SPRING MOTORS DISTRIBUTORS, INC., A CORPORATION, PLAINTIFF-RESPONDENT, v. FORD MOTOR COMPANY; CLARK EQUIPMENT COMPANY, A CORPORATION AND TURNPIKE FORD TRUCK SALES, INC., A CORPORATION, DEFENDANTS-APPELLANTS.
Supreme Court of New Jersey
Argued April 30, 1984—Decided March 28, 1985.
98 N.J. 555 | 489 A.2d 660
SPRING MOTORS DISTRIBUTORS, INC., A CORPORATION, PLAINTIFF-RESPONDENT, v. FORD MOTOR COMPANY; CLARK EQUIPMENT COMPANY, A CORPORATION AND TURNPIKE FORD TRUCK SALES, INC., A CORPORATION, DEFENDANTS-APPELLANTS.
Argued April 30, 1984—Decided March 28, 1985.
Richard S. Zackin argued the cause for appellant Clark Equipment Company, etc. (Crummy, Del Deo, Dolan, Griffinger & Vecchione, attorneys; Richard S. Zackin and John H. Klock, on the briefs).
Ronald Silber argued the cause for respondent (Krevsky & Silber, attorneys; Ronald Silber and Marianne Caulfield, on the briefs).
Cynthia J. Jahn, Assistant Counsel, submitted a brief on behalf of amicus curiae New Jersey School Boards Association (Paula A. Mullaly, General Counsel, attorney).
Robert C. Billmeier submitted a brief on behalf of amicus curiae United States Gypsum Company (Backes, Waldron & Hill, attorneys).
The opinion of the Court was delivered by
POLLOCK, J.
The fundamental issue on this appeal concerns the rights of a commercial buyer to recover for economic loss caused by the purchase of defective goods. More specifically, the question is whether the buyer should be restricted to its cause of action under the Uniform Commercial Code (hereinafter U.C.C. or the Code) or should be allowed to pursue a cause of action predicated on principles of negligence and strict liability. The difference is important because the buyer in the present case instituted its action beyond the four-year period provided by the U.C.C.,
The trial court perceived the matter as sounding in contract and found that the plaintiff had not instituted its action within the four-year period provided by the U.C.C.
We hold that a commercial buyer seeking damages for economic loss resulting from the purchase of defective goods may recover from an immediate seller and a remote supplier in a distributive chain for breach of warranty under the U.C.C., but not in strict liability or negligence. We hold also that the buyer need not establish privity with the remote supplier to maintain an action for breach of express or implied warranties. Accordingly, the four-year period of limitations provided by the Code,
I
Because this matter is presented on defendants’ motion for summary judgment, we accept as true plaintiff‘s version of the facts, according that version the benefit of all favorable infer
In the agreement, Spring Motors specified that the trucks should be equipped with model 390V transmissions made by Clark Equipment Company (Clark), a supplier to Ford. Spring Motors specified Clark transmissions because of “excellent service and parts availability on past models” and because of Clark‘s advertisements and brochures.
At the time of the sale to Spring Motors, Ford issued a form warranty with each truck to
repair or replace any of the following parts that are found to be defective in factory material or workmanship under normal use in the United States or Canada on the following basis: * * * any part during the first 12 months or 12,000 miles of operation, whichever is earlier * * * transmission case and all internal transmission parts (including auxiliary transmission) * * * after 12,000 miles and during the first 12 months or 50,000 miles of operation, whichever is earlier, for a charge of 50% of the dealer‘s regular warranty charge to Ford for parts and labor. * * * For series 850 and higher trucks, any part of the * * * transmission * * * for the first 12 months or 100,000 miles of operation, whichever is earlier * * *.
The warranty also stated: “To the extent allowed by law, this WARRANTY IS IN PLACE OF all other warranties, express or implied, including ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS.” Furthermore, the Ford warranty expressly stated: “Under this warranty, repair or replacement of parts is the only remedy, and loss of use of the vehicle, loss of time, inconvenience, commercial loss or consequential damages are not covered.”
