## Facts

- Chatlos Systems, Inc., a New Jersey manufacturer, sought to modernize its business data operations and negotiated with NCR to purchase an NCR 399/656 disc-based computer system.
- NCR represented that the system would address Chatlos’s inventory problems, reduce direct labor costs, and be programmed by NCR personnel to become operational within about six months.
- The system was expected to perform six business functions, including accounts receivable, payroll, order entry, inventory deletion, state income tax, and cash receipts.
- After delivery and programming efforts, the system failed to perform as warranted, functioning in only one of the required areas, and NCR’s repair/reprogramming efforts did not produce a properly functioning system within a reasonable time.
- The contract limited remedies largely to repair or replacement and separately disclaimed liability for consequential damages.
- After a bench trial, the district court found NCR liable for breach of express and implied warranties, held the limited remedy failed of its essential purpose, and awarded direct and consequential damages; both parties appealed.

## Issues

1. Whether the contract’s repair/replacement limited remedy failed of its essential purpose under U.C.C. § 2-719(2), permitting resort to other U.C.C. remedies.
2. Whether the failure of the limited remedy automatically invalidated the contract’s separate exclusion of consequential damages, or whether the exclusion must be assessed independently under U.C.C. § 2-719(3).
3. Whether the district court correctly measured and calculated direct breach-of-warranty damages under U.C.C. § 2-714(2) (difference between value as accepted and value as warranted).

## Decision

- The Third Circuit affirmed the finding that NCR breached warranties and that the repair/replacement remedy failed of its essential purpose because it did not provide a conforming, functioning system within a reasonable time.
- The court reversed the award of consequential damages, holding the consequential-damages exclusion remained enforceable despite the limited remedy’s failure.
- The court remanded for recalculation of direct damages under the proper U.C.C. § 2-714(2) framework, finding errors in aspects of the trial court’s valuation factors.
- Disposition: affirmed in part, reversed in part, and remanded.

## Legal Principles

- A limited remedy of repair or replacement fails of its essential purpose under U.C.C. § 2-719(2) when it does not, in practice, furnish conforming goods within a reasonable time; the buyer may then pursue other Code remedies.
- A consequential-damages exclusion under U.C.C. § 2-719(3) is analytically separate from a limited remedy; failure of the limited remedy does not automatically negate the exclusion.
- A consequential-damages disclaimer remains enforceable in a commercial contract absent a showing of unconscionability or other invalidating policy considerations.
- Direct breach-of-warranty damages are generally measured under U.C.C. § 2-714(2) by the difference, at the time and place of acceptance, between the value of the goods as accepted and the value they would have had if as warranted.
- Contract price is not necessarily equivalent to the market value of the goods as warranted; courts may consider other competent evidence of warranted value.

## Conclusion

The Third Circuit held that NCR’s repair/replacement remedy failed because it did not produce a functional, conforming computer system within a reasonable time, but it enforced the separate consequential-damages exclusion and remanded for recalculation of direct damages under the U.C.C.’s benefit-of-the-bargain measure.


Chatlos Sys., Inc. v. Nat’l Cash Register Corp., 635 F.2d 1081 (3d Cir. 1980)