Case Information
*2 Before M ANION K ANNE , and W ILLIAMS , Circuit Judges. W ILLIAMS , Circuit Judge
. A warehouse that Nabisco, Inc. leased to store its products contained chemical resi- dues which contaminated its packaged food products, and it sought to recover the replacement costs of those prod- ucts. Nabisco sued those involved in the warehouse lease, construction, and floor finishing process, alleging that their negligence and breach of their duties to warn al- lowed chemicals to damage its property. American United Logistics (“AUL”), Nabisco’s warehouse partner, and Cen- tral American Warehousing, AUL’s affiliate, also filed suit against the property developer, contractor, and subcon- tractors, claiming breach of warranty and contract. The district court dismissed Nabisco’s negligence and breach of duty to warn claims, finding that the economic loss doctrine barred tort recovery. Additionally, the court dismissed Central and AUL’s claims, ruling that they did not have a right to enforce warranties issued by the prop- erty developer, contractor, and subcontractors. We affirm the judgment against Nabisco, reverse the judgments against Central and remand for further proceedings, and reverse in part and affirm in part the judgments against AUL and remand for further proceedings.
I. BACKGROUND
A. The Facts
Nabisco and AUL were warehousing partners for Nabisco’s snack food products. Nabisco asked that AUL find additional warehouse space for snack food products, and they signed a “Public Warehouse Storage, Handling and Inventory Agreement” (“warehouse agreement”). Under the warehouse agreement, AUL agreed to provide ware- house space and other services for the storage and handling of Nabisco’s bakery products. In addition, the warehouse agreement specifically required AUL to keep poisonous, dangerous chemicals and foul odors in a separate part of the warehouse. Under the warehouse agreement, AUL’s lia- bility for any damage to Nabisco’s property was limited to $1 million per occurrence.
AUL contacted Catellus Construction Corporation to find available warehouse space in Illinois. AUL told Catel- lus that the warehouse was for Nabisco and that it must be suitable for the storage of retail food products. Accord- ing to the parties, Catellus expressed reservations about entering into the contract with AUL because AUL had only been in existence for a short time, and Catellus pre- ferred to contract with AUL’s affiliate, Central. Conse- quently, Catellus and Central signed a Single Tenant Industrial Lease (the “tenant lease”) for warehouse space that Catellus already had under construction. Eight months earlier, Catellus had hired Krusinski Construction as the warehouse contractor. Krusinski in turn hired G.A. Blocker Grading Contractor, Inc. to excavate the subgrade underneath the concrete warehouse floor and Brandonisio Construction Corporation to prepare the concrete floor.
According to its contract with Krusinski, Brandonisio was supposed to use a finishing product known as Sonisil on the floor; instead Brandonisio used Cure & Seal, a different finishing product manufactured by Specco. Cure & Seal contains aromatic hydrocarbons, which are air- borne chemicals that have a fragrance, odor, perfume, or scent. As a result of this error, Krusinski contracted with Artlow Systems, Division of Archem, Inc. to strip the floor and fix the sealant problems, but Krusinski failed to specify the stripping agent to be used to remove the finish. Artlow used a product called Arsolv, manufac- tured by Hydrite Chemical Company, to strip the floor, which also contains aromatic hydrocarbons.
Shortly after the floor finishing process was complete, Nabisco began using the warehouse. A month later, Nabisco began receiving complaints from customers regarding a chemical odor and flavor in certain snack food products such as Chips Ahoy and Oreo cookies. Nabisco investigated and learned that the complaints were all related to products that had passed through the Illinois warehouse. Test results indicated that all Nabisco products stored in the warehouse that were wrapped in polypropylene were contaminated with aromatic hydrocarbons. The contam- ination made them unfit for sale but did not pose a health risk. These actions followed.
B. District Court Proceedings
1. Nabisco’s claims.
Nabisco sued AUL, Central, Catellus, Krusinski, Brandonisio, and Artlow, alleging negligence. In addi- tion, Nabisco sued Specco and Hydrite claiming a breach of their duty to warn users of the effect of their products on polypropylene-packaged food products. Nabisco al- leges that chemical emissions from the finishing products infiltrated its polypropylene-wrapped packaged goods as soon as these products entered the warehouse. Nabisco supports this argument by submitting evidence that no matter how long its products were in the warehouse, they were all contaminated by aromatic hydrocarbons. Fur- thermore, Nabisco proffers the testimony of experts who concluded that contamination occurred immediately. Nabis- co seeks $30 million for the costs incurred as a result of the contamination, including the cost of testing the ware- house and recalling and destroying contaminated products.
