Jacada (Europe), Ltd. F/k/a Client/server Technology (Europe), Ltd. v. International Marketing Strategies, Inc.

CLAY, Circuit Judge,

concurring in part and dissenting in part.

I fully concur in parts I — III of the Court’s opinion; however, I write separately with respect to part IV of the Court’s opinion, because I believe that the arbitration award manifestly disregards applicable law. Notwithstanding our narrow standard of review, in my view this is the rare case where the award amounts to the arbitrators’ “own notions of industrial justice.” United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 38 , 108 S.Ct. 364 , 98 L.Ed.2d 286 (1987); Beacon Journal Publ’g Co. v. Akron Newspaper Guild, 114 F.3d 596 (6th Cir.1997).

The arbitrators voided the limitation of damages clause in the parties’ agreement because they found it to be “unreasonable and unconscionable,” and further found “that it fails of its essential purpose.” (J.A. at 74.) The majority is correct that under Michigan law an arbitrator may refuse to apply a limitation of damages provision for uneonscionability, and this Court “may not reject [the arbitrator’s] findings simply because it disagrees with them.” United Paperworkers Int’l Union, 484 U.S. at 38 , 108 S.Ct. 364 , 98 L.Ed.2d 286 ; cf. Anaconda Co. v. District Lodge No. 27 of the Int’l Ass’n of Machinists and Aerospace Workers, 693 F.2d 35, 37-8 (6th Cir.1982) (“ ‘Manifest disregard of the law means more than a mere error in interpretation or application of the law.”). However, the majority limits its review of the arbitration award to a recitation of permissible outcomes under Michigan law, failing to examine whether the arbitrators actually applied the law, and ignoring the fact that “a blatant disregard of the applicable rule of law will not be tolerated.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 421 (6th Cir.1995). Where “the applicable legal principle is clearly defined and not subject to reasonable debate” and “the arbitrators refused to heed that legal principle,” we must set the arbitration award aside as being “‘in manifest disregard of the law.’ ” Id. (quoting Wilko v. Swan, 346 U.S. 427 , 74 S.Ct. 182 , 98 L.Ed. 168 (1953)).

Michigan law is guided by “the general principle that individuals are fully competent to enter into any contract which they wish to enter into and may obligate themselves to perform in any manner provided the contract is not in violation of any penal laws or public policy of the state.” Michigan Ass’n of Psychotherapy Clinics v. Blue Cross and Blue Shield of Michigan, 101 Mich.App. 559 , 301 N.W.2d 33, 40 (1981). The leading Michigan case regarding uneonscionability in a commercial setting, Allen v. Michigan Bell Telephone Co., makes clear that in order to void a limitation of damages clause for uncon-scionability, there must be a finding of both substantive and procedural uncon-scionability. 18 Mich.App. 632 , 171 N.W.2d 689, 692 (1969) (“There are then two inquiries in a case such as this: (1) What is the relative bargaining power of the parties, their relative economic strength, the alternative sources of supply, in a word, what are their options?; (2) Is the challenged term substantively reasonable?”). Allen narrowly defines uncon-scionability as “ ‘an absence of meaningful choice on the part of one of the parties *716 together with contract terms which are unreasonabl[y] favorable to the other party.’ ” Id. (quoting Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C.Cir.1965)).

Thus, merely because the parties have different options or bargaining power, unequal or wholly out of proportion to each other, does not mean that the agreement of one of the parties to a term of a contract will not be enforced against him; if the term is substantively reasonable it will be enforced. By like token, if the provision is substantively unreasonable, it may not be enforced without regard to the relative bargaining power of the contracting parties.

Id. Allen involved a contract between a plaintiff who wanted to advertise in the yellow pages and the phone company that printed the telephone book. The Michigan Court of Appeals found that the limitation of damages clause in the parties’ contract was proeedurally unconscionable because the parties were not in positions of equal bargaining power; since the defendant printed the only telephone book in the geographic area, the plaintiff was either forced to accept the contract or forego advertising in the yellow pages. Id. at 639-40, 171 N.W.2d 689 . The limitation of damages clause was also found to be substantively unconscionable because it completely absolved the phone company from any liability in the event of a breach of contract. Id. at 640 , 171 N.W.2d 689 .

Allen’s result is atypical, and was later recognized as such by the Michigan Court of Appeals. See Michigan Ass’n of Psychotherapy Clinics, 301 N.W.2d at 40 (highlighting that court’s “primary concern” in Allen “was that plaintiff was contracting with a public utility which, in essence, had a monopoly on the type of advertising sought”); see also Northwest Acceptance Corp. v. Almont Gravel, Inc., 162 Mich.App. 294 , 412 N.W.2d 719, 723-24 (1987) (emphasizing that a finding of un-conscionability requires lack of realistic choice for one party coupled with contract terms that are unreasonably favorable to the other party). “Whether a contractual provision is substantively unreasonable or unconscionable depends on the commercial setting, purpose and effect of the provision.” Id. at 41, 412 N.W.2d 719 . Other courts that have interpreted Michigan law, including this Court, have noted that “un-conscionability is rarely found to exist in a commercial setting.” Citizens Ins. Co. of Am. v. Proctor & Schwartz, Inc., 802 F.Supp. 133, 143 (W.D.Mich.1992), overruled on other grounds by Detroit Edison Co. v. NABCO, Inc., 35 F.3d 236, 242 (6th Cir.1994); accord U.S. Fibres v. Proctor & Schwartz, Inc., 509 F.2d 1043 , 1048 (6th Cir.1975); WXON-TV, Inc. v. AC. Nielsen Co., 740 F.Supp. 1261, 1264 (E.D.Mich.1990).