The warranty that Clark extended to Ford provided: “WARRANTY. Clark Equipment Company (‘Clark‘) warrants to Buy
Spring Motors took delivery of the trucks in November 1976, and leased them to Economic Laboratories, Inc. (Economic), which used the trucks in cities and on highways for their intended purpose of hauling. Spring Motors, which serviced the trucks during the period of the lease, began experiencing problems with the performance of the Clark transmissions as early as February 1977. The problems persisted, and Spring Motors communicated directly with Clark, writing in October 1977 that it had “had nothing but trouble” with the transmissions. Later correspondence, dated January 26, 1978, confirmed that Clark analyzed the transmissions and found that “the failure in these gear boxes was a result of improper angle degree in the way certain gears were cut,” resulting “in additional strain on the actual gear and the mating gear and related shafts.” Still later, Spring Motors pointed out that the transmission failures had cost it “several thousand dollars in out of pocket expenses plus many additional thousands of dollars in lost revenues, customer ill will, replacement equipment, etc.”
Clark provided Spring Motors with replacement parts, but the transmission failures continued. On July 11, 1978, Spring Motors wrote to Clark that in the absence of a satisfactory response by August 1, it would remove and replace the Clark transmissions and “take whatever action is necessary to hold
In the complaint, which contained three counts, Spring Motors sought judgment against all defendants for consequential damages: the expenses of towing, repairs, and replacement of parts; lost profits; and decrease in market value of the trucks. The first count asserted that the defendants breached certain express and implied warranties; the second count claimed a violation of the Magnuson-Moss Act,
The trial court found that a lack of privity barred the action between Spring Motors and Clark and that the four-year period of limitations under the U.C.C.,
The Appellate Division affirmed the dismissal of the breach of warranty claim in the first count, but reversed the dismissal of the tort claims, without discussing the negligence aspect of the third count. That court concluded that Spring Motors, as a commercial buyer, could maintain its strict liability claim against all defendants. 191 N.J.Super. at 41. The court also determined that the six-year limitation period provided by
We granted petitions for certification by Ford, Turnpike, and Clark to review that part of the Appellate Division judgment that reversed the dismissal of the tort claims. Spring Motors
II
If the legal relationships among the parties are governed by the U.C.C., then plaintiff‘s action, which was instituted more than four years after the delivery of the trucks, is time-barred. Hence, one question is whether the Code provides the exclusive remedies available to Spring Motors. In answering that question, we turn to the structure and purpose of the Code, which constitutes a comprehensive system for determining the rights and duties of buyers and sellers with respect to contracts for the sale of goods. Ramirez v. Autosport, 88 N.J. 277, 285-90 (1982). Its underlying purpose is to clarify and make uniform throughout the United States the law governing commercial transactions.
The Code provides for express warranties regarding the quality of goods,
Subject to requirements of good faith, diligence, and reasonableness, parties may vary the terms of the Code.
When a seller delivers goods that are not as warranted, the buyer‘s measure of damage is the difference between the value of the defective goods and the value they would have had if they had been as warranted.
Economic loss can take the form of either direct or consequential damages. A direct economic loss includes the loss of the benefit of the bargain, i.e., the difference between the value of the product as represented and its value in its defective condition. Consequential economic loss includes such indirect losses as lost profits. J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code §§ 11-4 to 11-6 at 405-10 (2d ed. 1980) [hereinafter cited as White & Summers]; Note, “Economic Loss in Products Liability Jurisprudence,” 66 Colum.L.Rev. 917, 918 (1966); Note, “Manufacturer‘s Liability to Remote Purchasers for ‘Economic Loss’ Damages—Tort or Contract?,” 114 U.Pa.L.Rev. 539, 542 (1966). Because it presents a claim for economic loss, which is not normally recoverable in a tort action, rather than a claim for physical harm, this case probes the boundary between strict liability and the U.C.C. The delineation of that boundary requires a brief summary of the history and nature of strict liability.
One year before the adoption of the U.C.C. in New Jersey, this Court delivered its landmark opinion in Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358 (1960). Henningsen involved a defective automobile that crashed and caused property damage to the car and personal injuries to the driver, who
Prosser describes the effect of the Henningsen holding as “the most rapid and altogether spectacular overturn of an established rule in the entire history of the law of torts.” W. Prosser & W. Page Keeton, Handbook of the Law of Torts § 97 at 690 (5th ed. 1984) [hereinafter cited as Prosser & Keeton]. Courts throughout the country followed the lead of New Jersey, id., and the American Law Institute (ALI) included a new section, 402A, captioned “Special Liability of Seller of Product for Physical Harm to User or Consumer,” in the Restatement (Second) of Torts. The comment to section 402A disavows that the section is governed by the warranty provisions of the U.C.C. or by U.C.C. limitations on the scope and content of the warranties.