In May 2000, Magistrate Judge Ashman recommended that Nabisco’s negligence and duty to warn claims be dismissed, holding that Nabisco’s claims were actually contractual disputes barred by the economic loss doctrine. District Judge Bucklo adopted the magistrate judge’s findings and ruled that the contamination of Nabisco’s 5 products was not a “sudden or calamitous” occurrence, and thus not exempt from the economic loss doctrine. The district court granted Nabisco leave to file its fourth amended complaint, but denied Nabisco’s attempt to al- lege new facts to support its negligence claims.
2. Central and AUL’s claims.
In response to Nabisco’s fourth amended complaint, Central filed suit against Krusinski, Brandonisio, Artlow, and Blocker for breach of warranty. Central maintains that Catellus assigned its rights to enforce any warran- ties arising out of the construction contracts to Central. AUL, Central’s affiliate, also filed a third-party complaint against Catellus. Relying on prior negotiations and the tenant lease between Central and Catellus, AUL alleged that it was a direct third-party beneficiary of the tenant lease and had the same rights as Central under the lease. Additionally, AUL brought claims against Krusinski, Brandonisio, Artlow, and Blocker, asserting that it had a right to recover damages as Nabisco’s bailee. The de- fendants sued by AUL and Central moved to dismiss those claims, asserting various defenses, including lack of standing. Judge Bucklo granted the defendants’ mo- tions to dismiss the complaints of AUL and Central and denied AUL leave to amend.
AUL and Central jointly filed a motion seeking clari- fication of the judgment. In response to this motion for clarification, the district court reinstated Central’s claim against Blocker, the excavation contractor, and issued its *6 6
final judgment against AUL and Central with respect to all claims except Blocker’s. Nabisco, AUL, and Central timely appealed.
II. ANALYSIS
When reviewing claims dismissed pursuant to Rule
12(b)(6), we ask whether the plaintiffs can prove any set
of facts supporting their claims that would entitle them
to relief. We accept all the well-pleaded factual allega-
tions in the complaint as true and draw all reasonable
inferences in favor of the nonmoving parties.
See Albany
Bank & Trust Co. v. Exxon Mobil Corp
.,
A. Nabisco’s Tort Claims
1. Negligence and the economic loss doctrine.
The economic loss doctrine denies a tort remedy for
product defects when the loss “is rooted in disappointed
contractual or commercial expectations.”
See Mutual Serv.
Cas. Ins. Co. v. Elizabeth State Bank
265 F.3d 601, 615
(7th Cir. 2001) (quoting
Collins v. Reynard
, 607 N.E.2d
1185, 1188 (Ill. 1992) (Miller, C.J., concurring)). Contract
law provides the proper remedy for disappointed commer-
cial expectations, such as when a product is unfit for its
intended use.
See Moorman Mfg. Co. v. Nat’l Tank Co.
, 435
N.E.2d 443, 450 (Ill. 1982). Recovery in tort for disap-
pointed commercial expectations due to breach of implied
duties and warranties between non-contracting parties is
also barred by the economic loss doctrine.
See Redarowicz
v. Ohlendorf
441 N.E.2d 324, 327 (Ill. 1982);
Moorman
,
In Chicago Flood , a broken water main in Chicago flooded many downtown businesses. Id. at 268. The Illi- nois Supreme Court held that only plaintiffs who lost perishable inventory as a result of interrupted electrical service could recover in tort. Id. at 276. The court reasoned that these plaintiffs were not “seek[ing] damages for the loss of continuous electrical service, which is a disap- pointed commercial expectation.” Id . Instead, the plain- tiffs sought damages for perished goods, which were re- coverable because “[s]uch damages are above and beyond class plaintiffs’ disappointed commercial expectation” and thus, “fall outside the definition of economic loss and are recoverable in tort.” Id.
