Chemtrol Adhesives, Inc. v. American Mfrs. Mut. Ins. Co.

• Citation: 42 Ohio St.3d 40,537 N.E.2d 624
• Decision Date: 19 April 1989
• Docket Number: No. 87-1979,87-1979
• Parties: , 9 UCC Rep.Serv.2d 88, Prod.Liab.Rep. (CCH) P 12,112 CHEMTROL ADHESIVES, INC. v. AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY et al.; Lexington Insurance Company, Appellant; Midland-Ross Corporation, Ross Air Systems Division, Appellee.
• Court: United States State Supreme Court of Ohio

Page 40

42 Ohio St.3d 40

537 N.E.2d 624, 9 UCC Rep.Serv.2d 88,

Prod.Liab.Rep. (CCH) P 12,112

CHEMTROL ADHESIVES, INC. v. AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY et al. Lexington Insurance Company, Appellant Midland-Ross Corporation, Ross Air Systems Division, Appellee.

No. 87-1979.

Supreme Court of Ohio.

Submitted Jan. 11, 1989.

Decided April 19, 1989.

Syllabus by the Court

1. An insurer-subrogee cannot succeed to or acquire any right or remedy not possessed by its insured-subrogor.

2. A commercial buyer seeking recovery from the seller for economic losses resulting from damage to the defective product itself may maintain a contract action for breach of warranty under the Uniform

Commercial Code; however, in the absence of injury to persons or damage to other property, the commercial buyer may not recover for economic losses premised on tort theories of strict liability or negligence.

This appeal arises from the sale of an "arch dryer" system by appellee Midland-Ross Corporation ("Midland-Ross") to Chemtrol Adhesives, Inc. ("Chemtrol").

Chemtrol is engaged in the business of manufacturing and selling pressure-sensitive labeling stock. As part of the manufacturing process, the paper used to make the labels is coated with silicone. An arch dryer is used to evaporate excess moisture from the silicone/solvent mixture. At some point, an explosion occurred in Chemtrol's arch dryer system, and Chemtrol engaged Midland-Ross to design and build a new arch dryer. Following negotiations aimed at safety, efficiency, and cost reduction, the parties agreed to a system which included a "heat recovery system" designed to "transfer the waste heat from the exhaust system indirectly to the incoming make-up air" thereby decreasing fuel requirements. While this heat recovery system was originally to be a "Q" dot system, a Supertherm, hot-water based system, which involved water-filled heat exchanger coils, was substituted by agreement.

The Midland-Ross system was installed and placed into service in May 1980. In December of that year, the feeding device in the paper-coating machine malfunctioned causing the system, including the furnace heating the system, to automatically shut down. However, the system's air-intake fan was not designed to shut off automatically, and it continued to draw cold outside air across the hot-water coils. The fan's operation while the furnace was down eventually caused the water in the heat exchange coils to freeze, rupturing the coils. Chemtrol engaged Jacco Service, Inc. ("Jacco") to repair the coils. According to appellant, Midland-Ross was advised of the problem and sent representatives to investigate the system. Apparently, following a second freezing of the coils and further repairs by Jacco, the system was returned to operational status in June 1981, but not before Chemtrol had suffered substantial loss.

Chemtrol was insured by American Manufacturers Mutual Insurance Company ("American") and appellant Lexington Insurance Company ("Lexington"). In December 1981, Chemtrol brought the instant breach of contract action against American and Lexington, alleging wrongful refusal to provide insurance benefits for the losses incurred. Lexington filed third-party claims against Midland-Ross, Noe & Bryer (apparently the manufacturer of the attendant "solvent recovery system"), and Jacco. American filed a separate action for indemnification against Midland-Ross, and this action was subsequently consolidated with Lexington's third-party action against Midland-Ross.

The claims against Midland-Ross were based on theories of negligence, strict liability, breach of express and implied warranties, and breach of contract. Midland-Ross moved for summary judgment against Lexington and American, and the trial court sustained Midland-Ross' motion as to all theories. Both Lexington and American appealed. The court of appeals affirmed, and Lexington filed a timely appeal with this court.

The cause is now before this court upon the allowance of a motion to certify the record.

Arter & Hadden, Anthony J. Damelio, Jr., Cleveland, Denenberg, Tuffley, Bocan, Jameson, Black, Hopkins & Ewald, P.C., William G. Jamieson, George F. Curran III and Dana L. Ramsay, Southfield, Mich., for appellant.

Thompson, Hine & Flory, Daniel W. Hammer, Jeffrey R. Appelbaum and Thomas L. McGinnis, Cleveland, for appellee.

WRIGHT, Justice.