Underlying the Henningsen decision was the Court‘s recognition that consumers were in an unequal bargaining position with respect to automobile manufacturers and dealers, who required them to sign standard contracts. Henningsen, supra, 32 N.J. at 389-404. One of the main purposes of strict liability, as declared in Henningsen, is the allocation of the risk and distribution of the loss to the better risk-bearer. Id. at 379; Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 173 (1979). Generally, the manufacturer, who is better able to eliminate defects from its product and who can spread the cost of the risk among all of its customers, is the better risk-bearer.
The year after the Henningsen decision, 1961, the Legislature adopted the U.C.C., effective January 1, 1963. L.1961, c. 120. Then in 1965 this Court decided Santor v. A. & M. Karagheusian, Inc., 44 N.J. 52, which, like Henningsen, involved facts that occurred before the adoption of the U.C.C. In Santor, a carpet manufacturer sold a defective carpet to a consumer through its wholly-owned distributor. The Court found that the consumer could recover against the manufacturer, although there was no privity between the parties and the action was for an economic loss.
The action was couched in terms of a breach of implied warranty of merchantability, id. at 63, but the Court acknowledged that the action could be described better as one in strict liability. Id. at 63-67. In Santor, Justice Francis made clear that neither mass advertising by the manufacturer nor personal injuries to the consumer was essential to the invocation of strict liability. Id. at 65. Echoing his words in Henningsen, he stated that the purpose of a strict liability action was to shift the risk of loss so that it was borne by “the makers of the products who put them in the channels of trade, rather than by the injured or damaged persons who ordinarily are powerless to protect themselves.” Id. Like the plaintiff in Henningsen, the plaintiff in Santor was an individual consumer. Furthermore, the action was for a direct economic loss, and the Court limited recovery to the lost benefit of the bargain, i.e., “the difference between the price paid by the plaintiff and the actual market value of the defective carpeting at the time when plaintiff knew or should have known it was defective * * *.” Id. at 68-69.
Heavner concerned an action against a manufacturer for damages to a truck and personal injuries to its driver caused by a tire blowout. The action was instituted more than three years after the accident. This Court ruled that the two-year statute of limitations applicable to personal injury actions in tort,
As the preceding cases demonstrate, the U.C.C. rules pertaining to the sale of goods overlap the doctrine of strict liability for placing a defective product in the stream of commerce. One reason for the overlap is that strict liability, in this regard, evolved from implied warranties of fitness and merchantability under the U.C.C. and its predecessor, the Uniform Sales Act. Those warranties originated as a matter of social policy to compensate consumers who sustained personal injuries from defective food. Prosser & Keeton, supra, § 97 at 690. Neither the ALI, which published the Restatement (Second) of Torts, nor the permanent editorial board of the U.C.C., which operates as a joint project of the ALI and the Commissioners on Uniform State Laws, has undertaken to resolve the overlap between strict liability as declared in section 402A and the breach of warranty provisions under the U.C.C. 112 N.J.L.J. 700 (1983).
From the perspective of the injured party, strict liability generally provides a more congenial environment than contract principles, which may prevent recovery because of a lack of privity with the manufacturer. In addition to privity, the Code retains two other requirements that may pose considerable obstacles to a buyer. The first requirement is that of notice to a seller of a breach of warranty,
By comparison, the U.C.C. emphasizes the simplification of the law governing commercial transactions and the expansion of commercial practices through agreement.
The problem is ascertaining where on the spectrum to place a cause of action brought by a commercial entity, or even a consumer, for purely economic loss. One gains perspective by reviewing the decisions of this Court and those of the Supreme Court of California.
As explained earlier, this Court‘s decision in Henningsen was couched in warranty terms. In Greenman v. Yuba Power Prods., Inc., 59 Cal.2d 57, 27 Cal. Rptr. 697, 701, 377 P.2d 897, 901 (1962), which involved personal injuries sustained by a husband from a defective power saw purchased by his wife, the California court drew on Henningsen, but declared that the cause of action could be more appropriately denominated as strict liability in tort.
The cross-pollination between the two jurisdictions continued through our Santor decision, which relied on Greenman. Five months later, however, when the California court was confronted with an individual‘s claim for economic loss resulting from the purchase of a defective truck, that court rejected Santor
In Seely, an individual owner-driver purchased a truck for use in his heavy duty hauling business. From the time the purchaser took possession, the truck bounced violently, but the dealer was unable to correct the defect. Thereafter, a brake failure caused the truck to overturn. The truck sustained property damage, and Seely, who stopped making payments after the accident, sued the dealer and the manufacturer for lost profits and the money paid on the purchase price of the truck.
