UNICARE INTERNATIONAL, INC. v. FUTUREBIOTICS, INC.

Thursday, February 7, 2002

Supreme Court

Suffolk County

Justice Klein

UNICARE INTERNATIONAL, INC. v. FUTUREBIOTICS, INC. ” ORDERED that Plaintiff’s motion (#003) for an order, pursuant to CPLR 3212, granting partial summary judgment it its favor, striking defendant’s affirmative defenses, and for leave to amend its ad damnum clause is denied.

Defendant’s cross motion (#004) for an order, pursuant to CPLR 3212, granting summary judgment in its favor dismissing plaintiff’s complaint is decided as follows.

Plaintiff commenced this action for economic losses allegedly suffered due to the breach of contract, negligence, and breach of warranty, relative to nutritional supplements distributed and/or manufactured by defendant. Plaintiff is in the business of exporting supplements to the former Soviet Union and Eastern Block countries. Defendant is a supplier of nutritional supplements and assures potential buyers “that every product Futurebiotics makes is 100 percent guaranteed for your total satisfaction.” (Emphasis added)

A brief synopsis of the facts reveals that plaintiff’s export business functioned much like Amway or Mary Kay function in the United States., i.e. with “multilevel marketing.” Plaintiff placed orders for certain health supplements with defendant and visited defendant’s facilities in Suffolk County. In 1995 the order for bottles of colloidal silver was received and shipped without incident and the necessary legal approvals were obtained in the countries where the products were sold. By letter dated February 8, 1996 defendant acknowledged that it had appointed plaintiff as its exclusive “Export Distributor” for the countries of the former Soviet Union. In 1996 plaintiff purchased, inter alia, shark cartilage, “colon green,” and colloidal silver. Also in 1996 plaintiff purchased the colloidal silver without defendants label affixed to the bottles so that plaintiff’s own label could be affixed. Various complaints marked the 1996 shipment; the shark cartilage had a “spoiled smell”; the “colon green” bottles were missing the tamper resistant seal; and the colloidal silver contained a cloudy substance, and, upon analysis, contained an insufficient amount of silver.

By letter dated September 19, 1996 defendant acknowledged that there were problems with the colloidal silver shipment but offered that the problem was caused by a mis-routed shipment rather than any harmful contaminants. However, this was based on “retention samples.” It does not appear that defendant’s lab tested the shipment samples relative to that explanation. By letter dated October 20, 1996, plaintiff advised defendant that it had lost many distributors based on a lack of confidence in the products; plaintiff also lamented that it was “still replacing very bad products with also bad product, creating more unhappy customers.” Apparently, the March colloidal silver shipment was replaced in December 1996 but it was also met with complaints as to quality and deficient amounts of silver. The second replacement shipment, of May 1997, also did not meet consumer satisfaction. There are reports of conflicting lab test results as to whether there were contaminants in the suspension as well as whether the level of silver present was sufficient. The gravamen of plaintiff’s complaint is that the growth of its business was essentially reversed by the nonconforming quality of the products, as well as the replacements, leaving it with little or no distribution network with which to rebuild its business.

A printed form of the reverse side of the packing slip, enclosed with each prepaid shipment, provides, in relevant part:

11. Seller shall not be liable for special or consequential damages. The Remedies of the Purchaser set forth herein are exclusive and shall not, except as expressly provided herein, exceed the purchase price of product on which such liability is based.

a. In the event Seller determines that the product sold is defective, Seller at its option will either refund the purchase price paid or replace with identical product.

Defendant contends that it is entitled to summary judgment because plaintiff is bound by the limitation of liability and remedies provision on the packing slip. Section 2-207 of the Uniform Commercial Code governs whether such additional terms on the packing slip ¹ become part of the contract between the parties. That section makes a distinction between a clause disclaiming warranties, which would normally “materially alter” the contract, and a clause limiting a party’s remedy in a reasonable manner, which may be considered part of the parties agreement (see, UCC 2-207, Comments 4, 5). The limited remedy of refund or replacement and a consequential damages exclusion are two discrete ways of attempting to limit recovery for breach of warranty. The UCC “tests each by a different standard. The former survives unless it fails of its essential purpose, while the latter is valid unless it is unconscionable … [Thus,] the failure of the limited remedy provided in the contract, without more, [does not invalidate] a whole distinct term in the agreement excluding consequential damages” (Farm Family Mutual Ins. Co. v. Moore Business Forms, Inc., 164 Misc2d 656 quoting Cayuga Harvester v. Allis-Chalmers Corp., 95 AD2d 5; UCC 2-719[2]). Whether an exclusive or limited remedy provision fails of its essential purpose is an issue of fact for the jury (see, Scott v. Palermo, 233 AD2d 869). However, it is well settled that, where, as here, a contract contains both an exclusive remedy provision and a provision limiting consequential damages, the provision limiting consequential damages will be enforced provided that it is not unconscionable, even where an issue of fact exists concerning the enforceability of the exclusive remedy provision (see, Scott v. Palermo, supra; Cayuga Harvester v. Allis-Chalmers Corp., supra). Whether a provision is unconscionable presents an issue of law for the court (see, Scott v. Palermo, supra).