Several issues are presented herein for review. The first is whether the subrogee of a commercial consumer may maintain an action keyed to negligence and strict liability theories for solely economic damages. The second is whether the trial court was correct in entering summary judgment against Lexington in its breach of warranty action against Midland-Ross on the grounds that Midland-Ross did not receive timely and adequate notice of its alleged breach of contract. Finally, we must determine whether to give effect to the limitation-of-damages provisions contained in the contract at issue. For the reasons set forth below, the judgment of the court of appeals is affirmed in part and reversed in part.

I

Few matters in the development of products liability law have generated more judicial inquiry and scholarly comment than the ever-uncertain boundary between tort and contract. On the one hand, our system is guided by the equitable policy of tort law that injured consumers should be entitled to recover from those who manufacture and distribute a defective product. ¹ On the other hand, fundamental principles of contract law teach us that parties to a commercial transaction should remain free to govern their own affairs. ² Here we are faced with a situation where both tort and contract principles are invoked.

Appellant Lexington argues that in seeking indemnification from Midland-Ross it is not limited to an action on the Chemtrol/Midland-Ross contract. In its third-party complaint against Midland-Ross, Lexington asserted tort claims sounding in negligence, breach of express and implied warranties, and strict liability. The trial court held that these counts of the third-party complaint "must fail as the Ohio Uniform Commercial Code governs the rights and liabilities of the parties where the transaction involved was a commercial transaction and the parties were in privity of contract." The court of appeals agreed, concluding as to this issue: "Since the trial court found that the parties were large corporations in privity of contract who negotiated from equal bargaining positions, * * * [Lexington's] rights were limited to the contract provisions and the UCC."

Lexington sued Midland-Ross for "all damages recovered by * * * [Chemtrol] against Lexington * * *." As Chemtrol's insurer and subrogee, Lexington succeeds to all rights and the benefit of all remedies available to Chemtrol. State v. Jones (1980), 61 Ohio St.2d 99, 100-101, 15 O.O.3d 132, 133, 399 N.E.2d 1215, 1216-1217. However, an insurer-subrogee cannot succeed to or acquire any right or remedy not possessed by its insured. Aetna Cas. & Sur. Co. v. Hensgen (1970), 22 Ohio St.2d 83, 91, 51 O.O.2d 106, 111, 258 N.E.2d 237, 242-243. Accordingly, since Lexington's remedies are limited to those possessed by Chemtrol, our inquiry must focus on the damages claimed by Chemtrol and whether Chemtrol itself would be able to recover from Midland-Ross for same.

Chemtrol's complaint against Lexington and American alleged "damage to property insured by * * * [Lexington and American] with resultant expenses and business interruption losses continuing until June 30, 1981 * * *."

Chemtrol itemized its claim of $225,407.43 in damages as follows:

"1. $33,005.00 for additional energy costs.

"2. $18,119.97 for the extra expense incurred by Chemtrol for the purchase of outside silicone coated paper while the line was down and being repaired.

"3. $186,944.30 of solvent which had to be purchased during the time the heat exchangers were down.

"4. $1,710.00--The difference in valuation of 9500 gallons of solvent inventory.

"5. $15,628.16--Invoices for initial repair and final replacement for Jacco, Hudson, Ohio as well as some minor amounts for clean-up supplies, labor and items of that nature."

The Chemtrol/Midland-Ross contract contained a one-year limited warranty and a limitation of Midland-Ross' potential liability as follows:

"WARRANTY

"Except as hereinafter in this section set forth, all equipment sold by Seller is warranted for a period of one year from the date of shipment to the Purchaser to be free from latent defects in material and workmanship disclosed under normal use and service. If the Purchaser within this period notifies Seller in writing of any claimed defect in any equipment delivered by Seller and such equipment is found by Seller, after appropriate tests and inspection by Seller, not to be in conformity with this warranty, Seller will at its option and expense either repair the same or provide a replacement therefor, F.O.B. Seller's shipping point. THE WARRANTY STATED HEREIN IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, OF MERCHANTABILITY OR FITNESS FOR PARTICULAR USE.

"LIABILITY LIMITATION

"In the event of a breach or repudiation of this contract on any of the provisions by the Seller, Purchaser shall not be entitled to recover incidental or consequential damages including those arising upon breach of IMPLIED WARRANTY OF MERCHANTABILITY or any losses, costs, expenses, liabilities and damages (including, but without limitation to, loss of use or profits, damages to property, all liabilities of the Purchaser to its customers or third persons, and all other special or consequential damages) whether direct or indirect, and whether or not resulting from, or contributed to by the default or negligence of Seller, its agents, employees, or subcontractors, which might be claimed as the result of the use or failure of the equipment delivered. Nor shall the Purchaser be entitled to recover any costs for materials...