Chief Justice Traynor, writing for the majority of the court, affirmed a judgment for Seely. The absence of privity did not preclude judgment against the manufacturer for the breach of an express warranty that the truck was “free from defects in material and workmanship under normal use and service * * * ” Seely, supra, 63 Cal.2d at 13, 45 Cal.Rptr. at 20, 403 P.2d at 148. After reaching that result, the court rejected plaintiff‘s alternative contention of strict liability. The court ruled that in the absence of personal injuries or property damage strict liability was inapplicable. Although the truck had been damaged, the court sustained a finding of the trial court that defendant had not created the defect that caused the damage.
While rejecting plaintiff‘s right to recover in strict liability, Chief Justice Traynor observed that the law of sales has been carefully articulated to govern economic relationships between suppliers and consumers. He stated further that strict liability was not intended to undermine the warranty provisions of the U.C.C., but “to govern the distinct problem of physical injuries.” Seely, supra, 63 Cal.2d at 15, 45 Cal.Rptr. at 21, 403 P.2d at 149.
In a concurring and dissenting opinion, Justice Peters embraced Santor, and stated that an individual consumer should be allowed to recover in strict liability for economic damages
Over the intervening years, Seely has emerged as representing the majority view. See, e.g., Purvis v. Consolidated Energy Prods. Co., 674 F.2d 217, 222-23 (4th Cir.1982) (losses resulting from ineffectiveness of tobacco-curing equipment recoverable under the law of contracts rather than strict liability); Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F.2d 280, 285-90 (3d Cir.1980) (strict liability does not apply in a suit for economic loss occasioned by defects in factory roof); Iowa Elec. Light & Power Co. v. Allis-Chalmers Mfg. Co., 360 F.Supp. 25, 32 (S.D.Iowa 1973) (strict liability not available when the transaction was covered by contract negotiated between parties of equal bargaining power); Morrow v. New Moon Homes, Inc., 548 P.2d 279, 283-86 (Alaska 1976) (the U.C.C., not strict liability, applies to a suit for defects in mobile home); Arrow Leasing Corp. v. Cummins Ariz. Diesel, Inc., 136 Ariz. 444, 666 P.2d 544, 548 (1983) (products liability law was not designed to address economic losses caused by defective part in engine); Hiigel v. General Motors Corp., 190 Colo. 57, 544 P.2d 983, 989 (1975) (business losses not recoverable under strict liability); Chrysler Corp. v. Taylor, 141 Ga.App. 671, 234 S.E.2d 123, 124 (1977) (automobile purchaser must sue under warranty law, not strict liability or negligence, for loss of the benefit of the bargain); Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443, 447 (1982) (adopting strict liability for economic loss ensuing from defects in grain storage tank would eviscerate sections of
Santor, however, has attracted the support of a few jurisdictions. See Mead Corp. v. Allendale Mut. Ins. Co., 465 F.Supp. 355, 363-66 (N.D.Ohio 1979) (commercial buyer allowed to recover under strict liability in tort for direct and indirect economic losses due to defective steam turbine); Cova v. Harley Davidson Motor Co., 26 Mich.App. 602, 182 N.W.2d 800, 804 (1970) (owners of golf course may recover against manufacturer in strict liability for economic losses resulting from defects in golf carts); Iacono v. Anderson Concrete Corp., 42 Ohio St.2d 88, 326 N.E.2d 267, 269-71 (1975) (homeowner permitted to maintain an action in tort for damage to concrete driveway due to defective materials and workmanship); City of LaCrosse v. Schubert, 72 Wis.2d 38, 240 N.W.2d 124, 127 (1976) (manufacturer of defective roofing materials may be liable for loss of value of roof under strict liability in tort, and, in dicta, consequential economic damages are also recoverable).
