimony will support an inference of fraudulent intent, we, like the experts at trial, distinguish between compatibility, or practical compatibility, and complete, absolute, or theoretical compatibility. If two products are completely compatible, they will work properly together in every possible situation, every time. As Mr. Robertson explained, "complete compatibility is almost virtually impossible to obtain". On the other hand, two products are compatible, within the standards of the computer industry, if they work together almost every time in almost every possible situation.^[55]

It is undisputed that the representations made by the sales representatives referred to practical compatibility, while Mr. Robertson's testimony referred to complete compatibility. Because of the differences between practical and complete compatibility, as those terms are used in the industry, we agree with the district court that Mr. Robertson's testimony about "complete compatibility" will not support a finding, under the clear and convincing standard, that TSL knew its representations concerning practical compatibility were false. In context, Mr. Robertson's statement was simply an expression of technical fact, not an indication that he knew that Multilink Advanced failed to satisfy industry standards for practical compatibility.

IV. THE IMPLIED WARRANTY OF MERCHANTABILITY CLAIM AGAINST WYSE

Step-Saver argues that there was sufficient evidence in the record to support a jury finding that the Wyse terminal was not "fit for the ordinary purposes for which such goods are used",^[56] and that the trial judge should have permitted the jury to decide the implied warranty of merchantability issue.

The only evidence introduced by Step-Saver on this issue was that certain features on the WY-60 terminal were not compatible with the Multilink Advanced operating environment. For example, the WY-60 terminal originally had repeatable, instead of toggle,^[57] NUM LOCK and CAPS LOCK keys. The combination of repeatable keys and the Multilink Advanced program caused the NUM LOCK or CAPS LOCK indicated by the terminal to become out of synchronicity with the actual setting followed by the computer. As a result, a terminal's screen and keyboard might indicate that CAPS LOCK was on, when in fact it was off. Because of this, a user might type an entire document believing that the document was in all capital letters, only to discover upon printing that the document was in all lower case letters.

While this evidence demonstrates some compatibility problems between the WY-60 terminal and the Multilink Advanced program, Wyse introduced undisputed testimony that a user would encounter the same compatibility problems when using the Multilink Advanced operating environment on either a Kimtron KT-7 terminal, or a Link terminal, the terminals offered by Wyse's two primary competitors. Undisputed testimony also established that Wyse had sold over one million WY-60 terminals since the terminal's introduction in April of 1986, and that the WY-60 was the top-selling terminal in its class.

Furthermore, undisputed testimony by Wyse engineers established that the WY-60 terminals were built to industry-standard specifications for terminals designed to work with a multi-user system based on the IBM AT or XT. It is apparent that when the pieces of a system intended to work together are designed and built independently, each piece must conform to certain specifications if the pieces are to work together properly. Just as a nut and bolt must be built in a certain manner to insure their fit, so too the components of a multi-user system. Just as a bolt, built to industry standards for a certain size and thread, cannot be considered unfit for its ordinary use simply because a particular nut does not fit it, so too the WY-60 terminal.

Under a warranty of merchantability, the seller warrants only that the goods are of acceptable quality "when compared to that generally acceptable in the trade for goods of the kind."^[58] Because the undisputed testimony established that the WY-60 terminal conformed to the industry standard for terminals designed to operate in conjunction with an IBM AT, the evidence of incompatibility with the Multilink Advanced operating system is not sufficient to support a finding that Wyse breached the implied warranty of merchantability.^[59]

V. EVIDENTIARY RULINGS

We have carefully reviewed the record regarding the evidentiary rulings. For the reasons given on these two issues in the district court's memorandum opinion rejecting Step-Saver's motion for a new trial,^[60] we hold that the exclusion of the unsent letter and the refusal to permit rebuttal testimony on the issue of the ordinary uses of the WY-60 terminal did not constitute an abuse of discretion.

VI.

We will reverse the holding of the district court that the parties intended to adopt the box-top license as the complete and final expression of the terms of their agreement. We will remand for further consideration of Step-Saver's express and implied warranty claims against TSL. Finding a sufficient basis for the other decisions of the district court, we will affirm in all other respects.

[*] Hon. John M. Wisdom, United States Court of Appeals for the Fifth Circuit, sitting by designation.

[1] In essence, the terminals are simply video screens with keyboards that serve as input-output devices for the main computer. The main computer receives data from all of the terminals and processes it appropriately, sending a return signal to the terminal. To someone working on one of the terminals of a properly operating multi-user system, the terminal appears to function as if it were, in fact, a computer. Thus, an operator could work with a word processing program on a terminal, and it would appear to the operator the same as would working with the word processing program on a computer. The difference is that, with a set of computers, the commands of each user are processed within each user's computer, whereas with a multi-user system, the commands of all of the users are sent to the main computer for processing.

[2] MS-DOS was the standard operating system for IBM and compatible personal computers.

[3] According to the testimony of Jeffrey Worthington, an employee of Step-Saver, twenty to twenty-five of the purchasers of the multi-user system had serious problems with the system that were never resolved.

[4] See Step-Saver Data Sys., Inc. v. Wyse Tech., 912 F.2d 643 (3d Cir.1990).

[5] Step-Saver also advanced claims under negligent misrepresentation and breach of contract theories. Step-Saver does not appeal these claims.

[6] All three parties agree that the terminals and the program are "goods" within the meaning of UCC § 2-102 & 2-105. Cf. Advent Sys. Ltd. v. Unisys Corp., 925 F.2d 670, 674-76 (3d Cir.1991). TSL and Step-Saver have disputed whether Pennsylvania or Georgia law governs the issues of contract formation and modification with regard to the Multilink programs. Because both Pennsylvania and Georgia have adopted, without modification, the relevant portions of Article 2 of the Uniform Commercial Code, seeGa.Code Ann. §§ 11-2-101 to 11-2-725 (1990); 13 Pa.Cons.Stat.Ann. §§ 2101-2725 (Purdon 1984), we will simply cite to the relevant UCC provision.

[7] When these form licenses were first developed for software, it was, in large part, to avoid the federal copyright law first sale doctrine. Under the first sale doctrine, once the copyright holder has sold a copy of the copyrighted work, the owner of the copy could "sell or otherwise dispose of the possession of that copy" without the copyright holder's consent. See Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350, 28 S.Ct. 722, 726, 52 L.Ed. 1086 (1908); 17 U.S.C.A. § 109(a) (West 1977). Under this doctrine, one could purchase a copy of a computer program, and then lease it or lend it to another without infringing the copyright on the program. Because of the ease of copying software, software producers were justifiably concerned that companies would spring up that would purchase copies of various programs and then lease those to consumers. Typically, the companies, like a videotape rental store, would purchase a number of copies of each program, and then make them available for over-night rental to consumers. Consumers, instead of purchasing their own copy of the program, would simply rent a copy of the program, and duplicate it. This copying by the individual consumers would presumably infringe the copyright, but usually it would be far too expensive for the copyright holder to identify and sue each individual copier. Thus, software producers wanted to sue the companies that were renting the copies of the program to individual consumers, rather than the individual consumers. The first sale doctrine, though, stood as a substantial barrier to successful suit against these software rental companies, even under a theory of contributory infringement. By characterizing the original transaction between the software producer and the software rental company as a license, rather than a sale, and by making the license personal and non-transferable, software producers hoped to avoid the reach of the first sale doctrine and to establish a basis in state contract law for suing the software rental companies directly. Questions remained, however, as to whether the use of state contract law to avoid the first sale doctrine would be preempted either by the federal copyright statute (statutory preemption) or by the exclusive constitutional grant of authority over copyright issues to the federal government (constitutional preemption). See generally Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989); Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974); Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669 (1964); Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964). Congress recognized the problem, and, in 1990, amended the first sale doctrine as it applies to computer programs and phonorecords. See Computer Software Rental Amendments Act of 1990, Pub.L. No. 101-650, 104 Stat. 5134 (codified at 17 U.S.C.A. § 109(b) (West Supp.1991)). As amended, the first sale doctrines permits only non-profit libraries and educational institutions to lend or lease copies of software and phonorecords. See 17 U.S.C.A. § 109(b)(1)(A) (West Supp.1991). (Under the amended statute, a purchaser of a copy of a copyrighted computer program may still sell his copy to another without the consent of the copyright holder.) This amendment renders the need to characterize the original transaction as a license largely anachronistic. While these transactions took place in 1986-87, before the Computer Software Rental Amendments were enacted, there was no need to characterize the transactions between Step-Saver and TSL as a license to avoid the first sale doctrine because both Step-Saver and TSL agree that Step-Saver had the right to resell the copies of the Multilink Advanced program.

[8] See Diamond Fruit Growers, Inc. v. Krack Corp., 794 F.2d 1440, 1442 (9th Cir.1986).

[9] See UCC § 2-206(1)(b) and comment 2. Note that under UCC § 2-201, the oral contract would not be enforceable in the absence of a writing or part performance because each order typically involved more than $500 in goods. However, courts have typically treated the questions of formation and interpretation as separate from the question of when the contract becomes enforceable. See, e.g., C. Itoh & Co. v. Jordan Int'l Co., 552 F.2d 1228, 1232-33 (7th Cir.1977); Southeastern Adhesives Co. v. Funder America, 89 N.C.App. 438, 366 S.E.2d 505, 507-08 (N.C.Ct.App.1988); United Coal & Commodities Co. v. Hawley Fuel Coal, Inc., 363 Pa.Super. 106, 525 A.2d 741, 743 (Pa.Super.Ct.), app. denied, 517 Pa. 609, 536 A.2d 1333 (1987).

[10] Section 2-207 provides:

Additional Terms in Acceptance or Confirmation.

(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.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of the Act.

[11] Two other issues were raised by Step-Saver. First, Step-Saver argued that the box-top disclaimer is either unconscionable or not in good faith. Second, Step-Saver argued that the warranty disclaimer was inconsistent with the express warranties made by TSL in the product specifications. Step-Saver argues that interpreting the form language of the license agreement to override the specific warranties contained in the product specification is unreasonable, citing Consolidated Data Terminals v. Applied Digital Data Sys., 708 F.2d 385 (9th Cir.1983). See also Northern States Power Co. v. ITT Meyer Indus., 777 F.2d 405 (8th Cir.1985). Because of our holding that the terms of the box-top license were not incorporated into the contract, we do not address these issues.

[12] See McJunkin Corp. v. Mechanicals, Inc., 888 F.2d 481, 488 (6th Cir.1989).

[13] See, e.g., Sierra Diesel Injection Serv., Inc. v. Burroughs Corp., 890 F.2d 108, 112-13 (9th Cir.1989)(UCC § 2-202). By its terms, UCC § 2-209 extends only to "[a]n agreement to modify".

[14] See Mead Corp. v. McNally-Pittsburgh Mfg. Corp., 654 F.2d 1197, 1206 (6th Cir.1981).

[15] See, e.g., Learning Works, Inc. v. Learning Annex, Inc., 830 F.2d 541, 543 (4th Cir.1987).

[16] See, e.g., Diamond Fruit Growers, Inc., 794 F.2d at 1443; J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code, § 1-2 at 34 (2d ed. 1980).

[17] See, e.g., Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1578 (10th Cir.1984).

[18] As Judge Engel has written:

Usually, these standard terms mean little, for a contract looks to its fulfillment and rarely anticipates its breach. Hope springs eternal in the commercial world and expectations are usually, but not always, realized.

McJunkin Corp. v. Mechanicals, Inc., 888 F.2d at 482.

