## Facts

- Rheem Manufacturing Co. made residential gas furnaces and sold them through an authorized distributor, Federated Supply Corp., which sold furnaces to Phelps Heating & Air Conditioning, Inc. for installation and resale.
- Rheem provided a written limited warranty promising replacement of defective parts during the warranty period and limiting replacement-part coverage to the balance of the original period.
- The warranty disclaimed incidental and consequential damages and expressly excluded labor and service costs, including removal and reinstallation expenses.
- Phelps experienced numerous furnace failures after installation and performed repeated service and repairs for customers.
- Phelps claimed substantial unreimbursed labor costs and lost profits and sued Rheem for breach of express warranty seeking those damages.

## Issues

1. Whether a consequential-damages exclusion under Indiana’s U.C.C. § 26-1-2-719(3) remains enforceable when the contract’s limited remedy arguably fails of its essential purpose under § 26-1-2-719(2).
2. Whether Rheem’s express warranty permitted recovery of Phelps’s labor and service expenses associated with repairs and replacement.

## Decision

- The Indiana Supreme Court held that a consequential-damages exclusion under § 26-1-2-719(3) is enforceable even if a limited remedy arguably fails under § 26-1-2-719(2), absent unconscionability.
- The court held that Rheem’s warranty unambiguously barred recovery of labor and service costs, including removal and reinstallation.
- The court reversed the lower courts to the extent they permitted claims for consequential damages and labor expenses on the express-warranty theory and remanded for further proceedings consistent with its interpretation.

## Legal Principles

- U.C.C. § 2-719(2) (failure of essential purpose) and § 2-719(3) (consequential-damages exclusion) are construed independently; failure of a repair-or-replace remedy does not, by itself, invalidate a separate consequential-damages exclusion.
- A contractual exclusion of consequential damages is enforceable unless unconscionable; the proper inquiry is unconscionability of the exclusion, not automatic invalidation due to remedy failure.
- Clear warranty terms disclaiming labor, service, removal, and reinstallation costs are enforceable in a commercial transaction absent unconscionability.

## Conclusion

The court enforced both the consequential-damages exclusion and the labor-cost disclaimer in a commercial warranty, holding that even an arguable failure of the limited repair-or-replace remedy did not open the door to consequential damages and that the warranty’s explicit labor exclusions barred recovery of service-related expenses.


Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 746 N.E.2d 941 (Ind. 2001)