Commentators likewise have been critical of Santor, and wary of extending strict liability to encompass claims for purely economic loss. See, e.g., White & Summers, supra, § 11-9 at 418 (in claims for economic loss, better solution than in Santor would be to hold strict liability inapplicable and apply statute of limitations under the Code); Franklin, “When Worlds Collide: Liability Theories and Disclaimers in Defective Product Cases,” 18 Stan.L.Rev. 974, 989-90 (1966) (criticizing courts as defiant or unaware of relevance of sales law to products liability law); Speidel, “Products Liability, Economic Loss and the U.C.C.,” 40 Tenn.L.Rev. 309, 316-18, 327 (1973) (social needs justify strict
In the present case, which involves an action between commercial parties, we need not reconsider the Santor rule that an ultimate consumer may recover in strict liability for direct economic loss. To determine whether a commercial buyer may recover economic loss, however, we must reconsider the policies underlying the doctrine of strict liability and those underlying the
The considerations that give rise to strict liability do not obtain between commercial parties with comparable bargaining power. Iowa Elec. Light & Power Co. v. Allis-Chalmers Mfg. Co., supra, 360 F.Supp. at 32 (stating doctrine of strict liability loses all meaning when plaintiff is a large company suing for commercial loss). Furthermore, perfect parity is not necessary to a determination that parties have substantially equal bargaining positions. Cf. Moreira Constr. Co., Inc. v. Moretrench Corp., 97 N.J.Super. 391, 394-95 (App.Div.1967), aff‘d o.b., 51 N.J. 405 (1968) (refusing to apply rule of Santor to suit between corporations even though plaintiff was a small company and defendant was the world‘s largest well point company). Suffice it to state that Spring Motors had sufficient bargaining power to persuade Ford to install Clark transmissions in the trucks that were the subject of the contract.
Insofar as risk allocation and distribution are concerned, Spring Motors is at least as well situated as the defendants to assess the impact of economic loss. Indeed, a commercial buyer, such as Spring Motors, may be better situated than the manufacturer to factor into its price the risk of economic loss caused by the purchase of a defective product. See Note, “Economic Loss in Products Liability Jurisprudence,” supra, 66 Colum.L.Rev. at 952-58.
Presumably the price paid by Spring Motors for the trucks reflected the fact that Ford was liable for repair or replacement of parts only. By seeking to impose the risk of loss on Ford, Spring Motors seeks, in effect, to obtain a better bargain than it made. In such a context, the imposition of the risk of loss on the manufacturer might lead to price increases for all of its customers, including individual consumers. Id. at
Delineation of the boundary between strict liability and the
By allowing this case to proceed under strict liability principles, the Appellate Division erred in several respects. First, it relied too heavily on Santor, which did not consider the effect of the
Second, the court misread our decision last year in H. Rosenblum, Inc. v. Adler, 93 N.J. 324 (1983), which involved the liability of a public accountant for the negligent auditing of financial statements. Underlying the Rosenblum decision was our recognition that a public accountant‘s duty of care extended beyond the audited corporation to potential investors. The decision turned on the principle of negligent misrepresentation, not on strict liability. Id. at 334-35. Consequently, the case did not implicate the policy considerations that underlie strict liability, such as imposing on a manufacturer liability for physical harm caused by defective goods. Insofar as a commercial
Plaintiff also misplaces its reliance on Monsanto Co. v. Alden Leeds, Inc., 130 N.J.Super. 245 (Law Div.1974), to support the availability of tort theories for recovery of purely economic loss in a commercial setting. In Monsanto, a corporate plaintiff sued the seller of allegedly defective chemicals for damages resulting from a fire caused by the chemicals, which had been sold to a related corporation and stored in the plaintiff‘s building. Id. at 249. One of the issues was whether strict liability in tort would apply to a commercial plaintiff in a suit for property damage and consequential economic loss. Id. at 250, 256. Monsanto is distinguishable because it involved property damage, which is recoverable under strict liability. The case of ICI Australia Ltd. v. Elliott Overseas Co., 551 F.Supp. 265 (D.N.J.1982), on which plaintiff likewise relies, also involved negligence and strict liability claims by a commercial buyer against an immediate seller for property damage caused by an accident. Id. at 268-69. ICI Australia Ltd. is distinguishable because it involved both an accident and property damage, neither of which is present in the instant case. Also distinguishable are cases involving claims for actual or potential personal injuries, claims that Spring Motors does not assert. See Kodiak Electric Ass‘n v. DeLaval Turbine, Inc., 694 P.2d 150, 153-54 (Alaska 1984) (denying summary judgment seeking dismissal of strict liability claim arising out of failure of electrical generator where there was “serious danger to persons.“).