[19] As the Mead Court explained:

Absent the [UCC], questions of contract formation and intent remain factual issues to be resolved by the trier of fact after careful review of the evidence. However, the [UCC] provides rules of law, and section 2-207 establishes important legal principles to be employed to resolve complex contract disputes arising from the exchange of business forms. Section 2-207 was intended to provide some degree of certainty in this otherwise ambiguous area of contract law. In our view, it is unreasonable and contrary to the policy behind the [UCC] merely to turn the issue over to the uninformed speculation of the jury left to apply its own particular sense of equity.

Mead Corp., 654 F.2d at 1206 (citations omitted).

[20] The parties may demonstrate their acceptance of a particular term either "orally or by informal correspondence", UCC 2-207, comment 1, or by placing the term in their respective form.

[21] 507 Pa. 88, 488 A.2d 581 (1985).

[22] 488 A.2d at 591.

[23] The most significant difference would be that, under the terms of the license, Step-Saver could not transfer the copies without TSL's consent, while Step-Saver could do so under the federal copyright law if it had purchased the copy. Even if we assume that federal law would not preempt state law enforcement of this aspect of the license, this difference is not material to this case in that both parties agree that Step-Saver had the right to transfer the copies to purchasers of the Step-Saver multi-user system.

[24] See UCC § 2-312, 2-313, 2-314, & 2-315.

[25] See, e.g., City University of New York v. Finalco, Inc., 514 N.Y.S.2d 244, 129 A.D.2d 494 (N.Y.App.Div.1987); URSA Farmers Coop. Co. v. Trent, 58 Ill.App.3d 930, 16 Ill.Dec. 348, 374 N.E.2d 1123 (Ill.App.Ct.1978).

[26] UCC § 2-207(1).

[27] In the remainder of the opinion, we will refer to the transaction as a sale for the sake of simplicity, but, by doing so, do not mean to resolve the sale-license question.

[28] 426 So.2d 574 (Fla.Dist.Ct.App.1982).

[29] Even though a writing is sent after performance establishes the existence of a contract, courts have analyzed the effect of such a writing under UCC § 2-207. See Herzog Oil Field Serv. v. Otto Torpedo Co., 391 Pa.Super. 133, 570 A.2d 549, 550 (Pa.Super.Ct.1990); McJunkin Corp. v. Mechanicals, Inc., 888 F.2d at 487. The official comment to UCC 2-207 suggests that, even though a proposed deal has been closed, the conditional acceptance analysis still applies in determining which writing's terms will define the contract.

2. Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, any additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms.

[30] See Daitom, Inc., 741 F.2d at 1574-75.

[31] Daitom, Inc., 741 F.2d at 1576. See, e.g., Roto-Lith Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir.1962).

[32] 391 Pa.Super. 133, 570 A.2d 549 (Pa.Super.Ct.1990).

[33] The seller/offeree sent a written confirmation that contained a term that provided for attorney's fees of 25 percent of the balance due if the account was turned over for collection. 570 A.2d at 550.

[34] Ralph Shrader, Inc. v. Diamond Int'l Corp., 833 F.2d 1210, 1214 (6th Cir.1987); see McJunkin Corp., 888 F.2d at 488. Note that even though an acceptance contains the key phrase, and is conditional, these courts typically avoid finding a contract on the terms of the counteroffer by requiring the offeree/counterofferor to establish that the offeror assented to the terms of the counteroffer. Generally, acceptance of the goods, alone, is not sufficient to establish assent by the offeror to the terms of the counteroffer. See, e.g., Ralph Shrader, Inc., 833 F.2d at 1215; Diamond Fruit Growers, Inc., 794 F.2d at 1443-44; Coastal Indus. v. Automatic Steam Prods. Corp., 654 F.2d 375, 379 (5th Cir. Unit B Aug.1981). If the sole evidence of assent to the terms of the counteroffer is from the conduct of the parties in proceeding with the transaction, then the courts generally define the terms of the parties's agreement under § 2-207(3). See, e.g., Diamond Fruit Growers, Inc., 794 F.2d at 1444.

[35] See, e.g., Daitom, Inc., 741 F.2d at 1576; Idaho Power Co. v. Westinghouse Elec. Corp., 596 F.2d 924, 926 (9th Cir.1979).

[36] Under the second approach, the box-top license might be considered a conditional acceptance, but Step-Saver, by accepting the product, would not be automatically bound to the terms of the box-top license. See Diamond Fruit Growers, Inc., 794 F.2d at 1444. Instead, courts have applied UCC § 2-207(3) to determine the terms of the parties's agreement. The terms of the agreement would be those "on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act." UCC § 2-207(3). Because the writings of the parties did not agree on the warranty disclaimer and limitation of remedies terms, the box-top license version of those terms would not be included in the parties's contract; rather, the default provisions of the UCC would govern.

[37] See Diamond Fruit Growers, Inc., 794 F.2d at 1444-45; cf. Ralph Shrader, Inc., 833 F.2d at 1215.

[38] See, e.g., Idaho Power Co., 596 F.2d at 926-27.

[39] One Florida Court of Appeals has accepted such an offer as a strong indication of a conditional acceptance. Monsanto Agricultural Prods. Co., 426 So.2d at 575-76. Note that the Monsanto warranty label was conspicuous and available to the purchaser before the contract for the sale of the herbicide was formed. When an offeree proceeds with a contract with constructive knowledge of the terms of the offer, the offeree is typically bound by those terms, making the conditional acceptance finding unnecessary to the result reached in Monsanto.

[40] A "course of performance" refers to actions with respect to the contract taken after the contract has formed. UCC § 2-208(1). "A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct." UCC § 1-205.

[41] See Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir.1981).

[42] See Schulze & Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709, 714-15 (7th Cir.1987). As support for its position, the Schulze Court cites Barliant v. Follett Corp., 138 Ill.App.3d 756, 91 Ill.Dec. 677, 483 N.E.2d 1312 (Ill.App.Ct.1985). Yet, the facts and result in Barliant do not support the reasoning in Schulze. In Barliant, the buyer had paid some twenty-four invoices, which included charges for freight and warehousing even though the agreement specified charges were F.O.B. The court found that the buyer had paid the invoices with knowledge of the additional charge for freight and warehousing. Because of this conduct with respect to the term in question, the buyer waived any right to complain that the charges should not have been included. 91 Ill.Dec. at 679-80, 483 N.E.2d at 1314-15. In contrast, in Schulze, neither party had taken any action with respect to the arbitration provision. Because no disputes had arisen, there was no conduct by either party indicating how disputes were to be resolved. Nevertheless, the Schulze Court held that, because the provision had been repeated in nine previous invoices, it became part of the parties's bargain. 831 F.2d at 715. We note that the Seventh Circuit refused to follow Schulze in a more recent case raising the same issue. See Trans-Aire Int'l v. Northern Adhesive Co., 882 F.2d 1254, 1262-63 & n. 9 (7th Cir.1989).

[43] See, e.g., Trans-Aire Int'l v. Northern Adhesive Co., 882 F.2d at 1262-63 & n. 9; Diamond Fruit Growers, Inc., 794 F.2d at 1445; Tuck Industries v. Reichhold Chemicals, Inc., 542 N.Y.S.2d 676, 678, 151 A.D.2d 566 (N.Y.App.Div.1989); Southeastern Adhesives Co., 366 S.E.2d at 507-08.

[44] Cf. UCC § 2-207, comment 4 (suggesting that terms that "materially alter" a contract are those that would result in "surprise or hardship if incorporated without express awareness by the other party").

[45] Compare Hill v. BASF Wyandotte Corp., 696 F.2d 287, 290-91 (4th Cir.1982). In that case, a farmer purchased seventy-three five gallon cans of a herbicide from a retailer. Because the disclaimer was printed conspicuously on each can, the farmer had constructive knowledge of the terms of the disclaimer before the contract formed. As a result, when he selected each can of the herbicide from the shelf and purchased it, the law implies his assent to the terms of the disclaimer. See also Bowdoin v. Showell Growers, Inc., 817 F.2d 1543, 1545 (11th Cir.1987) (disclaimers that were conspicuous before the contract for sale has formed are effective; post-sale disclaimers are ineffective); Monsanto Agricultural Prods. Co. v. Edenfield, 426 So.2d at 575-76.

[46] Louisiana Software License Enforcement Act, La.R.S. §§ 51:1961-1966 (1987); Illinois Software Enforcement Act, Ill.Ann.Stat. ch. 29, para. 801-808 (Smith-Hurd 1987).

[47] UCC § 2-207(2)(b).

[48] For example, questions exist as to: (1) whether the statements by TSL were representations of fact, or mere statements of opinion; (2) whether the custom in the trade is to exclude warranties and limit remedies in contracts between a software producer and its dealer; (3) whether Step-Saver relied on TSL's alleged representations, or whether these warranties became a basis of the parties's bargain; and (4) whether Step-Saver's testing excluded some or all of these warranties. From the record, it appears that most of these issues are factual determinations that will require a trial, as did the warranty claims against Wyse. But we leave these issues open to the district court on remand.

[49] See Valtrol, Inc. v. General Connectors Corp., 884 F.2d 149, 155 (4th Cir.1989); Trans-Aire Int'l v. Northern Adhesive Co., 882 F.2d at 1262-63; UCC § 2-207, official comment 4.

[50] The following recent cases reach a similar conclusion concerning indemnity or warranty disclaimers contained in writings exchanged after the contract had formed: McJunkin Corp., 888 F.2d at 488-89; Valtrol, Inc. v. General Connectors Corp., 884 F.2d at 155; Trans-Aire Int'l v. Northern Adhesive Co., 882 F.2d at 1262-63; Bowdoin, 817 F.2d at 1545-46; Diamond Fruit Growers, Inc., 794 F.2d at 1445; Tuck Industries, 542 N.Y.S.2d at 678; Southeastern Adhesives Co., 366 S.E.2d at 507-08.

[51] See Idaho Power Co., 596 F.2d at 925-27 (applying UCC § 2-207 despite presence of integration clause in written confirmation).

[52] See, e.g., Indian Coffee Corp. v. Proctor & Gamble Co., 752 F.2d 891, 894 (3d Cir.), cert. denied,474 U.S. 863, 106 S.Ct. 180, 88 L.Ed.2d 150 (1985).

[53] See Beardshall v. Minuteman Press Int'l, Inc., 664 F.2d 23, 26 (3d Cir.1981); Snell v. State Examining Bd., 490 Pa. 277, 281, 416 A.2d 468, 470 (1980).

[54] See Kinnel v. Mid-Atlantic Mausoleums, Inc., 850 F.2d 958, 963-64 (3d Cir.1988); Scaife Co. v. Rockwell-Standard Corp., 446 Pa. 280, 285, 285 A.2d 451, 454 (1971), cert. denied, 407 U.S. 920, 92 S.Ct. 2459, 32 L.Ed.2d 806 (1972).

[55] We disagree with the holding by the district court that a representation of compatibility is a statement of opinion, rather than fact. Compatibility between two computer products can be tested and determined. While two computer products are not likely to be perfectly compatible, the question of whether the degree of compatibility is consistent with industry standards is a question generally for the jury, not the judge.

[56] UCC § 2-314(2)(c).

