Chatlos Systems v. National Cash Register Corp.

In early 1974, Chatlos Systems, Inc. (Chatlos) (plaintiff) contracted to obtain a computer system from National Cash Register Corp. (NCR) (defendant). Chatlos and NCR agreed that the computer would provide multiple payroll- and inventory-management functions that would be programmed into the system by NCR. NCR expressly warranted that the system would be free from defects for 12 months after delivery, that NCR would correct any defects so that the computer would be fully operational, and that the computer was fit for Chatlos’s specific purposes as the planned user. However, NCR limited the warranty to correcting any defects in the specific programming to within 60 days after the installation of each programming function. The contract between the parties also specifically disclaimed consequential damages in a separate provision. The computer was delivered to Chatlos in December 1974, but over the course of the next two years, and despite repeated efforts by NCR, NCR was unable to get the computer to be fully operational; only one of the many intended programming functions ever worked correctly. Chatlos sued, claiming breach of warranty and seeking damages. The United States District Court for the District of New Jersey held that the limited remedy was invalid because it failed its essential purpose and, further, that the disclaimer of consequential damages was invalid because of the failure. The district court allowed damages for the breaches of warranty and consequential damages. NCR appealed.