## Facts

- Chatlos Systems, Inc. (CSI) manufactured cable pressurization equipment and sought to modernize its growing data-processing needs.
- NCR solicited CSI and recommended a computer system, representing it would perform six functions: accounts receivable, payroll, order entry, inventory deletion, state income tax, and cash receipts.
- NCR also represented the system would reduce labor costs, solve inventory problems, be programmed by capable personnel, and be operational by March 1975.
- CSI’s president signed NCR’s System Services Agreement; the acquisition was structured as a lease-financing transaction with a bank, with the system valued at about $75,800.
- NCR’s form agreement limited remedies to repair or replacement and excluded consequential damages.
- Installation and programming efforts were prolonged and unsuccessful: by March 1975 only payroll worked; state-income-tax functionality did not work until September 1976; four promised functions never properly operated.
- CSI cooperated with NCR’s remediation efforts for an extended period, then refused further accommodations in September 1976.
- CSI presented evidence that the system’s actual value at acceptance was about $6,000 and sought incidental and consequential damages for economic losses tied to the system’s failures.

## Issues

1. Whether NCR’s written and oral functionality promises created express warranties and whether the system’s failures breached those warranties.
2. Whether CSI established an implied warranty of fitness for a particular purpose based on NCR’s knowledge of CSI’s needs and CSI’s reliance on NCR’s selection and programming, and whether that warranty was breached.
3. Whether the contract’s repair-or-replace limitation and consequential-damages exclusion were enforceable, or instead failed of their essential purpose under U.C.C. § 2-719.
4. Whether NCR’s representations constituted fraudulent misrepresentation supporting punitive damages.

## Decision

- NCR breached express warranties because its specific functionality assurances became part of the basis of the bargain and the system did not perform as warranted.
- NCR breached the implied warranty of fitness for a particular purpose because NCR knew CSI’s particular needs and CSI relied on NCR’s skill and judgment in supplying a suitable system.
- The repair-or-replace limitation failed of its essential purpose under U.C.C. § 2-719 given NCR’s prolonged inability to make the system perform as promised; CSI could pursue incidental and consequential damages.
- CSI did not prove fraud or the level of culpability required for punitive damages; punitive damages were denied.
- The court awarded compensatory damages for breach of warranty, including difference-in-value damages and certain incidental/consequential losses.

## Legal Principles

- Specific performance representations about a product’s capabilities, made during negotiations and forming part of the basis of the bargain, constitute express warranties under U.C.C. § 2-313.
- An implied warranty of fitness for a particular purpose arises under U.C.C. § 2-315 when the seller knows the buyer’s particular purpose and the buyer relies on the seller’s skill and judgment to furnish suitable goods.
- Under U.C.C. § 2-719, a limitation to repair or replacement is ineffective when it fails of its essential purpose—such as where repeated repair efforts over time do not provide the buyer the substantial value of the bargain—permitting resort to broader U.C.C. remedies, including incidental and consequential damages.
- Damages for accepted, nonconforming goods may include the difference between the value as warranted and the value as accepted (U.C.C. § 2-714(2)), plus incidental and consequential damages (U.C.C. § 2-715) when permitted.
- Fraud and punitive damages require proof of intentional deception or comparable culpable state of mind; breach of warranty based on overconfidence or negligence is insufficient.

## Conclusion

The court held NCR liable for breach of express warranties and the implied warranty of fitness where a promised multi-function computer system never became operational as represented, ruled the repair-only limitation failed its essential purpose so CSI could recover broader U.C.C. damages, and rejected fraud and punitive damages for lack of proof of intent to deceive.


Chatlos Sys., Inc. v. Nat’l Cash Register Corp., 479 F. Supp. 738 (D.N.J. 1979)