[57] If a user presses and holds a repeatable NUM LOCK key, the terminal will switch back and forth between NUM LOCK on and NUM LOCK off as long as the user holds down the key. In contrast, if a user presses and holds a toggle key, the terminal will switch from the present setting to the other setting. Even if the user continues to hold the key, the setting will not change but once. In order to change the setting back to the prior setting, the user must release the key and press it again.

[58] Price Bros. Co. v. Philadelphia Gear Corp., 649 F.2d 416, 424 (6th Cir.), cert. denied, 454 U.S. 1099, 102 S.Ct. 674, 70 L.Ed.2d 641 (1981); see also Dugan & Meyers Constr. Co. v. Worthington Pump Corp. (USA), 746 F.2d 1166, 1176 (6th Cir.1984), cert. denied, 471 U.S. 1135, 105 S.Ct. 2675, 86 L.Ed.2d 694 (1985).

[59] See In re Franklin Computer Corp., 57 B.R. 155, 157 (Bankr.E.D.Pa.1986).

[60] Step-Saver Data Sys., Inc. v. Wyse Tech., 752 F.Supp. 181, 192-93 (E.D.Pa.1990).

Philip B. Kurland, Chicago, Ill., for Royal Business Machines and Litton Business Systems.

Morris L. Klapper, Indianapolis, Ind., for Lorraine Corp. and Michael L. Booher.

Before PELL and WOOD, Circuit Judges, and BAKER, District Judge.^[*]

BAKER, District Judge.

This is an appeal from a judgment of the district court entered after a bench trial awarding Michael L. Booher and Lorraine Corp. (Booher) $1,171,216.16 in compensatory and punitive damages against Litton Business Systems, Inc. and Royal Business Machines, Inc. (Royal). The judgment further awarded Booher attorneys' fees of $156,800.00. It denied, for want of consideration, the recovery by Royal of a $596,921.33 indebtedness assessed against Booher earlier in the proceedings in a summary judgment. The judgment also granted Royal a set-off of $12,020.00 for an unpaid balance due on computer typewriters.

The case arose from commercial transactions extending over a period of 18 months between Royal and Booher in which Royal sold and Booher purchased 114 RBC I and 14 RBC II plain paper copying machines. In mid-August 1976, Booher filed suit against Royal in the Indiana courts claiming breach of warranties and fraud. On September 1, 1976, Royal sued Booher on his financing agreements in the district court and also removed the state litigation to the district court where the cases were consolidated.

The issues in the cases arise under Indiana common law and under the U.C.C. as adopted in Indiana, Ind.Code § 26-1-2-102 et seq. (1976). The contentions urged by Royal on appeal are that:

(1) substantial evidence does not support the findings that Royal made certain express warranties or that it breached any express warranty and, as a matter of law, no warranties were made; and

(2) substantial evidence does not support the findings that Royal breached the implied warranties of merchantability and fitness for a particular purpose; and

(3) substantial evidence does not support the finding that Booher made a timely revocation of acceptance of the goods sold; and

(4) substantial evidence does not support the findings upon which the awards of compensatory damages were made and that certain awards constituted a double recovery; and

(5) substantial evidence does not support the findings upon which the awards of punitive damages were made.

We reverse and remand for a new trial on the grounds set forth in this opinion.

EXPRESS WARRANTIES

We first address the question whether substantial evidence on the record supports the district court's findings that Royal made and breached express warranties to Booher. The trial judge found that Royal Business Machines made and breached the following express warranties:

(1) that the RBC Model I and II machines and their component parts were of high quality;

(2) that experience and testing had shown that frequency of repairs was very low on such machines and would remain so;

(3) that replacement parts were readily available;

(4) that the cost of maintenance for each RBC machine and cost of supplies was and would remain low, no more than ½ cent per copy;

(5) that the RBC machines had been extensively tested and were ready to be marketed;

(6) that experience and reasonable projections had shown that the purchase of the RBC machines by Mr. Booher and Lorraine Corporation and the leasing of the same to customers would return substantial profits to Booher and Lorraine;

(7) that the machines were safe and could not cause fires; and

(8) that service calls were and would be required for the RBC Model II machine on the average of every 7,000 to 9,000 copies, including preventive maintenance calls.

Substantial evidence supports the court's findings as to Numbers 5, 7, 8, and the maintenance aspect of Number 4, but, as a matter of law, Numbers 1, 2, 3, 6, and the cost of supplies portion of Number 4 cannot be considered express warranties.

Paraphrasing U.C.C. § 2-313 as adopted in Indiana,^[1] an express warranty is made up of the following elements: (a) an affirmation of fact or promise, (b) that relates to the goods, and (c) becomes a part of the basis of the bargain between the parties. When each of these three elements is present, a warranty is created that the goods shall conform to the affirmation of fact or to the promise.

The decisive test for whether a given representation is a warranty or merely an expression of the seller's opinion is whether the seller asserts a fact of which the buyer is ignorant or merely states an opinion or judgment on a matter of which the seller has no special knowledge and on which the buyer may be expected also to have an opinion and to exercise his judgment. Weiss v. Rockwell Mfg. Co., 9 Ill. App.3d 906, 293 N.E.2d 375 (1977), citing Keller v. Flynn, 346 Ill.App. 499, 105 N.E.2d 532, 536 (1952); General Supply & Equipment Co. v. Phillips, 490 S.W.2d 913 (Tex. Civ.App. 1972). General statements to the effect that goods are "the best," Thompson Farms, Inc. v. Corno Feed Products, ___ Ind. App. ___, 366 N.E.2d 3 (1977), or are "of good quality," Olin-Mathieson Chemical Corp. v. Moushon, 93 Ill.App.2d 280, 235 N.E.2d 263 (1968), or will "last a lifetime" and be "in perfect condition," Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972), are generally regarded as expressions of the seller's opinion or "the puffing of his wares" and do not create an express warranty.

No express warranty was created by Royal's affirmation that both RBC machine models and their component parts were of high quality. This was a statement of the seller's opinion, the kind of "puffing" to be expected in any sales transaction, rather than a positive averment of fact describing a product's capabilities to which an express warranty could attach. Thompson Farms, Inc. v. Corno Feed Products, supra; Keller v. Flynn, supra.

Similarly, the representations by Royal that experience and testing had shown that the frequency of repair was "very low" and would remain so lack the specificity of an affirmation of fact upon which a warranty could be predicated. These representations were statements of the seller's opinion.

The statement that replacement parts were readily available is an assertion of fact, but it is not a fact that relates to the goods sold as required by Ind.Code § 26-1-2-313(1)(a) and is not an express warranty to which the goods were to conform. Neither is the statement about the future costs of supplies being ½ cent per copy an assertion of fact that relates to the goods sold, so the statement cannot constitute the basis of an express warranty.

It was also erroneous to find that an express warranty was created by Royal's assurances to Booher that purchase of the RBC machines would bring him substantial profits. Such a representation does not describe the goods within the meaning of U.C.C. § 2-313(1)(b), nor is the representation an affirmation of fact relating to the goods under U.C.C. § 2-313(1)(a). It is merely sales talk and the expression of the seller's opinion. See Regal Motor Products v. Bender, 102 Ohio App. 447, 139 N.E.2d 463, 465 (1956) (representation that goods were "readily saleable" and that the demand for them would create a market was not a warranty). See also Conant v. Terre Haute National State Bank, 121 Ind. 323, 22 N.E. 250, 251 (1889); Harness v. Horne, 20 Ind.App. 134, 50 N.E. 395, 397 (1898).

On the other hand, the assertion that the machines could not cause fires is an assertion of fact relating to the goods, and substantial evidence in the record supports the trial judge's findings that the assertion was made by Royal to Booher.^[2] The same may be said for the assertion that the machines were tested and ready to be marketed. See Bemidji Sales Barn v. Chatfield, 312 Minn. 11, 250 N.W.2d 185 (1977) (seller's representation that cattle "had been vaccinated for shipping fever and were ready for the farm" constituted an express warranty). See generally R. Anderson, Uniform Commercial Code § 2-313:36 (2d ed. 1970) (author asserts that seller who sells with seal of approval of a third person, e. g., a testing laboratory, makes an express warranty that the product has been tested and approved and is liable if the product was in fact not approved). The record supports the district court's finding that Royal represented that the machines had been tested.^[3]

As for findings 8 and the maintenance portion of Number 4, Royal's argument that those statements relate to predictions for the future and cannot qualify as warranties is unpersuasive.^[4] An expression of future capacity or performance can constitute an express warranty. In Teter v. Schultz, 110 Ind.App. 541, 39 N.E.2d 802, 804 (1942), the Indiana courts held that a seller's statement that dairy cows would give six gallons of milk per day was an affirmation of fact by the seller relating to the goods. It was not a statement of value nor was it merely a statement of the seller's opinion. The Indiana courts have also found that an express warranty was created by a seller's representation that a windmill was capable of furnishing power to grind 20 to 30 bushels of grain per hour in a moderate wind and with a very light wind would pump an abundance of water. Smith v. Borden,160 Ind. 233, 66 N.E. 681 (1903). Further, in General Supply and Equipment Co. v. Phillips, supra, the Texas courts upheld the following express warranties made by a seller of roof panels: (1) that tests show no deterioration in 5 years of normal use; (2) that the roofing panels won't turn black or discolor ... even after years of exposure; and (3) that the panels will not burn, rot, rust, or mildew. Snow's Laundry and Dry Cleaning v. Georgia Power Co., 61 Ga.App. 402, 6 S.E.2d 159 (1959),impliedly recognized that a warranty as to future gas consumption following installation of gas equipment was possible. In holding that no warranty was created in that particular case, the Georgia court noted: "The statements made by Spencer were denominated by him as estimates, nowhere did he warrant or guarantee that the gas consumption would not exceed $230.50 per month." 61 Ga.App. at 405, 6 S.E.2d at 162. See Matlack, Inc. v. Butler Mfg. Co., 253 F.Supp. 972 (E.D.Pa.1966).

Whether a seller affirmed a fact or made a promise amounting to a warranty is a question of fact reserved for the trier of fact. General Supply and Equip. Co. v. Phillips, supra. Substantial evidence in the record supports the finding that Royal made the assertion to Booher that maintenance cost for the machine would run ½ cent per copy and that this assertion was not an estimate but an assertion of a fact of performance capability.^[5]

Finding Number 8, that service calls on the RBC II would be required every 7,000 to 9,000 copies, relates to performance capability and could constitute the basis of an express warranty. There is substantial evidence in the record to support the finding that this assertion was also made.^[6]

While substantial evidence supports the trial court's findings as to the making of those four affirmations of fact or promises, the district court failed to make the further finding that they became part of the basis of the bargain. Ind.Code § 26-1-2-313(1) (1976). While Royal may have made such affirmations to Booher, the question of his knowledge or reliance is another matter.^[7]

This case is complicated by the fact that it involved a series of sales transactions between the same parties over approximately an 18-month period and concerned two different machines. The situations of the parties, their knowledge and reliance, may be expected to change in light of their experience during that time. An affirmation of fact which the buyer from his experience knows to be untrue cannot form a part of the basis of the bargain. City Machine & Mfg. Co. v. A. & A. Machinery Corp., 4 UCCRS 461 (E.D.N.Y.1967). See generally R. Anderson, Uniform Commercial Code, § 22-313:18 (2d ed. 1970). Therefore, as to each purchase, Booher's expanding knowledge of the capacities of the copying machines would have to be considered in deciding whether Royal's representations were part of the basis of the bargain. The same representations that could have constituted an express warranty early in the series of transactions might not have qualified as an express warranty in a later transaction if the buyer had acquired independent knowledge as to the fact asserted.