[12] For the preceding reasons, we hold that a commercial buyer seeking damages for economic loss only should proceed under the
III
What we have said about Spring Motors’ strict liability claim applies substantially to its negligence claim. Underlying that conclusion is the principle that a seller‘s duty of care generally stops short of creating a right in a commercial buyer to recover a purely economic loss. Thus viewed, the definition of the seller‘s duty reflects a policy choice that economic losses inflicted by a seller of goods are better resolved under principles of contract law. In that context, economic interests traditionally have not been entitled to protection against mere negligence. See, e.g., Wyatt v. Cadillac Motor Car Div., 145 Cal.App.2d 423, 302 P.2d 665, 667 (1956) (no recovery in negligence against manufacturer for loss of value of automobile); Trans World Airlines, Inc. v. Curtiss-Wright Corp., 1 Misc.2d 477, 148 N.Y.S.2d 284, 290 (Sup.Ct.1955) (absent an accident, airplane purchaser may not recover in negligence against manufacturer for repair costs of malfunctioning engines); Inglis v. American Motors Corp., 3 Ohio St. 2d 132, 209 N.E.2d 583, 588 (1965) (purchaser of automobile could not recover in negligence from manufacturer for difference between purchase price and market value); Prosser & Keeton, supra, § 92 at 657; § 101 at 708 (recovery of intangible economic loss is normally determined by contract law).
The demarcation of duties arising in tort and those arising in contract is often indistinct, but one difference appears in the interest protected under each set of principles. Prosser & Keeton, supra, § 92 at 655-56. The purpose of a tort duty of care is to protect society‘s interest in freedom from harm, i.e., the duty arises from policy considerations formed without reference to any agreement between the parties. A contractual duty, by comparison, arises from society‘s interest in the performance of promises. Generally speaking, tort prin
Although the nature of the damage may be a useful point of distinction, it also signals more subtle differences in the roles that tort and contract play in our legal system. The differences include judicial evaluation of the status, relationship, and expectations of the parties; the ability of the parties to protect themselves against the risk of loss either by contractual provision or by insurance; and the manner in which the loss occurred. See Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1173 (3rd Cir.1981) (allowing recovery for damage to defective machinery resulting from fire caused by defect). This evaluation reflects, among other things, policy choices about the relative roles of contracts and tort law as sources of legal obligations. As among commercial parties in a direct chain of distribution, contract law, expressed here through the
Some courts, however, have rejected the distinction between physical harm and economic loss as arbitrary, thereby allowing recovery in tort for repair costs and lost profits. See, e.g., Berg v. General Motors Corp., 87 Wash.2d 584, 555 P.2d 818, 822-23 (1976) (purely economic loss, including lost fishing profits, recoverable in negligence against remote manufacturer of diesel engine); cf. Emerson G.M. Diesel, Inc. v. Alaskan Enterprise, 732 F.2d 1468, 1474 (9th Cir.1984) (recovery under strict liability for economic loss available in admiralty against manufacturer of diesel engine parts). Other courts have rejected the requirement of an accident as a prerequisite to recovery in negligence. See, e.g., State ex rel. Western Seed Prod. Corp. v. Campbell, 250 Or. 262, 442 P.2d 215, 218 (1968) (recovery in negligence allowed against remote supplier for crop losses caused by defective seed); see also, Nobility Homes of Texas v. Shivers, supra, 557 S.W.2d at 78, 83 (purchaser of defectively designed and constructed mobile homes may recover in negligence and for breach of implied warranties under
Nonetheless, the weight of authority supports the proposition that economic expectations that are protected by the
It follows from our determination that Spring Motors should be restricted to its
We also conclude that Spring Motors should be restricted to its
We conclude that the absence of privity between a remote supplier and an ultimate purchaser should not preclude the extension to the purchaser of the supplier‘s warranties made to the manufacturer. We reach that conclusion notwithstanding our recognition that the Code generally applies to parties in privity, Herbstman v. Eastman Kodak Co., 68 N.J. 1, 9-10 (1975); Heavner v. Uniroyal, Inc., supra, 63 N.J. at 150, and that no privity exists between Spring Motors and Clark.
More recently, strict liability in New Jersey has evolved as a means of permitting a consumer to recover for physical damage and direct economic loss against a remote seller, notwithstanding the absence of privity. Insofar as indirect economic losses arising out of a commercial transaction between business entities are concerned, we believe that the
Fundamental to our decision is the role of privity in modern business law, a role that is often described in terms of vertical and horizontal relationships. A vertical relationship describes one that exists between parties in a distributive chain, i.e., between a manufacturer, wholesaler, retailer, and ultimate buyer. A buyer within this chain that did not buy goods directly from the named defendant would be a “vertical non-privity plaintiff” as to that defendant. 2 Hawkland, supra, § 2-318:01 at 419; White & Summers, supra, § 11-2 at 399. Here, Spring Motors, which purchased the trucks from Ford, is in vertical privity with the Ford defendants, but not with Clark. Thus, Spring Motors is a vertical non-privity plaintiff as to Clark.
