Central Washington Refrigeration, Inc. v. Barbee

Decision Date13 November 1997
Docket NumberNo. 64431-4,64431-4
Citation133 Wn.2d 509,946 P.2d 760
CourtWashington Supreme Court
Parties, 34 UCC Rep.Serv.2d 273 CENTRAL WASHINGTON REFRIGERATION, INC., a subsidiary of Central Heating & Plumbing, Inc., Petitioner, v. Les BARBEE d/b/a/ Barbee Orchards, Defendant, McCormack Engineering, a Washington corporation, Respondent.

Halverson & Applegate, James Berg, Yakima, Larson & Perkins, James A. Perkins, Yakima, for petitioner.

Lane, Powell, Spears & Luberski, Michael Runyan, Charles Huber, Michael King, Seattle, for respondent.

SANDERS, Justice.

We are asked whether a buyer of goods may bring an indemnity action against the seller for liability incurred to a third party for a defect in the goods, and, if so, when the statute of limitations begins to run. We hold a buyer may maintain such indemnity action and that the statute of limitations begins to run when the buyer pays damages to the third party or the third party obtains judgment against the buyer, whichever is first in time.

In 1987 petitioner Central Washington Refrigeration, Inc. (Central) contracted with a Yakima orchard to install a set of cold storage rooms to store apples and other fruit. Central in turn contracted with respondent McCormack Engineering (McCormack) to purchase the refrigeration coils which Central was to install. Pursuant to the sales agreement McCormack specially manufactured the coils according to Central's specifications and timely delivered them in August 1987 at which time Central installed the coils in the cold storage rooms.

From the start, however, the orchard experienced problems with the cold storage rooms. After several repair attempts and an intervening bankruptcy by the orchard the orchard defaulted on payments for the cold storage rooms and Central subsequently sued for payment. In March 1989 the orchard counterclaimed for damages asserting Central misdesigned the cold storage system, used poor workmanship in building it, installed improper components, and failed to repair the system.

On May 22, 1992--over four-and-a-half years after McCormack delivered the coils--Central filed a third-party complaint against McCormack alleging the coils were defective and caused all the problems, seeking contribution and/or indemnity from McCormack for any damages due the orchard from Central.

In response McCormack sought summary judgment of dismissal arguing (1) to the extent Central claimed in tort for contribution it was precluded by the tort reform act and (2) to the extent Central claimed against McCormack for breach of contract it was barred by the Uniform Commercial Code (U.C.C.) four-year statute of limitations. RCW 62A.2-725. The trial court dismissed McCormack on summary judgment. Shortly thereafter Central settled with the orchard by paying it $220,000.

Central appealed the summary judgment. The Court of Appeals affirmed reasoning (1) to the extent Central's claim against McCormack was for tort liability, McCormack could not be liable to Central under RCW 4.22.040 as Central could not be lawfully held jointly and severally liable to the orchard along with McCormack; 1 and (2) to the extent Central's claim was either contractual or for indemnity, it was barred by the four-year U.C.C. statute of limitations governing contracts. Central Washington Refrigeration, Inc. v. Barbee, 81 Wash.App. 212, 220, 223-24, 913 P.2d 836 (1996). We granted review to determine whether a buyer may maintain an indemnity action against the seller based on breach of warranty, and, if so, when the applicable statute of limitations commences to run. Central Washington Refrigeration, Inc. v. Barbee, 130 Wash.2d 1016, 928 P.2d 414 (1996).

Indemnity in its most basic sense means reimbursement (Black's Law Dictionary 769 (6th ed.1990)) and may lie when one party discharges a liability which another should rightfully have assumed. Stevens v. Security Pac. Mortgage Corp., 53 Wash.App. 507, 517, 768 P.2d 1007, review denied, 112 Wash.2d 1023 (1989) ("Indemnity requires full reimbursement and transfers liability from the one who has been compelled to pay damages to another who should bear the entire loss."). 2

While indemnity sounds in contract and tort 3 it is a separate equitable cause of action. The variety of indemnity relevant to this case is implied contractual indemnity, also referenced to as "implied in fact" indemnity. Such arises when one party incurs a liability the other party should discharge by virtue of the nature of the relationship between the two parties. Stevens, 53 Wash.App. at 517, 768 P.2d 1007; Olch v. Pacific Press & Shear Co., 19 Wash.App. 89, 93-97, 573 P.2d 1355, review denied, 90 Wash.2d 1017 (1978); Peoples' Democratic Republic of Yemen v. Goodpasture, Inc., 782 F.2d 346, 350 (2d Cir.1986). The nature of the relationship between the parties gives rise to the right of implied indemnity. 4 Ryan Stevedoring Co. v. Pan-Atlantic S.S. Corp., 350 U.S. 124, 76 S.Ct. 232, 100 L.Ed. 133 (1956), superseded by statute as stated in Ducrepont v. Baton Rouge Marine Enters., Inc., 666 F.Supp. 882 (1987). The question here is whether the contractual relationship between buyer and seller under the U.C.C. is sufficient to give rise to an implied right of indemnity when a defect in the good causes damage to a third party user and such defect constitutes breach of seller's warranties.