The trial court did not indicate that it considered whether the warranties could exist and apply to each transaction in the series. Such an analysis is crucial to a just determination. Its absence renders the district court's findings insufficient on the issue of the breach of express warranties.

Since a retrial on the questions of the breach of express warranties and the extent of damages is necessary, we offer the following observations. The court must consider whether the machines were defective upon delivery. Breach occurs only if the goods are defective upon delivery and not if the goods later become defective through abuse or neglect. Chisholm v. J. R. Simplot Co., 94 Idaho 628, 495 P.2d 1113 (1972).

In considering the promise relating to the cost of maintenance, the district court should determine at what stage Booher's own knowledge and experience prevented him from blindly relying on the representations of Royal. A similar analysis is needed in examining the representation concerning fire hazard in the RBC I machines. The court also should determine when that representation was made. If not made until February 1975, the representation could not have been the basis for sales made prior to that date.

FRAUD AND MISREPRESENTATION

The district court found that beginning in April or May of 1974 and continuing throughout most of 1975, Royal, by and through its agents and employees acting in the course and scope of their employment, persuaded Booher to buy RBC I and RBC II copiers by knowingly making material oral misrepresentations^[8] which were relied upon by Booher to his injury.

Under Indiana law, the essential elements of actionable fraud are representations, falsity, scienter, deception, and injury. Middelkamp v. Hanewich, 147 Ind.App. 561, 263 N.E.2d 189 (1970). A fraud action must be predicated upon statements of existing facts, not promises to perform in the future. Conant v. Terre Haute Nat'l State Bank, 121 Ind. 323, 22 N.E. 250, 251 (1889). Nor do expressions of opinion qualify as fraudulent misrepresentations. The district court made no specific findings as to which of the alleged representations it relied upon in finding fraud. If the court held all eight to be fraudulent misrepresentations, the court erred as to Numbers 1, 2, and 6 because, as discussed above, these were merely expressions of the seller's opinion rather than statements of material fact upon which a fraud action could be based. Numbers 3, 4, 5, 7, and 8, on the other hand, readily qualify as material factual representations.^[9]

The specific findings of the district court with regard to scienter connected to findings 3, 4, 5 (as it applied to the RBC II), 7, and 8 are upheld by the record.^[10]State of mind is a question to be determined, if at all possible, by the trier of fact.

The trial court, however, is silent on the remaining question, that of deception or reasonable reliance by Booher on the representations in the various transactions. Gonderman v. State Exchange Bank, Roann, 166 Ind.App. 181, 189-90, 334 N.E.2d 724 (1975). This issue is virtually identical to the basis of the bargain question remanded under the express warranty theory.

The district court's finding of fraud, therefore, must be set aside, and the cause remanded for retrial on the questions of the specific misrepresentations relied upon by Booher in each transaction and the reasonableness of that reliance.

With regard to rescission as a remedy for fraud, rescission would be available only for those specific sales to which fraud attached. Wolfeld v. Hanika, 95 Ind.App. 44, 179 N.E. 178 (1932).

IMPLIED WARRANTIES

The district court found that Royal breached the implied warranties of merchantability and of fitness for a particular purpose. We cannot agree that the record supports the court's findings.

A warranty of merchantability is implied by law in any sale where the seller is a merchant of the goods. To be merchantable, goods must, inter alia, pass without objection in the trade under the contract description, be of fair average quality, and be fit for the ordinary purposes for which such goods are used. Ind.Code § 26-1-2-314 (1976). They must "conform to ordinary standards, and ... be of the same average grade, quality and value as similar goods sold under similar circumstances." Jones v. Abriani, ___ Ind.App. ___, 350 N.E.2d 635, 645 (1976),citing Woodruff v. Clark County Farm Bureau Coop. Ass'n, 153 Ind.App. 31, 286 N.E.2d 188 (1972). It was Booher's burden to prove that the copying machines were not merchantable. Mullet v. Emme, 144 Ind.App. 638, 248 N.E.2d 178 (1969); McMeekin v. Gimble Bros. Inc., 223 F.Supp. 896 (W.D.Pa.1963). Booher failed to satisfy his burden of proof as to standards in the trade for either the RBC I or RBC II machine. No evidence supports the trial court's findings of a breach of the implied warranty of merchantability.

An implied warranty of fitness for a particular purpose arises where a seller has reason to know a particular purpose for which the goods are required and the buyer relies on the seller's skill or judgment to select or furnish suitable goods. Ind.Code § 26-1-2-315 (1976). The court found that Royal knew the particular purpose for which all the RBC machines were to be used and, in fact, that Royal had taken affirmative steps to persuade Booher to become its dealer and that occasionally its employees even accompanied Booher on calls to customers. See Thompson Farms, Inc. v. Corno Feed Products, supra.

The district court, however, failed to distinguish between implied warranties on the RBC I and on the RBC II machines. Nor did the court differentiate among the different transactions involving the two machines. On remand the district court should make further findings on Booher's actual reliance on Royal's skill or judgment in each purchase of the RBC I and RBC II machines. We view it as most unlikely that a dealer who now concedes himself to be an expert in the field of plain paper copiers did not at some point, as his experience with the machines increased, rely on his own judgment in making purchases.

We are troubled by one further aspect of the district court's rulings. It is the law that a plaintiff may not recover for breach of express or implied warranty "where the facts proven show that there are several possible causes of an injury, for one or more of which the defendant was not responsible and it is just as reasonable and probable that the injury was the result of one cause or the other ...." Republic Corp. v. Procedyne Corp., 401 F.Supp. 1061, 1070 (S.D.N.Y.1975). Accord, Chisholm v. J. R. Simplot Co., supra. Royal argues that the evidence demonstrates that Booher's modifications of the machines and lack of maintenance were the cause of the damages claimed. The district court found as to both machines that "certain modifications were made which were necessitated by machine defects or by parts shortages all of which were suggested by representatives of Royal-Litton." On remand, the district court should clarify its holding. Is the district court holding that Royal is estopped from arguing modification as a defense? Or, in the alternative, has the court found breach of warranties to be the sole cause of damages?

We reject Royal's argument that the implied warranties have been limited or disclaimed. Such a disclaimer must be clear, conspicuous, conscionable, and consciously bargained for, and, in the case of an implied warranty of fitness for a particular purpose, the disclaimer must be in writing. Ind.Code § 26-1-2-316(2) (1976); See also Ind.Code § 26-1-2-317(c) (1976); Woodruff v. Clark County Farm Bureau Coop. Ass'n, 153 Ind.App. 31, 286 N.E.2d 188 (1972).

REVOCATION OF ACCEPTANCE

The district court found that Booher made a timely revocation of acceptance of both the RBC I and the RBC II machines. We disagree.

The U.C.C. provides that a buyer who has accepted goods may revoke his acceptance when the goods are non-conforming and their value is impaired and "the goods were accepted without knowledge of the non-conformity or acceptance occurred with the reasonable assumption that the defect would be cured," Ind.Code § 26-1-2-608(1) (1976), and "the revocation occurred within a reasonable time and before any substantial change in the condition of the goods," Ind.Code § 26-1-2-608(2) (1976).

Regarding the RBC I machines, the district court found that Booher accepted the machines without discovering the latent defects, including the fire hazard defect, which did not become apparent until the machines were in use. The district court further found (1) that Royal assured Booher that the machines were not defective and/or would not catch fire, (2) that Booher revoked acceptance of the RBC I machines within a reasonable time after discovery was made that fires were indeed possible, and (3) that revocation took place before any substantial change had occurred to the machines except such changes as were caused or necessitated by defects in the equipment itself and by the shortages of Royal replacement parts.^[11]

Booher purchased his first RBC I in June 1974. He purchased additional machines through December of 1975. The district court found that it was not until the fall of 1976 that Booher received first-hand confirmation of "open flame" fires in the machines and that in February 1975, Booher had asked Royal about fire hazard and had been assured that there was no danger of fire. The revocation of acceptance of the goods occurred on December 3, 1976, three months after the commencement of this litigation.

The evidence is uncontradicted that Booher had complaints from customers as early as February 4, 1975 that "burn jams" occurred in the RBC I. Those complaints recurred during the two-year period Booher was operating the Royal franchise and must have put him on notice of a problem inherent in the RBC I. The other "defects" in function claimed by Booher-copy quality, electrical defects, and gross jamming problems-were also well-known from his experience with the RBC I and, as shown by the evidence, became apparent soon after Booher became the franchise operator.

Rule 52(a) of the Federal Rules of Civil Procedure provides that upon appellate review a district court's "findings of fact shall not be set aside unless clearly erroneous." In United States v. United States Gypsum Co., 33 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948), the Supreme Court said: "A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." See generally 5A Moore's Federal Practice ¶ 52.03(1) (1980). Where, as here, the decisions of the trial court do not appear to be based upon the credibility of the witnesses,^[12] and the underlying facts are uncontroverted, and no reason appears for not believing them, the scope of review becomes even broader. Apolskis v. Concord Life Ins. Co., 445 F.2d 31, 34 (7th Cir. 1971). Considering all the evidence in the case bearing on timeliness of revocation, we are "left with the definite and firm conviction that a mistake has been committed." The district court's finding that Booher's revocation of acceptance of the RBC I machines was reasonable in time is clearly erroneous. The finding is contrary to the clear weight of the evidence which reveals that, for some two and one-half years prior to revocation, Booher had been purchasing RBC I machines with full knowledge of their operating deficiencies. Added to that, the revocation did not occur until three and one-half months after the inception of this litigation.

The same may be said for the RBC II copiers. What is a reasonable time within which to revoke acceptance of goods depends upon the nature, purpose, and circumstances of the particular case. "Reasonable time" does not necessarily mean immediately. Trailmobile Div. of Pullman, Inc. v. Jones, 118 Ga.App. 472, 164 S.E.2d 346 (1968). Booher had known of the defects in the RBC II machines since approximately August of 1974. The evidence reveals, however, that Royal continually made promises to cure the RBC II defects and in April of 1976 replaced nine of Booher's oldest RBC II machines with nine new RBC II machines. On June 30, 1976, Royal modified the remaining five RBC II machines that had not been replaced. A seller's repeated assurances to cure can extend the time within which revocation is reasonable. Jones v. Abriani, supra. However, it was some seven months after the replacement of the nine RBC II machines that Booher finally revoked acceptance. If the defects had not been cured, that must have been known to Booher long before December 3, 1976. The trial court's finding that revocation of acceptance of the RBC II machines was timely was in error. Heibel v. United States Air Conditioning Corp., 206 Minn. 288, 288 N.W. 393 (1939).

Since the remedy of revocation is not available to Booher, on rehearing the district court may reinstitute the summary judgment, which was previously vacated, awarding Royal the $596,921.33 unpaid balance on the purchase price of the copying machines.

PUNITIVE DAMAGES

The district court awarded punitive damages in the sum of $83,512.80 to Booher and $376,492.32 to Lorraine Corp., for a total of $460,005.12. Royal argues strongly that no valid ground exists in law or in fact for the imposition of punitive damages.