“Horizontal non-privity,” on the other hand, describes the relationship between the retailer and someone, other than the buyer, who has used or consumed the goods. For example, in an action against a retailer, a “horizontal non-privity plaintiff” would refer to the buyer‘s spouse or child, but not to the buyer. White & Summers, supra, § 11-2 at 399.
In drafting the
In other states, legislatures have refused to adopt Alternative A. California was the first to criticize the section as “a step backward” and to omit the section from its version of the Code. Permanent Editorial Board note, following Official Comment to section 2-318. Still other states developed variants of section 318. In 1966, to stem the proliferation of non-uniform provisions, the members of the Permanent Editorial Board of the
ALTERNATIVE B
A seller‘s warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.
ALTERNATIVE C
A seller‘s warranty whether express or implied extends to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury of the person of an individual to whom the warranty extends.
Alternatives B and C go beyond Alternative A in eroding the privity defense. Alternative C, for example, allows “any per
The Permanent Editorial Board‘s comment on Alternative C states that the section reflects “the trend of more recent decisions as indicated by Restatement of Torts 2d § 402A * * *, extending the rule beyond personal injuries.” As previously indicated, in most jurisdictions section 402A precludes claims for economic loss. In New Jersey, however, a consumer may recover direct economic loss in a strict liability action against a remote supplier. Santor v. A & M Karagheusian, Inc., supra, 44 N.J. 52. Because the Code provides the more appropriate framework for resolving disputes between commercial entities, we eschew permitting recovery by a business entity for economic loss under principles of strict liability. Nonetheless, it is consistent with the principles underlying Santor and with the intent of the Code‘s drafters to recognize a claim under the
Furthermore, a plaintiff in a suit for breach of warranty against a remote seller, like a plaintiff in a strict liability action, need not establish privity with or negligence by the defendant. To this extent, our recognition of a warranty action for economic loss by a commercial buyer parallels our recognition in Santor of a similar claim by a consumer. One significant difference, of course, is that the plaintiff in a warranty action need not establish the existence of a defect; the failure of the goods to perform as warranted is sufficient. By bringing the action within the ambit of the Code, we believe we come closer to fulfilling the expectations of the parties and the
Our conclusion also is consistent with the proposition that the Code drafters have left it to the courts to determine whether vertical privity should be required in a warranty action between a seller and a remote buyer. See, e.g., Omaha Pollution Control Corp. v. Carver-Greenfield, 413 F.Supp. 1069, 1088-90 (D.Neb.1976) (the Code did not intend to set any limits regarding vertical privity); Autrey v. Chemtrust Industries Corp., 362 F.Supp. 1085, 1092 (D.Del.1973) (section 318 has no effect on Florida‘s developing case law when a nonconsumer seeks to recover economic loss damages from a remote manufacturer on breach of warranty); Morrow v. New Moon Homes, Inc., supra, 548 P.2d at 287-88 (the Code leaves to the courts the extent to which vertical privity will be required); J.G. Kassab v. Central Soya, 432 Pa. 217, 246 A.2d 848, 856 (1968) (nothing prevents judicial abolition of vertical privity in breach of warranty actions for property damage); Nobility Homes of Texas, Inc. v. Shivers, supra, 557 S.W.2d at 81 (vertical privity is not a requirement for a consumer to recover economic losses in a
Eliminating the requirement of vertical privity is particularly appropriate in the present action where Spring Motors read advertisements published by Clark, specifically requested Clark transmissions, expected the transmissions to be incorporated into trucks to be manufactured by Ford, contracted with Ford only, and now seeks to recover its economic loss. Given the nature of the transaction and the expectations of the parties, the absence of a direct contractual relationship should not preclude Spring Motors from asserting a cause of action for breach of express warranty against Clark. Because the Code, not principles of tort law, governs the relationship
Our recognition of a warranty extending from Clark to Spring Motors should be compared with our recognition in Aronsohn v. Mandara, 98 N.J. 92 (1984), of an implied covenant running from a building contractor to a subsequent homeowner. By predicating the Aronsohn opinion on an implied contractual provision that the subject of the building contract, a patio, would be constructed in a good and workmanlike manner, we found it unnecessary to determine whether the homeowner could recover in negligence against the builder. In suits relating to home improvements, Aronsohn focuses attention on the original contract to determine the scope of the duty owed by the building contractor. In the present case, involving a commercial setting for the sale of goods, we likewise focus on the parties’ expectations and contractual arrangements to determine a remote buyer‘s right to recover for economic loss. From that perspective, the buyer‘s right is most appropriately appraised under the
Because any action by Spring Motors against Clark is time-barred, we need not determine the outer limits of a suit by an ultimate purchaser against a remote supplier for economic loss. Therefore, we reserve determination on the effectiveness of a remote manufacturer‘s disclaimer or limitation on express and implied warranties to an ultimate purchaser that did not have the opportunity to negotiate over the terms of the agreement.