In this case, Nabisco asserts that it lost $30 million in part due to AUL’s alleged negligence which made the warehouse and its products unfit for use. However, in contrast to the plaintiffs’ claims in Chicago Flood , Nabis- co’s claims of recovery for contamination were not above and beyond their commercial expectations. In fact, Nabis- co bargained for and received a contractual protection against contamination in the form of AUL’s promise to keep harmful chemicals in a separate part of the ware- house. This expectation was not met, and as a result Nabisco suffered a loss. Although Nabisco spent more to address the contamination than it was entitled to recover from AUL, Nabisco accepted this risk when it contracted to hold AUL responsible for a maximum of $1 million for *8 8
breaching this term. Nabisco cannot circumvent this bargained-for limitation by suing in tort for those disap- pointed commercial expectations addressed in the contract. See Moorman , 435 N.E.2d at 450. Its negligence claim against AUL is therefore barred by the economic loss doctrine.
Nabisco’s negligence claims against Central, Catellus, Krusinski, and the subcontractors are also barred by the economic loss doctrine. Nabisco alleges that Central, Catellus, Krusinski, and the subcontractors breached their warranties against latent defects. See Redarowicz , N.E.2d at 327. However, the damages that Nabisco seeks are economic losses, which are addressed by contract law, not tort law. [3] In Redarowicz the second purchaser of a house discovered that there were latent defects that caused the chimney and adjoining brick wall to separate from the house. Id. at 326. The purchaser’s claims were for deterioration and loss of bargain resulting from inferior workmanship. Id. at 327. The court found that the losses from the latent defects were disappointed commercial expectations because the only losses the purchaser in- curred were “additional expenses for living conditions that were less than what was bargained for.” Id. Like Redarowicz’s claims, Nabisco’s negligence claims against Central, Catellus, Krusinski, and the subcontractors are for the recovery of losses due to a construction defect. Nabisco claims that as a result of the defendants’ breach its products were contaminated, making them unfit to sell and causing Nabisco to lose the bargained-for use of the warehouse. These losses are for disappointed com- mercial expectations, which were contemplated by the contract. Therefore, unless Nabisco qualifies for an ex- ception, its negligence claims against AUL, Central, Catellus, Krusinski, and the subcontractors are barred by the economic loss doctrine.
2. Exceptions to the economic loss doctrine.
There are three exceptions to the
Moorman
economic
loss rule,
[4]
though the parties agree that only one excep-
tion is at issue—whether Nabisco’s property damage
was caused by a sudden, calamitous, or dangerous occur-
rence.
See Chicago Flood
, 680 N.E.2d at 275;
Moorman
,
In contamination cases, Illinois courts have generally
rejected the application of the sudden or calamitous oc-
currence exception, unless the defect makes the product
hazardous or unreasonably dangerous.
See Dixie-Portland
Flour Mills, Inc. v. Nation Enters., Inc.
613 F. Supp.
985, 989 (N.D. Ill. 1985) (contamination of flour by sand
did not fall under exception);
NBD Bank v. Krueger Ringier
,
Inc.
,
Loss from contamination is recoverable notwithstand-
ing the economic loss rule if the product becomes inher-
ently and unreasonably dangerous. In
Board of Educa-
tion v. A, C & S, Inc.
,
Here, however, Nabisco alleges in its third amended complaint that the contamination did not pose a health risk. Given this allegation, Nabisco could not plead any facts that would support a finding that the contamina- tion of its products meets the requirements for the ap- plication of this exception to Moorman . See Thomas v. Farley 31 F.3d 557, 558-59 (7th Cir. 1994) (“[I]f a plaintiff . . . plead[s] particulars, and they show that he has no claim, then he is out of luck—he has pleaded him- self out of court.”); R.J.R. Serv., Inc. v. Aetna Cas. & Sur. Co. , 895 F.2d 279, 280 (7th Cir. 1988) (stating that a court is “not obliged to ignore any facts set forth in the complaint that undermine the plaintiff’s claim”). There- fore, we agree with the district court that Nabisco’s neg- ligence claims are barred by the economic loss doctrine and were properly dismissed.
Nabisco sought leave to amend its complaint to add additional facts showing that its products were contami- nated as soon as they entered the warehouse, but did not seek to withdraw its allegation that the contamina- tion posed no health risk. Therefore, the proposed amend- ment would have been futile and the district court did not abuse its discretion in denying it.