Generally, Indiana follows the rule that punitive damages ordinarily are not awarded in cases involving a breach of contract. Monte Carlo, Inc. v. Wilcox, ___ Ind.App. ___, 390 N.E.2d 673 (1979). However, in Vernon Fire & Casualty Ins. Co. v. Sharp, 264 Ind. 599, 349 N.E.2d 173 (1976), the Indiana Supreme Court held that punitive damages may be awarded "where the conduct of the breaching party not only amounts to a breach of the contract, but also independently establishes the elements of a common-law tort such as fraud." Id. at 180. Alternatively, the court continued, punitive damages may be awarded in the absence of an independent tort if "it appears from the evidence as a whole that a serious wrong, tortious in nature, has been committed, but the wrong does not conveniently fit the confines of a pre-determined tort ... [and] that the public interest will be served by the deterrent effect punitive damages will have upon future conduct of the wrongdoer and parties similarly situated." Id. This policy has been applied in a series of cases following Vernon Fire. Photovest Corp. v. Fotomat Corp., 606 F.2d 704 (7th Cir. 1979); First Fed. Sav. & Loan Ass'n of Indianapolis v. Mudgett, ___ Ind.App. ___, 397 N.E.2d 1002 (1979); Sandock v. F. D. Borkholder Co., ___ Ind.App. ___, 396 N.E.2d 955 (1979); United Farm Bureau Family Life Ins. v. Fultz,___ Ind.App. ___, 375 N.E.2d 601 (1978); State Farm Mut. Auto. Ins. Co. v. Shuman, ___ Ind.App. ___, 370 N.E.2d 941 (1977); Hibschman Pontiac, Inc. v. Batchelor, 266 Ind. 310, 362 N.E.2d 845 (1977); Joseph Schlitz Co. v. Central Beverage Co., ___ Ind.App. ___, 359 N.E.2d 566 (1977).

The district court does not specify which aspect of the Vernon Fire test the court relied upon in awarding punitive damages. The court awarded punitive damages against Royal "for the found willful tortious misconduct." If the award of punitive damages was based on fraud, then the award must be reconsidered along with the issue of fraud as discussed earlier in this opinion. Under a fraud theory, punitive damages can be awarded only for those specific transactions which constitute actionable fraud.

Vernon Fire, however, makes it clear that, as an alternative, an award of punitive damages can be supported by tortious conduct other than actionable fraud. State Farm Mut. Auto. Ins. Co. v. Shuman, supra. Absent fraud, there are two prerequisites to recovery: (1) the commission of a serious wrong, tortious in nature; and (2) the public interest must be served by the award. The Indiana courts have interpreted conduct "tortious in nature" to include an act committed with a fraudulent state of mind, First Fed. Sav. & Loan Ass'n of Indianapolis v. Mudgett, supra, or in bad faith, Jones v. Abriani, supra, even though all the elements of actionable fraud are not proved.

In this case, conduct which could constitute a breach of contract might also be tortious in nature, Monte Carlo, Inc. v. Wilcox, supra, and an award of exemplary damages might serve the public interest by deterring others from like conduct. But see Owen Co. Farm Bureau Coop. v. Waeger, 73 Ind.Dec. 482 (Ind.Ct.App.1980) (breach did not rise to level of oppression, fraud, or malice). If the district court's award of punitive damages is based on the second aspect of Vernon Fire, the award must be reconsidered together with the issues of breach of express and implied warranties as discussed earlier in this opinion. Punitive damages could only be awarded for those transactions constituting a breach of contract.

Royal argues that a statutory authorization of attorneys' fees, Ind.Code § 26-1-2-721 (1976)^[13] precludes an award of punitive damages. Johnson v. Tyler, 277 N.W.2d 617 (Iowa 1979), and Stoner v. Houston, 265 Ark. 928, 582 S.W.2d 28 (1979), cited by Royal to support its argument, are inapposite. They deal with situations providing for statutory treble damages where an additional allowance of punitive damages would work a double punishment. Treble damages are punitive in nature. Attorneys' fees are compensatory. The comments accompanying Ind.Code § 26-1-2-721 state: "The purpose of this section is to add the statutory remedies to the ordinary remedies." It seems evident that Ind.Code § 26-1-2-721 does not extinguish the common law right to recover punitive damages in a fraud action.

ATTORNEYS' FEES

Booher has asked for reasonable attorneys' fees in defending this appeal. Attorneys' fees on appeal may be awarded to an appellee where the judgment is affirmed on appeal. Marshall v. Reeves, 262 Ind. 403, 316 N.E.2d 828 (1974); Willsey v. Hartman, 150 Ind.App. 485, 276 N.E.2d 577 (1971); Michael-Regan Co. v. Lindell, 527 F.2d 653 (9th Cir. 1975); American Crystal Sugar Co. v. Mandeville Island Farms, Inc., 195 F.2d 622 (9th Cir. 1952); North Texas Producers Ass'n v. Metzger Dairies, Inc., 348 F.2d 189 (5th Cir. 1965); American Can Co. v. Ladoga Canning Co., 44 F.2d 763 (7th Cir. 1930); Maddrix v. Dize, 153 F.2d 274 (4th Cir. 1946). This is not an appropriate case in which to award attorneys' fees. The appellees' petition is therefore denied. Moreover, the district court's grant to Booher of $156,800.00 in attorneys' fees is nullified by this reversal. A reversal of an entire judgment negates the judgment and any orders based upon it. Doughty v. State Dep't. of Public Welfare, 233 Ind. 475, 477, 121 N.E.2d 645, 646 (1954); Hunter v. Hunter, 156 Ind.App. 187, 188, 295 N.E.2d 834, 835 (1973).

For the foregoing reasons the judgment of the district court is reversed, and the cause is remanded for a new trial on the remaining issues outlined herein. Each party is to bear its own costs.

[*] The Honorable Harold A. Baker, United States District Judge for the Central District of Illinois, is sitting by designation.

[1] Ind. Code § 26-1-2-313 (1976) provides:

(1) Express warranties by the seller are created as follows:

(a) any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he had a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

[2] Michael Booher testified at trial that in February or March of 1975 he called the service department at Royal Typewriter Company and spoke with either Bruce Lewis, national service manager, or with Joe Miller. Booher testified that he told the Royal representative that he had received a report of a fire in an RBC I machine at a customer's office. Booher then testified, "They told me that that couldn't happen." (Tr. Vol. IV, pp. 457-59). For a discussion of whether the assertions about fires, maintenance, and service calls became part of the basis of the bargain, see infra, pp. 44-45.

[3] The trial court's findings speak of "RBC machines" with reference to the testing warranty. The court's specific findings, however, refer only to the RBC II machine. On retrial, it would clarify matters if the specific machine intended were named.

Michael Booher testified at trial that Tom Gavel had assured Booher the Royal Bond Copier machine had been tested: "He [Gavel] said, `They have been well tested,' and said, `They are great machines.'" (Tr. Vol. III, p. 292).

Booher also testified that Jack Airey, a Royal representative, had stated at a promotional meeting that the RBC II had been extensively tested and was ready to market: "They [Royal] were now ready to market it [RBC II]; that it had been extensively tested." (Tr. Vol. III, p. 317).

[4] In Number 4, the trial court found that the appellant warranted that the cost of maintenance for each RBC machine and cost of supplies was and would remain low, no more than ½ cent per copy, and in Number 8 that service calls were and would be required for the RBC Model II machine approximately every 7,000 to 9,000 copies.

[5] Michael Booher testified at trial that Mr. Gavel, a Royal representative, told Booher in April 1974, at a meeting in Booher's Indianapolis office, that cost for service on the RBC I machine would be a half cent. (Tr. Vol. III, pp. 294-98). Booher further testified that in July 1974, at a meeting in Chicago sponsored by Royal, he was told by Jack Airey, a Royal representative, that maintenance costs for the RBC II machine would be the same as on the RBC I, except that service costs should actually be a little less due to the reliability of the machine. (Tr. Vol. III, pp. 320-21).

Gavel testified by deposition taken on May 27, 1977, which was admitted into evidence at trial, that he told Booher that service costs for the RBC I machine would be half a cent (Gavel Dep., p. 28). He further testified in reference to the costs quoted to dealers on the RBC II machines that "[n]obody ever implied they were estimates," (Gavel Dep., p. 110).

[6] Michael Booher testified at trial that at the Chicago meeting Royal representatives, Jack Airey and Roland Schultz, told him that the RBC II machines would require "a service call, a customer-related call about every nine thousand copies, and that we would have preventative maintenance calls about every twenty to twenty-one thousand copies ...." (Tr. Vol. III, p. 325).

[7] The requirement that a statement be part of the basis of the bargain in order to constitute an express warranty "is essentially a reliance requirement and is inextricably intertwined with the initial determination as to whether given language may constitute an express warranty since affirmations, promises and descriptions tend to become a part of the basis of the bargain. It was the intention of the drafters of the U.C.C. not to require a strong showing of reliance. In fact, they envisioned that all statements of the seller become part of the basis of the bargain unless clear affirmative proof is shown to the contrary. See Official Comments 3 and 8 to U.C.C. § 2-313." Sessa v. Riegle, 427 F.Supp. 760, 766 (E.D.Pa.1977), aff'd without op. 568 F.2d 770 (3d Cir. 1978).

Cf. Woodruff v. Clark County Farm Bureau Coop. Ass'n, 153 Ind.App. 31, 286 N.E.2d 188 (1972) where the court stated: "Whether such assertions [statements by the seller] constituted express warranties and whether [the buyer] relied upon these assertions are material issues of fact to be determined by the trier of fact." 286 N.E.2d at 199 (emphasis added); Stamm v. Wilder Travel Trailers, 44 Ill.App.3d 530, 358 N.E.2d 382 (1976) (reliance necessary in order to give rise to an express warranty).

"[F]or all practical purposes it is suggested that no great change was wrought by the Code. Whether one speaks of reliance or basis of the bargain, little difference exists between the two. In neither case should the statement be required to have been the sole factor leading the buyer to purchase. In either case, the statement should, at least, be one of such factors. What is really crucial is whether the statement was made as an affirmation of fact, the goods did not live up to the statement, and the defect was not so apparent that the buyer could not be held to have discovered it for himself." Bender's U.C.C. Service, Dusenberg & King, Sales and Bulk Transfers § 6.01, n. 2. (Matthew Bender & Co. 1980).

[8] The false representations which form the basis of the appellees' fraud theory are the same as those alleged to be express warranties.

[9] Findings Number 3 and the cost of supplies aspect of Number 4 qualify as representations of fact while they do not qualify as express warranties because in a fraud action, unlike a breach of warranty action, there is no requirement that the representations relate to the goods.

[10] The district court found scienter regarding the following misrepresentations during the specified time periods:

RBC I machine—

(1) From 1971 on, that potential for fire did not exist;

(2) In April, May, 1974, that replacement parts were readily available;

(3) In April, May, 1974, that dealer cost per copy for both service and supplies would not exceed 1 ¢

RBC II machine—

(1) As of July, 1974, that the average number of copies run between service calls would be 7,000-9,000;

(2) In July, 1974, that the machine had been extensively tested;

(3) In July, 1974, that the cost of servicing and supplying the machine was less than 1 ¢ per copy;

(4) In July, 1974, that replacement parts were readily available.

[11] The district court failed to make specific findings on the effect of the claimed lack of maintenance on the functional failures of the RBC I machines. We are unable to tell, therefore, whether Booher's maintenance was a contributing factor in the breakdown of the machines. If it was, revocation would not be an available remedy even had the revocation been timely.

[12] The findings of fact and conclusions of law make no reference to credibility.

