Definition[]
Failure of essential purpose refers to a remedy of a limitation of liability clause being insufficient.
| “ | [T]he determination of the applicability of the failure of essential purpose doctrine requires a two-tiered evaluation: first, identification of the essential purpose of the limited remedy, and second, whether the remedy in fact failed to accomplish such purpose.[1] | ” |
Overview[]
UCC 2-719 §3 – Consequential damages may be limited or excluded by agreement unless their limitation is unconscionable. For consumers, limitation of personal damages is prima facie unconscionable.
UCC 2-719 §2 provides consequential damages if the specified remedy fails, but §3 allows consequential damages to be limited if not unconscionable. Courts have followed different approaches:
- Option 1 — Failure of essential purpose -> consequential damages
- Option 2 — Failure of essential purpose does not lead to consequential damages unless the limitation of liability was unconscionable.
- Option 3 — Total and fundamental breach -> consequential damages. This option does not quite require unconscionability, but more than failure of essential purpose.
Best practices[]
- Use separate sections for the limitation of liability and warranty.[2]
- State explicitly that the limitation of liability survives any remedy’s failure of essential purpose.
References[]
- ↑ Cooley v. Big Horn Harvestore Sys., Inc., 813 P.2d 736, 744 (Colo. 1991).
- ↑ In Hawaiian Telephone v. Microform Data Systems, 829 F.2d 919 (9th Cir. 1987)(full-text), the plaintiff had both the limitation of liability and warranty in the same section. Because the contract was breached, the court held the warranty did not come into affect, and as a result, the limitation of liability did not apply to limit the plaintiff's liability.