3. Failure to warn.
Nabisco’s claims against Specco and Hydrite for breach
of their duties to warn are based on the same negli-
gence claims discussed above. Specco and Hydrite’s al-
leged breach was a direct and proximate cause of Nabis-
co’s commercial loss. Nabisco is seeking recovery for its
lost commercial expectations of storing its products in
an uncontaminated warehouse and selling its products
to consumers. Those who suffer loss of commercial ex-
pectations such as reduced value, repair and replacement,
or lost profits are barred from tort recovery and are rele-
gated to seeking recovery under contract law.
Moorman,
B. Mandatory Arbitration of Central’s Breach of Warranty
Claims The district court ruled that the mandatory arbitra- tion provision in the tenant lease between Catellus and Central applies to all of Central’s claims, including those against Krusinski and the subcontractors, and that each of the parties Central brought a claim against must sub- mit to arbitration. [5] The court left open the question of whether there was a valid assignment to Central of Catellus’s rights.
Although the Federal Arbitration Act favors resolution
of disputes through arbitration, its provisions are not to
be construed so broadly as to include claims that were
never intended for arbitration.
AGCO Corp. v. Anglin
,
In this case, the intent of the parties is clear. The arbitra- tion provision in the tenant lease between Central and Catellus applies only to the tenant lease. In the multitude of contracts in this action, there are no other contractual arbitration provisions. If Catellus had intended to re- quire the contractor or the subcontractors to arbitrate their claims, then an arbitration provision would have been added to these contracts. [6] Therefore, the contractor and the subcontractors cannot be required to arbitrate this dispute.
The court further ruled that the arbitrator must de- cide whether there was a valid assignment of Catellus’s rights to Central. However, in the very next paragraph the court held that there was no evidence that Central was assigned the right to sue. It is unclear whether the issue of assignment was decided and, based on the limited record before the court, we cannot decide the matter. This is because the issue of assignment of warranty rights depends on unresolved questions of fact based on the parties’ intentions. See Bd. of Managers of Medinah on Lake Homeowners Ass’n v. Bank of Ravenswood , 692 N.E.2d 402, 405 (Ill. App. Ct. 1998) ( the parties’ intentions to create an assignment is a question of fact and “must be determined based upon the instruments executed as well as the surrounding circumstances”); Rivan Die Mold Corp. v. Stewart-Warner Corp. , 325 N.E.2d 357, 361 (Ill. App. Ct. 1975). We cannot say as a matter of law that there was no assignment, so we remand the issue to the district court. If the court determines that there was an assignment, then the breach of warranty claims should not have been dismissed.
The district court dismissed Central’s breach of war- ranty claim, concluding that Central could not enforce the warranties issued by the contractor and subcontrac- tors. The parties agree that the subcontractors all issued warranties relating to the proper design and construction of the warehouse, though they disagree as to the intended recipients of these provisions. Central asserts that as a result of Catellus’s assignment of rights to Central under the tenant lease, it can sue the subcontractors for breach of warranty. In response, the subcontractors argue that the warranties in their contract extend only to Krusinski, not Catellus, and Central does not have standing to sue them for breach of warranty claims.
Contrary to the subcontractors’ argument, their war- ranties do extend to Catellus. In Section 9.8 of the sub- contractors’ agreement, the subcontractors warrant their work against defects and agree to satisfy the warranty obligations without cost to the “Owner or Contractor.” The first page of the subcontractors’ agreement lists Catellus as the “Owner.” Therefore, the plain language of the sub- contractors’ agreement reflects that Catellus has the right to enforce the subcontractors’ warranties. So, if the dis- trict court determines that there was a valid assignment of Catellus’s rights under the subcontractors’ agreement to Central, Central has a right to maintain breach of warranty claims against all of the subcontractors. Thus, the district court’s ruling requiring mandatory arbitra- tion for Catellus’s breach of warranty claims is reversed and the issue of whether there was a valid assignment of Central’s rights to Catellus is remanded for further proceedings.
C. AUL’s Third-Party Beneficiary Claims
A direct third-party beneficiary is a person who, although
not a party to the contract, the contracting parties
in-
tended
to benefit from the contract.
See A.E.I. Music
Network, Inc. v. Bus. Computers, Inc.
, 290 F.3d 952, 955
(7th Cir. 2002);
XL Disposal Corp. v. John Sexton Con-
tractors Co.