[13] Ind.Code § 26-1-2-721 provides:

Remedies for fraud-Right to attorney fees.-Remedies for material misrepresentation or fraud include all remedies available [under Article 2] for nonfraudulent breach. In all suits based on fraud or material misrepresentation, if the plaintiff recovers judgment in any amount, he shall also be entitled to recover reasonable attorneys fees which shall be entered by the court trying the suit as part of the judgment in that suit. Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy.

Douglas P. Jacobs, Anthony M. Bongiorno and David Boies for appellant.

Leon P. Gold, Robert J. Ward and John P. Stigi III for respondents.

Judges SIMONS, ALEXANDER and TITONE concur with Judge HANCOCK, JR.; Judge BELLACOSA dissents in part and votes to affirm in a separate opinion; Chief Judge WACHTLER and Judge KAYE taking no part.

498HANCOCK, JR., J.

A corporate buyer made a bid to purchase certain businesses based on financial information as to their profitability supplied by the seller. The bid was accepted and the parties entered into a binding bilateral contract for the sale which included, specifically, the seller's express warranties as to the truthfulness of the previously supplied financial information. 49Thereafter, pursuant to the purchase agreement, the buyer conducted its own investigation which led it to believe that the warranted information was untrue. The seller dismissed as meritless the buyer's expressions of disbelief in the validity of the financial information and insisted that the sale go through as agreed. The closing took place with the mutual understanding that it would not in any way affect the previously asserted position of either party. Did the buyer's manifested lack of belief in and reliance on the truth of the warranted information prior to the closing relieve the seller of its obligations under the warranties? This is the central question presented in the breach of express warranty claim brought by CBS Inc. (CBS) against Ziff-Davis Publishing Co. (Ziff-Davis).^[1] The courts below concluded that CBS's lack of reliance on the warranted information was fatal to its breach of warranty claim and, accordingly, dismissed that cause of action on motion under CPLR 3211 (a) (7). We granted leave to appeal and, for reasons stated hereinafter, disagree with this conclusion and hold that the warranty claim should be reinstated.

I

The essential facts pleaded — assumed to be true for the purpose of the dismissal motion — are these. In September 1984, Goldman Sachs & Co., acting as Ziff-Davis's investment banker and agent, solicited bids for the sale of the assets and businesses of 12 consumer magazines and 12 business publications. The offering circular, prepared by Goldman Sachs and Ziff-Davis, described Ziff-Davis's financial condition and included operating income statements for the fiscal year ending July 31, 1984 prepared by Ziff-Davis's accountant, Touche Ross & Co. Based on Ziff-Davis's representations in the offering circular, CBS, on November 9, 1984 submitted a bid limited to the purchase of the 12 consumer magazines in the amount of $362,500,000. This was the highest bid.

On November 19, 1984 CBS and Ziff-Davis entered into a binding bilateral purchase agreement for the sale of the consumer magazine businesses for the price of $362,500,000. Under section 3.5 of the purchase agreement, Ziff-Davis warranted that the audited income and expense report of the businesses for the 1984 fiscal year, which had been previously provided to CBS in the offering circular, had "been prepared in accordance with generally accepted accounting principles" (GAAP) and that the report "present[ed] fairly the items set forth". Ziff-Davis agreed to furnish an interim income and expense report (Stub Report) of the businesses covering the period after the end of the 1984 fiscal year, and it warranted under section 3.6 that from July 31, 1984 until the closing, there had "not been any material adverse change in Seller's business of publishing and distributing the Publications, taken as a whole". Section 6.1 (a) provided that "all representations and warranties of Seller to Buyer shall be true and correct as of the time of the closing", and in section 8.1, the parties agreed that all "representations and warranties * * * shall survive the closing, notwithstanding any investigation made by or on behalf of the other party." In section 5.1 Ziff-Davis gave CBS permission to "make such investigation" of the magazine businesses being sold "as [it might] desire" and agreed to give CBS and its accountants reasonable access to the books and records pertaining thereto and to furnish such documents and information as might reasonably be requested.

Thereafter, on January 30, 1985 Ziff-Davis delivered the required Stub Report. In the interim, CBS, acting under section 5.1 of the purchase agreement, had performed its own "due diligence" examination of Ziff-Davis's financial condition. Based on this examination and on reports by its accountant, Coopers & Lybrand, CBS discovered information causing it to believe that Ziff-Davis's certified financial statements and other financial reports were not prepared according to GAAP and did not fairly depict Ziff-Davis's financial condition.

In a January 31, 1985 letter, CBS wrote Ziff-Davis that, "[b]ased on the information and analysis provided [to it, CBS was] of the view that there [were] material misrepresentations in the financial statements provided [to CBS] by Touche Ross & Co., Goldman, Sachs & Co. and Ziff-Davis". In response to this letter, Ziff-Davis advised CBS by letter dated February 4, 1985 that it "believe[d] that all conditions to the closing * * * were fulfilled", that "there [was] no merit to the position taken by CBS in its [Jan. 31, 1985] letter" and that the financial statements were properly prepared and fairly presented Ziff-Davis's financial condition. It also warned CBS that, since all conditions to closing were satisfied, closing was required to be held that day, February 4, 1985, and that, if it "should fail to consummate the transactions as provided * * * Ziff-Davis intend[ed] to pursue all of its rights and remedies as provided by law." (Emphasis added.)

CBS responded to Ziff-Davis's February 4, 1985 letter with its own February 4 letter, which Ziff-Davis accepted and agreed to. In its February 4 letter, CBS acknowledged that "a clear dispute" existed between the parties. It stated that it had decided to proceed with the deal because it had "spent considerable time, effort and money in complying with [its] obligations * * * and recogniz[ed] that [Ziff-Davis had] considerably more information available". Accordingly, the parties agreed "to close [that day] on a mutual understanding that the decision to close, and the closing, [would] not constitute a waiver of any rights or defenses either of us may have" (emphasis added) under the purchase agreement. The deal was consummated on February 4.

CBS then brought this action claiming in its third cause of action^[2] that Ziff-Davis had breached the warranties made as to the magazines' profitability. Based on that breach, CBS alleged that "the price bid and the price paid by CBS were in excess of that which would have been bid and paid by CBS had Ziff-Davis not breached its representation and warranties." Supreme Court granted Ziff-Davis's motion to dismiss the breach of warranty cause of action because CBS alleged "it did not believe that the representations set forth in Paragraphs 3.5 and 3.6 of the contract of sale were true" and thus CBS did not satisfy "the law in New York [which] clearly requires that this reliance be alleged in a breach of warranty action." Supreme Court also dismissed CBS's fourth cause of action relating to an alleged breach of condition. The Appellate Division, First Department, unanimously affirmed for reasons stated by Supreme Court. There should be a modification so as to deny the dismissal motion with respect to the third cause of action for breach of warranties.

II

In addressing the central question whether the failure to plead reliance is fatal to CBS's claim for breach of express warranties, it is necessary to examine the exact nature of the missing element of reliance which Ziff-Davis contends is essential. This critical lack of reliance, according to Ziff-Davis, relates to CBS's disbelief in the truth of the warranted financial information which resulted from its investigation after the signing of the agreement and prior to the date of closing. The reliance in question, it must be emphasized, does not relate to whether CBS relied on the submitted financial information in making its bid or relied on Ziff-Davis's express warranties as to the validity of this information when CBS committed itself to buy the businesses by signing the purchase agreement containing the warranties.

Under Ziff-Davis's theory, the reliance which is a necessary element for a claim of breach of express warranty is essentially that required for a tort action based on fraud or misrepresentation — i.e., a belief in the truth of the representations made in the express warranty and a change of position in reliance on that belief. Thus, because, prior to the closing of the contract on February 4, 1985, CBS demonstrated its lack of belief in the truth of the warranted financial information, it cannot have closed in reliance on it and its breach of warranty claim must fail. This is so, Ziff-Davis maintains, despite its unequivocal rejection of CBS's expressions of its concern that the submitted financial reports contained errors, despite its insistence that the information it had submitted complied with the warranties and that there was "no merit" to CBS's position, and despite its warnings of legal action if CBS did not go ahead with the closing. Ziff-Davis's primary source for the proposition it urges — that a change of position in reliance on the truth of the warranted information is essential for a cause of action for breach of express warranty — is language found in older New York cases such as Crocker-Wheeler Elec. Co. v Johns-Pratt Co. (29 App Div 300, affd 164 N.Y. 593).

CBS, on the other hand, maintains that the decisive question is whether it purchased the express warranties as bargained-for contractual terms that were part of the purchase agreement (see, e.g., Ainger v Michigan Gen. Corp., 476 F Supp 1209, 1225 [SD NY 1979], affd 632 F.2d 1025 [2d Cir 1980]). It alleges that it did so and that, under these circumstances, the warranty provisions amounted to assurances of the existence of facts upon which CBS relied in committing itself to buy the consumer magazines. Ziff-Davis's assurances of these facts, CBS contends, were the equivalent of promises by Ziff-Davis to indemnify CBS if the assurances proved unfounded. Thus, as continuing promises to indemnify, the express contractual warranties did not lose their operative force when, prior to the closing, CBS formed a belief that the warranted financial information was in error. Indeed, CBS claims that it is precisely because of these warranties that it proceeded with the closing, despite its misgivings.

As authority for its position, CBS cites, inter alia, Ainger v Michigan Gen. Corp. (supra) and Judge Learned Hand's definition of warranty as "an assurance by one party to a contract of the existence of a fact upon which the other party may rely. It is intended precisely to relieve the promisee of any duty to ascertain the fact for himself; it amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue, for obviously the promisor cannot control what is already in the past." (Metropolitan Coal Co. v Howard, 155 F.2d 780, 784 [2d Cir 1946] [emphasis added]; see also, Groen v Tri-O-Inc., 667 P2d 598, 604 [Sup Ct Utah 1983]; Au v Au, 63 Haw 210, 263, 626 P2d 173, 179-180 [Sup Ct Haw 1981]; 1 Corbin on Contracts § 14; 17A CJS Contracts § 342, at 325.)

We believe that the analysis of the reliance requirement in actions for breach of express warranties adopted in Ainger v Michigan Gen. Corp. (supra) and urged by CBS here is correct. The critical question is not whether the buyer believed in the truth of the warranted information, as Ziff-Davis would have it, but "whether [it] believed [it] was purchasing the [seller's] promise [as to its truth]." (Ainger v Michigan Gen. Corp., supra, at 1225; see, e.g., Overstreet v Norden Labs., 669 F.2d 1286, 1291 [6th Cir 1982]; Pritchard v Liggett & Myers Tobacco Co., 350 F.2d 479, 483 [3d Cir 1965], cert denied382 US 987, opn amended 370 F.2d 95 [3d Cir 1966], cert denied 386 US 1009; CPC Intl. v McKesson Corp., 134 Misc 2d 834 [Sup Ct, NY County].) This view of "reliance" — i.e., as requiring no more than reliance on the express warranty as being a part of the bargain between the parties — reflects the prevailing perception of an action for breach of express warranty as one that is no longer grounded in tort, but essentially in contract. (See, Ainger v Michigan Gen. Corp., supra, at 1225; Randy Knitwear v American Cyanamid Co., 11 N.Y.2d 5, 10-11, n 2; see, 8 Williston, Contracts § 970, at 485-488 [3d ed].) The express warranty is as much a part of the contract as any other term. Once the express warranty is shown to have been relied on as part of the contract, the right to be indemnified in damages for its breach does not depend on proof that the buyer thereafter believed that the assurances of fact made in the warranty would be fulfilled. The right to indemnification depends only on establishing that the warranty was breached (see, Glacier Gen. Assur. Co. v Casualty Indem. Exch., 435 F Supp 855, 860 [D Mont 1977][citing Metropolitan Coal Co. v Howard, supra]; 1 Corbin, Contracts § 14).