I recite the applicable Michigan law relating to unconscionability to emphasize that in voiding the limitation of damages provision in the instant ease, the arbitrators completely failed to follow that law. The majority claims that “[tjhere is little law preventing arbitrators from considering that IMS’s smaller size coupled with the unique features of the Jacada/400 software package rendered the bargaining power between the two sides sufficiently unequal as to allow a conclusion of uncon-scionability.” Maj. Op. at 713-15. Whatever merit that statement may have in the abstract, it is clear that the arbitrators made no such findings regarding IMS’s size in relation to Jacada’s, or the “unique features” of Jacada/400. The arbitration award contains no inquiry into, and no discussion of, the relative bargaining strength of the parties, nor does the award discuss or recite any evidence indicating that IMS was faced with a lack of meaningful choice in entering into the contract *717 with Jacada. The arbitrators also failed to point to any evidence or testimony indicating that the limitation of damages clause was substantively unreasonable. Rather, the arbitrators rested their entire decision on a hypothetical calculation that the limitation of damages clause would arguably operate to divest IMS of “reasonable” damages under some circumstances. (J.A. at 74.) The reasoning employed by the arbitrators constitutes the most unsupportable kind of speculation and conjecture, which “fl[ies] in the face of clearly established legal precedent.” Merrill Lynch, 70 F.3d at 421 .

Additionally, although the arbitrators alternatively employed a hypothetical calculation to find that the limitation of damages provision fails of its essential purpose, the arbitrators made no argument that the provision failed of its essential purpose in light of Jacada’s actual breach. The arbitrators found that application of the limitation of damages provision here would limit IMS to $125,937.91 in damages, but then the arbitrators went on to discuss the “potential effect” of the limitation of damages provision using completely hypothetical figures. Id. This reasoning completely ignores Michigan law, under which failure of essential purpose is a default remedy under the Uniform Commercial Code (“UCC”), and is applied in cases where a limitation of damages clause actually fails of its essential purpose. See Mich. Comp. Laws Ahn. § 440.2719(b)(2) (2004) (“Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this act”) (emphasis added). The UCC provision

should be triggered only when the remedy [in the parties’ agreement] fails of its essential purpose. That is, when unanticipated circumstances cause the seller to be unable to provide the buyer with the remedy to which the parties agree, that remedy has failed of its essential purpose. It is a different question entirely if the remedy is unreasonable or unconscionable, for in such event it may not fail of its essential purpose although it leaves the buyer without an adequate remedy as to some part of the actions required to cure the problem.

Price Bros. Co. v. Charles J. Rogers Constr. Co., 104 Mich.App. 369 , 304 N.W.2d 584, 586 (1981); see also Severn v. Sperry Corp., 212 Mich.App. 406 , 538 N.W.2d 50, 54-5 (1995) (“[Djefendant did not give any indication of an ability or willingness to discover and fix the problem ... Under these circumstances, we believe [] there was sufficient evidence to conclude that defendant’s limited written warranty failed of its essential purpose.”); Krupp PM Eng’g, Inc. v. Honeywell, Inc., 209 Mich.App. 104 , 530 N.W.2d 146, 149 (1995) (“Moreover, because plaintiff was deprived of its furnace for eighteen months and the furnace was not completely fixed for three years, the warranty failed of its essential purpose.”); Kelynack v. Yamaha Motor Corp., USA, 152 Mich. App. 105 , 394 N.W.2d 17, 20 (1986) (warranty provision in sales contract failed of its essential purpose where motorcycle became inoperable within ten weeks of purchase due to defect and dealer failed to repair in a timely manner). In addition, the Michigan Court of Appeals has explicitly stated that because the failure of essential purpose doctrine is grounded in the UCC, it is inapplicable in cases not otherwise governed by the UCC, i.e., in cases where the parties have not contracted for the sale of goods. See Plymouth Pointe Condo. Ass’n v. Delcor Homes-Plymouth Pointe, Ltd., 2003 WL 22439654 at *2 (Mich.Ct.App. Oct.28, 2003). In non-UCC cases, “there is no need to adopt by analogy a UCC concept in analyzing the limited *718 warranty,” because the common law mechanism of unconscionability exists. Id. 1

In the current case, the arbitrators made absolutely no finding that there were unanticipated circumstances which caused the limited remedy bargained for by the parties to be unavailable. Furthermore, the arbitrators ignored the fact that the parties are two businesses that engaged in an arm’s length transaction supported by consideration. “The law presumes that business people are fully competent to enter into contracts and obligate themselves to perform in any manner they wish,” WXON-TV, 740 F.Supp. at 1264 , and nothing in the arbitration award suggests that the limitation of damages clause bargained for by the parties failed to operate in exactly the manner contemplated at the time the agreement was entered into. Thus, the conception of the failure of essential purpose doctrine contemplated by the arbitrators’ award has no basis whatsoever in Michigan law.

Although I concur in parts I — III of the Court’s opinion, I respectfully dissent from part IV. I would vacate the arbitration award’s calculation of damages and remand to the arbitrators for further findings in light of clearly established Michigan law.

. Although Plymouth Pointe was decided after the arbitration award in this case was issued, the court relies on Michigan cases that existed at the time the arbitrators rendered their decision.