Accordingly, we reverse the judgment of the Appellate Division and reinstate the dismissal of the complaint as to all defendants.
HANDLER, J., concurring.
In this case the Court rules that common-law causes of action sounding in strict products liability and negligence against the supplier of a product are no longer available to “commercial buyers” who incur economic loss attributable to a defective condition in the product. The Court holds specifically that such a buyer may recover economic damages from a “remote supplier in a distributive chain” only for breach of warranty under the Uniform Commercial Code (
I agree with the Court that under the particular circumstances of this case, resort to the Uniform Commercial Code is appropriate. Spring Motors Distributors, Inc. (Spring Motors) is a commercial entity engaged in the business of leasing
Almost immediately, Spring Motors and its lessees began experiencing problems with the Clark transmissions. After several unsuccessful attempts to repair the transmissions, Spring Motors initiated this suit. The claims, based on breach of warranty, negligence, and strict liability, were filed four years and one month after delivery of the trucks, beyond the statute of limitations prescribed by the
The Court characterizes Clark as a “remote supplier,” one not standing in direct privity with Spring Motors. The absence of privity in its traditional sense would generally constitute an insurmountable obstacle to recovery of losses for breach of contract. But cf. Aronsohn v. Mandara, 98 N.J. 92 (1984) (finding an implied assignment of home-improvement contract in absence of direct privity and allowing suit for breach of implied warranty against contractor by successor homeowner who was not a party to original contract). Thus, in this case, in finding under the
I do not denigrate the jurisprudential significance of the elimination of direct privity as a basis for an action under the
I mention the possibly attenuated privity aspect of this case to emphasize that the result that is reached by the Court can be justified by more than a disenchantment with the privity doctrine in its rigid traditional form. The regular commercial context in which the transaction took place, the relative contractual closeness of the parties, their course of dealings with one another, their business experience, and their apparent compara
It is also important to emphasize that the selection by the Court of a particular remedy does not turn on a label. It would not be correct to consider the
In Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965), Justice Peters disagreed with the majority‘s conclusion that strict liability should never apply to a claim against a remote seller for damages of an economic nature. He would have allowed such a claim when the plaintiff is an “ordinary consumer.” In Seely, plaintiff had bought a truck for use in his business of heavy-duty hauling. But it was the only truck he owned; he was “not a fleet-owner who bought
Justice Peters’ reasoning in Seely is parallel to that reflected in the Court‘s opinion in this case. The reasons we give as justification for limiting commercial purchasers to their
In its determination of the available causes of action and remedies for economic loss attributable to a defective product, a court should consider not only that the transaction or the purchase is “commercial” but that the parties, among other things, are commercially experienced and have comparatively equal bargaining power in dealing with one another with respect to the underlying transaction. In considering the good sense and fairness in using the
The significance of comparable bargaining power is also underscored by the nature of warranty remedies that may be available under the
While a suit for breach of warranty is still theoretically available against the immediate supplier based on whatever warranties were included in the agreement, the enforcement of implied warranty exclusions may effectively deny an aggrieved
There may also be special problems that occur with respect to implied warranties of fitness for a particular purpose. Under
Another consideration in determining what avenues of relief are open to parties for loss occasioned by defective products is risk allocation. In further support of an exclusive
If the nature of the transaction implicates genuine concerns for the purchaser‘s contractual ability to protect itself, resort to the
This analysis, I would emphasize, is not inconsistent with the Court‘s opinion, which focuses on the reasons in this case for applying the
We have recognized in an appropriate context the propriety of recovery by a purchaser-consumer based on strict products liability for economic losses attributable to a defective product. Santor v. Karaghesian, 44 N.J. 52 (1965). The Court‘s opinion in this case suggests an acceptable narrowing of the breadth of our holding in Santor. It does not, however, serve to displace
For these reasons, I concur in the opinion of the Court.
HANDLER, J., concurring in the result.
For reversal—Chief Justice WILENTZ and Justices CLIFFORD, HANDLER, POLLOCK, O‘HERN and GARIBALDI—6.
For affirmance—None.