If, as is allegedly the case here, the buyer has purchased the seller's promise as to the existence of the warranted facts, the seller should not be relieved of responsibility because the buyer, after agreeing to make the purchase, forms doubts as to the existence of those facts (see, Ainger v Metropolitan Gen. Corp., supra, at 1234; see also, Metropolitan Coal Co. v Howard, supra, at 781; Glacier Gen. Assur. Co. v Casualty Indem. Exch., 435 F Supp 855, 860-861, supra; 8 Williston, Contracts § 973 [3d ed]). Stated otherwise, the fact that the buyer has questioned the seller's ability to perform as promised should not relieve the seller of his obligations under the express warranties when he thereafter undertakes to render the promised performance.

The cases which Ziff-Davis cites as authority for the application of its tort-action type of reliance requirement do not support the proposition it urges. None are similar to the case at bar where the warranties sued on are bargained-for terms in a binding bilateral purchase contract. In most, the basis for the decision was a factor other than the buyer's lack of reliance such as, for example, insufficient proof of the existence of the alleged express warranty (see, e.g., Scaringe v Holstein, 103 AD2d 880, 881; Friedman v Medtronic, 42 AD2d 185, 190; Crocker-Wheeler Elec. Co. v Johns-Pratt Co., 29 App Div 300, affd 164 N.Y. 593, supra; Ellen v Heacock, 247 App Div 476, 477) or that the warranty sued upon was expressly excluded by terms of the contract (see, e.g., Caribbean Atl. Airlines v Rolls-Royce Ltd., 39 AD2d 673, affd without opn 31 N.Y.2d 798) or that there was insufficient proof that the express warranty had been breached (see, e.g., 200 E. End Ave. Corp. v General Elec. Co., 5 AD2d 415, affd without opn 6 N.Y.2d 731); and some involve implied rather than express warranties (see, e.g., Millens & Sons v Vladich, 28 AD2d 1045, affd without opn 23 N.Y.2d 998).

Ziff-Davis repeatedly cites and the dissent relies upon language contained in the Appellate Division's opinion in Crocker-Wheeler Elec. Co. v Johns-Pratt Co. (supra) which dealt with a claimed breach of an express warranty pertaining to the fitness of insulating material for a certain use. The court held that there was no actionable express warranty claim because the seller made no warranty with respect to use of the material. The language which Ziff-Davis quotes as a categorical proposition that should control the case before us — i.e., "[i]t is elementary that, in order to entitle the plaintiff to maintain an action for breach of an express warranty, it must be established that the warranty was relied on" (emphasis added) — is contained in dictum (29 App Div, at 302).^[3]

Viewed as a contract action involving the claimed breach of certain bargained-for express warranties contained in the purchase agreement, the case may be summarized this way. CBS contracted to buy the consumer magazine businesses in consideration, among other things, of the reciprocal promises made by Ziff-Davis concerning the magazines' profitability. These reciprocal promises included the express warranties that the audited reports for the year ending July 31, 1984 made by Touche Ross had been prepared according to GAAP and that the items contained therein were fairly presented, that there had been no adverse material change in the business after July 31, 1984, and that all representations and warranties would "be true and correct as of the time of the closing" and would "survive the closing, notwithstanding any investigation" by CBS.

Unquestionably, the financial information pertaining to the income and expenses of the consumer magazines was relied on by CBS in forming its opinion as to the value of the businesses and in arriving at the amount of its bid; the warranties pertaining to the validity of this financial information were express terms of the bargain and part of what CBS contracted to purchase. CBS was not merely buying identified consumer magazine businesses. It was buying businesses which it believed to be of a certain value based on information furnished by the seller which the seller warranted to be true. The determinative question is this: should Ziff-Davis be relieved from any contractual obligation under these warranties, as it contends that it should, because, prior to the closing, CBS and its accountants questioned the accuracy of the financial information and because CBS, when it closed, did so without believing in or relying on the truth of the information?

We see no reason why Ziff-Davis should be absolved from its warranty obligations under these circumstances. A holding that it should because CBS questioned the truth of the facts warranted would have the effect of depriving the express warranties of their only value to CBS — i.e., as continuing promises by Ziff-Davis to indemnify CBS if the facts warranted proved to be untrue (see, Metropolitan Coal Co. v Howard, supra, at 784).^[4] Ironically, if Ziff-Davis's position were adopted, it would have succeeded in pressing CBS to close despite CBS's misgivings and, at the same time, would have succeeded in defeating CBS's breach of warranties action because CBS harbored these identical misgivings.^[5]

We agree with the lower courts that CBS's fourth cause of action, for breach of section 6.1 (f) of the purchase agreement, was properly dismissed inasmuch as section 6.1 (f) was a condition to closing, not a representation or warranty, and was waived by CBS.

The order of the Appellate Division should be modified, with costs to the appellant, by denying the motion to dismiss the third cause of action for breach of warranty and the order should be otherwise affirmed.

BELLACOSA, J. (dissenting).

The issue is whether a buyer may sue a seller, after consummating a business transaction, for breach of an express warranty on which the buyer chose not to rely. The holding discards reliance as a necessary element to maintain an action for breach of an express warranty. Predictability and reliability with respect to commercial transactions, fostered by 90 years of precedent, are thus sacrificed. I respectfully dissent and would affirm the order of the Appellate Division unanimously affirming Supreme Court's application of the sound and well-settled rule.

Plaintiff CBS contracted to purchase defendant Ziff-Davis's consumer magazine group pursuant to an Asset Purchase Agreement (APA). CBS specifically negotiated the right to rely on its own accountant's representations in assessing the validity of the financial information which had been, and would be, provided to CBS by Ziff-Davis (§ 5.1 of the APA). Given the factual and fiscal complexity of this $362,500,000 acquisition, CBS chose to rely on its own investigation. What the CBS inspectors found in the Ziff-Davis books differed significantly from the financial picture the seller had painted. CBS notified Ziff-Davis of the discrepancies by letter on January 31, 1985, four days before the closing date. Despite its protest to the contrary, it had a contractual right under section 6.1 (a) of the APA to avert the closing if "all representations and warranties of Seller to Buyer" were not true on the closing date. Clearly then, CBS chose to rely on the results of its own investigation and made a business judgment to consummate the purchase rather than cancel the deal. It took the business risk of a big deal and tried by this subsequent litigation to mitigate whatever risk, if any, inured from that choice; in other words, CBS wanted to have its cake and eat it, too.

Supreme Court determined CBS did not rely on the Ziff-Davis warranties. The Appellate Division made the same determination and the nonreliance is acknowledged by the majority (majority opn, at 499). The reliance element is thus unnecessarily excised as a matter of law from the legal proposition governing and defining the cause of action. If I am "missing the point" (majority opn, at 506, n 5), I believe it is because that is where the appellant's argument and the state of the law have led me.

Part of CBS's argument is that it should prevail because the closing day letter purports to reserve its rights as to the Ziff-Davis warranties and section 8.1 of the APA purports to be a kind of nonmerger survival clause. On a sui generis contract basis therefore, without affecting the traditional reliance element of the cause of action, this argument is enticing. Nevertheless, I conclude — and the majority apparently agrees in this respect — that the argument is not dispositive. The warranties given to CBS created a right to rely on the financial data as part of the sales agreement, not a right not to rely on them, then consummate the deal and then sue on them besides. These aspects of the agreement, therefore, merely manifested the parties' intent not to allow the closing to operate as a waiver of CBS's right to rely — a right which was surrendered before the closing. If this issue were dispositive, it would render the case and the contract entirely sui generis and there would be no need to address or alter the long-standing test with its reliance element. However, the court confronts and decides the broader issue, and on that we see and understand the case all too well in a fundamentally different way.

"It is elementary that, in order to entitle the plaintiff to maintain an action for breach of an express warranty, it must be established that the warranty was relied on." (Crocker-Wheeler Elec. Co. v Johns-Pratt Co., 29 App Div 300, 302, affd 164 N.Y. 593.) This plain language proposition has been recognized by this court and by the Appellate Division (see, Randy Knitwear v American Cyanamid Co., 11 N.Y.2d 5, 9, 11, 15-16; see also, County Trust Co. v Pilmer Edsel, Inc., 14 N.Y.2d 617, 621 [Burke, J., dissenting]; see, Butler v Caldwell & Cook, 122 AD2d 559, 560, lv denied 73 N.Y.2d 709, appeal dismissed 73 N.Y.2d 849; Scaringe v Holstein, 103 AD2d 880; Zucker v Siegel, 54 AD2d 979; Friedman v Medtronic, Inc., 42 AD2d 185, 190; see also, Hellman v Kirschner, 191 NYS 202 [App Term, Lehman, J.]). The majority declares the oft-quoted principle of Crocker-Wheeler "is not to be followed" (majority opn, at 505, n 3), based in part on a dormant tort/contract categorical bifurcation drawn largely from Ainger v Michigan Gen. Corp. (476 F Supp 1209). Also, part of the justification for this departure from stare decisis in the field of common-law commercial transactions — where the burden for change is very high — is Professor Williston's "criticism" of Crocker-Wheeler. Examination of the complete section of the quoted text, however, discloses a significant qualification: "[I]t is generally and rightly held that inspection by the buyer does not excuse the seller from liability for * * * an express warranty, if the difference between the goods and the description was not detected" (8 Williston, Contracts § 973, at 501 [3d ed] [nn omitted; emphasis added]). "The difference" was definitively detected here by CBS pursuant to its express contractual right to personally assess the financial data.

In exchange for the long-standing, well-regarded and well-founded rule, New York law is subordinated to a theory advanced in Ainger v Michigan Gen. Corp. (476 F Supp, supra, at 1226). Among the problems of this approach, however, is that in affirming Ainger the Court of Appeals for the Second Circuit emphasized the limited impact of the District Court's categorical discussion of the precise issue before us. After stating that the District Court Judge's "finding of reliance made a discussion of New York law unnecessary," the Second Circuit said "[b]ecause there was reliance in this case, we will not speculate how the New York courts would decide a case in which there was none." (Ainger v Michigan Gen. Corp., 632 F.2d 1025, 1026, n 1.) The reliance on CPC Intl. v McKesson Corp. (134 Misc 2d 834) also seems misplaced. Again, the trial court in that case extensively discussed the reliance question. However, the appellate courts in an entirely different procedural review significantly minimized the discussion of the pertinent subject matter (see, CPC Intl. v McKesson Corp., 70 N.Y.2d 268, 285 ["plaintiff, in contracting to purchase (defendant's corporation), relied solely on the warranties"], 120 AD2d 221, 229 ["plaintiff relied solely upon the express warranties"]). Lack of reliance, therefore, was not part of the holdings in Ainger or CPC, even at their trial level citations by the majority. Yet those cases are accorded significant deference on the critical issue and they override superior longer-standing sources.

Finally, while I agree that analogy to the Uniform Commercial Code is "instructive" (majority opn, at 506, n 4), I believe the directly on-point express warranty section, UCC 2-313, emphasizes the need to stand by our precedents and thus affirm. Official comment 3 of that section indicates that were this a transaction governed by the Uniform Commercial Code, CBS's nonreliance would take the seller's warranties out of the agreement, especially after a buyer consummates the deal with full knowledge and with open disagreement concerning key financial data (UCC 2-313, comment 3; 1 White and Summers, Uniform Commercial Code § 9-5, at 450-451 [Practitioner's 3d ed]).