A minority of courts addressing the issue under comparable facts has found the contractual relationship between buyer and seller under the U.C.C. insufficient to give rise to an indemnity action. See, e.g., Perry v. Pioneer Wholesale Supply Co., 681 P.2d 214, 219 (Utah 1984). Jurisdictions following this minority rule are Utah, Idaho, and South Dakota. 5 The minority rule would view Central's claim as nothing more than a claim for damages under a sales contract between merchants for breach of implied warranties 6 resulting in consequential damages 7 owed to a third party. 8 Use of the label "indemnity" would not alter the perception that the action still sounds in contract. The claim would be governed in whole by the U.C.C. Under the U.C.C. actions for breach of contract must be commenced within four years of date of delivery of goods regardless of when the buyer discovers the defect. 9 Because Central failed to bring its claim against McCormack within four years of delivery, its suit would be time-barred under the minority rule. The Court of Appeals chose to follow the minority rule.

Central, however, argues the minority rule errs in failing to recognize an indemnity claim here. We agree. Central points to the majority of courts addressing the issue which have ruled the contractual relationship between buyer and seller under the U.C.C. is a sufficient relationship to give rise to an implied right of indemnity. 10 Jurisdictions following the majority rule include California, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New York, North Carolina, Pennsylvania, and Virginia. 11

A clear statement of the majority rule appears in Bellevue South Assocs. v. HRH Constr. Corp., 78 N.Y.2d 282, 579 N.E.2d 195, 574 N.Y.S.2d 165 (1991). In Bellevue a subcontractor installed defective floor tiles in an apartment complex and was sued by the apartment complex owner. The subcontractor eventually sued the tile manufacturer for indemnity, seeking to shift the entire liability, alleging the manufacturer breached the implied warranties. The manufacturer argued the suit was nothing more than one on the contract and thus the U.C.C. four-year statute of limitations must govern to bar the suit. The New York high court rejected the manufacturer's argument, concluding the contractual relationship and the U.C.C.'s implied warranties provided "the requisite basis for an indemnification claim." Id., 574 N.Y.S.2d at 171, 579 N.E.2d at 201.

We adopt the majority rule and hold a contractual relationship under the U.C.C., with its implied warranties, provides sufficient basis for an implied indemnity claim when the buyer incurs liability to a third party as a result of a defect in the goods which would constitute a breach of the seller's implied or express warranties. In so holding we acknowledge "[t]here is a substantial difference between an instance where a product simply fails as opposed to a situation where the product fails and causes damage to a third party." Carrier Corp. v. Detrex Corp., 4 Cal.App.4th 1522, 6 Cal.Rptr.2d 565, 569 (1992). We also understand our decision to join the majority camp comports with the equitable principles underlying indemnity. 12

The remaining question is when the statute of limitations commences to run on the indemnity claim. Indemnity actions are distinct, separate causes of action from the underlying wrong and are governed by separate statutes of limitations. 13 It is settled law that indemnity actions accrue when the party seeking indemnity pays or is legally adjudged obligated to pay damages to a third party. The statute of limitations on the indemnity action therefore begins to run at that point. Smith v. Jackson, 106 Wash.2d 298, 302, 721 P.2d 508 (1986); Earley v. Rooney, 49 Wash.2d 222, 228, 299 P.2d 209 (1956); Hanscome v. Perry, 75 Md.App. 605, 542 A.2d 421, 425 (1988); 42 C.J.S. Indemnity § 44, at 137. 14 These settled principles apply with equal force to the present case.

Thus, the statute of limitations on Central's alleged indemnity claim began to run when Central paid the orchard to settle the orchard's claims. Because Central brought suit at the same time it settled, we hold its indemnity action is not time barred. 15 Central's indemnification suit must be determined on its merits. 16 The Court of Appeals is reversed, the case is remanded for trial and Central shall recover its costs on appeal.

DURHAM, C.J., and DOLLIVER, SMITH, MADSEN and ALEXANDER, JJ., concur.

GUY, Justice (dissenting).

Article 2 of the Uniform Commercial Code (U.C.C.) establishes one...

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