,
AUL argues that it was a direct third-party beneficiary of the tenant lease between Central and Catellus because Catellus acknowledged that Central would operate the warehouse using AUL’s name. Specifically, the tenant lease states in Paragraph 15 that Central will conduct its operations under its name and under the name of its affiliate AUL, and these operations will not constitute subletting. In addition, AUL argues that Catellus knew all along that Central and AUL were virtually identical corporations under the common control and ownership of Concepcion because initially Concepcion approached Catellus about the warehouse space on AUL’s behalf.
In response, Catellus argues, and the district court ruled, that Section 17.1.8 of the tenant lease defeats AUL’s *16 16
claim that it was a direct third-party beneficiary since it clearly states that “nothing herein is intended to create any third party benefit.” However, Paragraph 15 makes Section 17.1.8 ambiguous because Paragraph 15 clearly confers an intended benefit on AUL: the authority to operate the warehouse. Catellus also asserts that no direct third-party beneficiary was created by the con- tract because Central’s name, not AUL, is on the con- tract. Nevertheless, AUL’s name remained in the contract as the operator of the warehouse space, an intended bene- fit. The acknowledgment of AUL in the contract and the alleged discussions during contract negotiations are enough to show that Central and Catellus intended AUL to receive a benefit from the contract. Therefore, AUL has stated a valid third-party beneficiary claim under Illinois law.
III. CONCLUSION
For the reasons discussed, as to No. 01-2310, we A FFIRM the judgment of the district court against Nabisco. As to Central’s claims under No. 01-1711, we R EVERSE the judgment of the district court and R EMAND for proceed- ings consistent with this opinion. Furthermore, under No. 01-1711, we A FFIRM the court’s denial of AUL’s motion for leave to amend its complaint, but R EVERSE the judg- ment of the court regarding AUL’s third-party beneficiary claims and R EMAND for further proceedings consistent with this opinion.
A true Copy:
Teste:
________________________________ Clerk of the United States Court of Appeals for the Seventh Circuit USCA-02-C-0072—2-12-03
Notes
[1] Nabisco’s other claims remain before the district court. Seek- ing resolution of the same matters as AUL and Central, Nabisco sought and received a Rule 54(b) judgment on its dismissed claims shortly after AUL’s and Central’s claims were dismissed.
[2] The parties agree that Illinois law applies to their diversity claims.
[3] Although the law of torts developed out of the law of warran-
ties, the law of warranties and contract law remain the appro-
priate manner in which to redress a purchaser’s disappointed
commercial expectations.
Moorman
,
[4] The other two exceptions to the economic loss doctrine are:
1) “the plaintiff ’s damages are proximately caused by a defen-
dant’s intentional, false representation,” or 2) “the plaintiff ’s
damages are proximately caused by a negligent misrepresenta-
tion by a defendant in the business of supplying information
for the guidance of others in their business transactions.”
See
Chicago Flood
,
[5] We note on appeal that the subcontractors agree that the district court’s determination of their intent to arbitrate was in error, and therefore no parties here dispute that the subcon- tractors did not agree to arbitrate issues pertaining to the warehouse construction. Nevertheless, the issue of whether the contractor and the subcontractors are required to submit to arbitration is still before this court.
[6] Furthermore, we note that Catellus entered into these con- struction contracts eight months before it executed the tenant lease. We find it difficult to imagine that at the time of these (continued...)
[6] (...continued) construction contracts, the parties intended to incorporate the arbitration provision of the later tenant lease.
[7] Catellus argues that under Illinois law it is presumed that the parties to a contract intend that the contract’s provisions apply only to them—not to third parties. See Ball Corp. , 543 N.E.2d at 107. However, this is not a full reading of Ball Corp. , which also states that the intent to create a direct third- party beneficiary is determined by the contract’s language and the surrounding circumstances at the time of the contract’s execution. Id .
[8] These negotiations were managed by Frolian Concepcion, who wholly owns AUL and Central.
[9] AUL tried to add a bailment claim on Nabisco’s behalf to pursue negligence claims against Catellus and the construction subcon- tractors. However, if Nabisco does not have a valid negligence claim against these parties, then neither does AUL. Thus, AUL’s bailment claims are also barred by the economic loss doctrine. The district court denied AUL’s motion to amend and we affirm.