Thus, we are presented with no binding or persuasive authorities sufficient to warrant overturning a venerable rule of the kind used especially in the commercial world to reliably order affairs in such a way as to reasonably avoid litigation (see, Cardozo, Selected Writings of Benjamin Nathan Cardozo, The Growth of the Law, at 236 ["In this department of activity (commercial law), the current axiology still places stability and certainty in the forefront of the virtues."]). Allowing CBS to consummate the deal, and then sue on warranted financial data it personally investigated and verified as wrong beforehand, unsettles the finality, "stability and certainty" of commercial transactions and business relationships.

CBS chose — for business reasons it knows best — to complete its significant acquisition at the impressively high agreed price with its cyclopean eye wide open. That tips the scales in favor of retaining and applying the traditional rule requiring a reliance element to sue for breach of warranty.

I would affirm the order in its entirety and leave the law where it was and the parties where they put themselves.

Order modified, etc.

[1] Ziff-Davis is a privately held corporation and is a wholly owned subsidiary of defendant Ziff Corporation. Ziff Corp. is the guarantor of the purchase agreement at issue. For ease of reference, when addressing arguments raised by these defendants, I will refer to the defendants collectively as Ziff-Davis.

[2] CBS's remaining claims, other than cause of action four (discussed infra, at 499) were also dismissed in prior orders by the lower courts. No issues have been raised as to these dismissed claims.

[3] We note that this dictum has been criticized (see, 8 Williston, Contracts § 973, at 501 [3d ed]) and to the extent Crocker-Wheeler can be broadly read to require the rule of "reliance" urged by Ziff-Davis in this case it is not to be followed.

[4] In this regard, analogy to the Uniform Commercial Code is "instructive". While acceptance of goods by the buyer precludes rejection of the goods accepted (see, UCC 2-607 [2]), the acceptance of nonconforming goods does not itself impair any other remedy for nonconformity (see, UCC 2-607 [2]), including damages for breach of an express warranty (see, UCC 2-714; see generally, 1 White and Summers, Uniform Commercial Code § 10-1, at 501-502 [Practitioner's 3d ed]; see also, Atwater & Co. v Panama R. R. Co., 255 N.Y. 496, 501-502).

[5] We make but one comment on the dissent: in its statement that our "holding discards reliance as a necessary element to maintain an action for breach of an express warranty" (dissenting opn, at 506), the dissent obviously misses the point of our decision. We do not hold that no reliance is required, but that the required reliance is established if, as here, the express warranties are bargained-for terms of the seller.

824 S.W.2d 538 (1992)

Darrell W. MORRIS, Plaintiff-Appellant, v. MACK'S USED CARS, Defendant-Appellee.

Supreme Court of Tennessee, at Knoxville.

January 27, 1992.

Richard R. Vance, Sevierville, for plaintiff-appellant.

Wayne Christeson, William Allen, Nashville, for Tennessee Ass'n of Legal Services, amicus curiae.

Carl P. McDonald with Goddard & Gamble, Maryville, for defendant-appellee.

Charles W. Burson, Atty. Gen. and Reporter, John Knox Walkup, Sol. Gen., Steven A. Hart, Glen L. Krause, Asst. Attys. Gen., Nashville, for State of Tenn., amicus curiae.

REID, Chief Justice.

The purchaser, Darrell Morris, sued the seller, Mack's Used Cars & Parts, Inc., for compensatory, treble, and punitive damages, alleging fraudulent concealment, breach of express warranty of title under T.C.A. § 47-2-312, breach of express warranty of description under T.C.A. § 47-2-313, breach of implied warranty of merchantability under T.C.A. § 47-2-314, and violation of the Tennessee Consumer Protection Act forbidding unfair or deceptive acts under T.C.A. § 47-18-104(b)(6), (7).

The facts were not disputed. In September 1985 the defendant sold to Morris a vehicle described on the bill of sale as a 1979 Ford pickup truck. An older truck was traded in as a down payment, and the balance of the purchase price was financed over a term of three years with a retail installment contract and security agreement, pursuant to which the certificate of title was delivered by the defendant-seller directly to the lender. The bill of sale contained the following statement immediately above the purchaser's signature, "This unit sold as is. No warranties have been expressed or implied." At the time of sale, the truck had been wrecked or dismantled and was a "reconstructed" vehicle within the meaning of Title 55, Chapter 3, Part 2 of Tennessee Code Annotated. The seller knew but did not disclose to the purchaser that the pickup was a reconstructed vehicle. The purchaser obtained this information three years later when he received the certificate of title after paying the final installment on the sales contract. Being reconstructed reduced the vehicle's fair market value 30 to 50 percent.

The seller's defense was that the disclaimer contained in the bill of sale avoided any liability for its not disclosing to the purchaser the condition of the vehicle as revealed by the certificate of title.

The trial court agreed with the seller and dismissed the suit. On appeal of the count charging violation of the Consumer Protection Act, the Court of Appeals affirmed, stating,

To hold the Defendant liable under the Tennessee Consumer Protection Act would, in effect, be creating liability under an as is sale which is waived under T.C.A. § 47-2-316(3)(a).

The Court of Appeals held, in the words of Judge Franks, dissenting, "[T]here can be no claim for unfair or deceptive trade practices whenever a seller disclaims warranties under the Uniform Commercial Code ... with an `as is' clause."

The trial court and the Court of Appeals misconstrued these statutes as they relate to the Consumer Protection Act. Disclaimers permitted by § 47-2-316 of the Uniform Commercial Code (UCC) may limit or modify liability otherwise imposed by the code, but such disclaimers do not defeat separate causes of action for unfair or deceptive acts or practices under the Consumer Protection Act, T.C.A. §§ 47-18-101 to -5002.

The UCC contemplates the applicability of supplemental bodies of law to commercial transactions. Section 47-1-103, T.C.A., provides the following:

Unless displaced by the particular provisions of chapters 1 through 9 of this title, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.

Also, the supplementary nature of the Consumer Protection Act is made clear by T.C.A. § 47-18-112, which states,

The powers and remedies provided in this part shall be cumulative and supplementary to all other powers and remedies otherwise provided by law. The invocation of one power or remedy herein shall not be construed as excluding or prohibiting the use of any other available remedy.

A seller may disclaim all implied warranties pursuant to T.C.A. § 47-2-316, which provides in pertinent part,

Exclusion or modification of warranties ... (3)(a) unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like as is, with all faults or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty.

The Consumer Protection Act recognizes this right of exclusion or modification of warranties under the UCC. Section 47-18-113, T.C.A., provides,

Waiver of Rights. (a) No provision of this part may be limited or waived by contract, agreement, or otherwise, notwithstanding any other provision of law to the contrary; provided, however, the provisions of this part shall not alter, amend, or repeal the provisions of the Uniform Commercial Code relative to express or implied warranties or the exclusion or modification of such warranties.

The above provision, however, also specifically precludes disclaimer of liability under the Consumer Protection Act. Furthermore, the UCC, pursuant to T.C.A. § 47-1-203, imposes an obligation of good faith in the performance or enforcement of every contract. Under T.C.A. § 47-1-102(3), this obligation may not be disclaimed.

Claims under the UCC and the Consumer Protection Act are distinct causes of action, with different components and defenses. The Consumer Protection Act is applicable to commercial transactions, also regulated by the UCC. The Court of Appeals in Skinner v. Steele, 730 S.W.2d 335 (Tenn. Ct. App. 1987), reached a similar conclusion with regard to the regulation of the insurance industry. The court held that the mere existence of a separate statute regulating the insurance industry does not create exemption from the Consumer Protection Act. 730 S.W.2d at 338.

Other states have recognized that the disclaimer of warranty liabilities under the UCC does not preclude the advancement of non-warranty claims based on unfair trade practices. In V.S.H. Realty, Inc. v. Texaco, Inc., 757 F.2d 411 (1st Cir.1985), the buyer of an oil storage facility under an "as is" contract sued the seller alleging misrepresentation, non-disclosure, and violation of the Massachusetts statute prohibiting unfair or deceptive practices. The district court dismissed the statutory claim on the basis of the "as is" disclaimer. The First Circuit Court of Appeals reversed, stating:

We believe the district court's view of the law regarding as is clauses is incorrect. Although the Uniform Commercial Code does expressly permit disclaimers in the sale of goods between merchants, § 2-316 refers specifically to disclaimers of implied warranties, suggesting to us that it was intended only to permit a seller to limit or modify the contractual bases of liability which the Code would otherwise impose on the transaction. The section does not appear to preclude claims based on fraud or other deceptive conduct.

Automobile sales cases from other jurisdictions have held that an "as is" disclaimer of warranties does not bar an action for deceptive trade practices. In Metro Ford Sales, Inc. v. Davis, 709 S.W.2d 785(Tex. Ct. App. — Fort Worth 1986), the buyer of a used truck brought an action against the seller under the Texas Deceptive Trade Practices Consumer Protection Act (DTPA). The buyer alleged that the salesman falsely represented that the truck was in "top" condition and had not been wrecked. The seller contended that the warranty disclaimer signed by the buyer was admissible to counter the DTPA cause of action. The court concluded,

We hold that the waiver of warranty did not waive [the buyer's] cause of action for misrepresentation under the DTPA and that the waiver was properly excluded.

709 S.W.2d at 790. In Attaway v. Tom's Auto Sales, Inc., 144 Ga.App. 813, 242 S.E.2d 740 (1978), the buyer of a used car brought suit against the seller, alleging breach of warranty and violation of the Georgia Fair Business Practices Act (Act). The sales contract provided "all cars sold as is ... no guarantee." The court stated that "the language in the contract would appear to prevent [the buyer] from recovering on the grounds of express or implied warranty" and concluded that "although [the buyer] might not be able to rescind the contract or otherwise set it aside, the Act itself is in no way tied to contractual rights and is wholly self-sustaining." 242 S.E.2d at 742. The court concluded,

From an overview of [the Act], we find that there is thereby created a separate and distinct cause of action under its provisions. A consumer who is damaged thereby has an independent right to recover under the Act, regardless of any other theory of recovery.

The Tennessee Consumer Protection Act is to be liberally construed to protect consumers and others from those who engage in deceptive acts or practices. Haverlah v. Memphis Aviation, Inc., 674 S.W.2d 297, 305 (Tenn. Ct. App. 1984). In a case similar to the one before the Court, the seller's failure to disclose to the buyer that the vehicle had been in an accident and had been repaired constituted a violation of the Consumer Protection Act. See Paty v. Herb Adcox Chevrolet Co., 756 S.W.2d 697(Tenn. Ct. App. 1988). To allow the seller here to avoid liability for unfair or deceptive acts or practices by disclaiming contractual warranties under the UCC would contravene the broad remedial intent of the Consumer Protection Act.

In summary, disclaimers permitted by T.C.A. § 47-2-316 do not prevent application of the Consumer Protection Act. The Consumer Protection Act creates a separate and distinct cause of action for unfair or deceptive acts or practices. The judgments of the trial court and Court of Appeals dismissing the alleged violation of the Consumer Protection Act, therefore, are reversed and the case is remanded. The costs are taxed to the appellee.

DROWOTA, O'BRIEN, DAUGHTREY, and ANDERSON, JJ., concur.