Where, as here, businessmen contract in a commercial setting, a presumption of conscionability arises (2A Anderson, Uniform Commercial Code ?§2-302:127, at 297 [3rd ed]). “As a general [rule], unconscionability requires some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” (see, Rubin v. Telemet Am., 698 F Supp 447, quoting State v. Avco Fin. Servs., 50 NY2d 383, quoting Williams v. Walker Thomas Furniture Co., 350 F2d 445). In the absence of any showing of unconscionability, parties may agree to limit the seller’s liability for damages (see, Mom’s Bagels of New York v. Greenebaum Inc., 164 AD2d 820, appeal dismissed 77 NY2d 902). In light of the fact that the parties to the contract were experienced in the field, and absent any evidence that the plaintiff was placed in a position where it lacked “meaningful choice” to select a different supplier or reject the contract, the court, as a matter of law, finds that the provision precluding the purchaser from recovering consequential damages is not unconscionable, and may therefore be enforced (see also, Suffolk Laundry Services v. Redux Corp., 238 AD2d 577; Pacs Industries, Inc. v. Cutler-Hammer, Inc., 103 F Supp2d 570). Accordingly, the court finds that defendant effectively excluded consequential damages as a matter of law and claims for such damages are dismissed.

Since consequential damages are unavailable to plaintiff, the court, in exercise of its discretion, denies so much of plaintiff’s motion which seeks leave to amend its complaint to increase the ad damnum clause from one million dollars to thirty-five million dollars. While leave to amend an ad damnum clause is liberally granted, it is not automatic, and must be supported by a proper showing by the plaintiff as to the merits of the request for the amendment and an explanation for the failure to initially assert the increased amount of damages (see, CPLR 3025 [b]; Martin v. Maimonides Med. Center, 125 AD2d 455; Dolan v. Garden City Union Free School Dist., 113 AD2d 781). Here, the gravamen of plaintiff’s increase is for lost profits and lost market value for growth which never occurred due to consumer dissatisfaction, clearly consequential damages. Since said damages are unavailable to plaintiff, leave to amend is denied.

Where a product fails to perform as promised due to the alleged negligence of a defendant in manufacturing or distributing a product, a plaintiff is precluded from recovering tort damages for its economic loss (see, Schiavone Constr. Co. v. Mayo Corp., 56 NY2d 667; Bristol-Meyers Squibb v. Delta Star, 206 AD2d 177). The economic loss rule is based on the principle that damages arising from the failure of the bargained-for consideration to meet the expectations of the parties are recoverable in contract, not tort, unless a legal duty independent of the contract itself has been violated (see, Bellevue S. Assocs. v. HRH Constr. Corp., 78 NY2d 282, 294-295; Bristol-Meyers Squibb v. Delta Star, supra). Since plaintiff’s damages are limited to economic loss and plaintiff has not asserted any damages from any accidental occurrence which independently caused injury to plaintiff, the court finds that the losses are not recoverable in tort (see, Carcone v. Gordon Heating & Air Conditioning Co., 212 AD2d 1017; Bristol-Meyers Squibb v. Delta Star, supra; Arell’s Fine Jewelers v. Honeywell, Inc., 170 AD2d 1013). Accordingly, the plaintiff’s cause of action sounding in negligence is dismissed.

As to the remaining portions of the motions for summary judgment, it is well settled that the movant has the initial burden of setting forth evidentiary facts sufficient to establish its entitlement to judgment as a matter of law (see, Zuckerman v. City of New York, 49 NY2d 557; Fabbricatore v. Lindenhurst Union Free School District, 259 AD2d 659). Only then does the burden shift to the opposing party to come forward with proof (see, Piccolo v. DeCarlo, 90 AD2d 609). The implied warranty of merchantability provides that goods will be fit for the ordinary purposes for which they are used (see, UCC 2-314 [2] [c]; Episcopal Church Home of Western New York v. Bulb Man, 274 AD2d 961; Gordon v. Ford Motor Co., 260 AD2d 164; Butler v. Interlake Corp., 244 AD2d 913). Here, the supplements were warranted to contain a specific amount of colloidal silver as well as to meet consumer satisfaction. Sufficient evidence has been submitted to, at minimum, create issues of fact as to whether the supplements supplied breached any express or implied warranty of merchantability. Therefore, except as previously provided by dismissing plaintiff’s negligence cause of action and claim for consequential damages, neither party has met their initial burden entitling them to summary judgment on any other causes of action (see, Fabbricatore v. Lindenhurst Union Free School District, supra) and the remaining portions of both motions are denied.

(1) The court finds no discernable difference between the packing slip utilized here and the “delivery ticket” utilized in Laidlaw Transportation v. Helena Chemical Company, 255 AD2d 869, which addresses the same issue.