Collins Co., Ltd. v. Carboline Co.

• Decision Date: 15 December 1988
• Docket Number: No. 66469,66469
• Citation: Collins Co., Ltd. v. Carboline Co., 125 Ill.2d 498, 532 N.E.2d 834, 127 Ill.Dec. 5 (Ill. 1988)
• Parties: , 127 Ill.Dec. 5, 7 UCC Rep.Serv.2d 616, Prod.Liab.Rep. (CCH) P 12,019 COLLINS COMPANY, LTD. v. CARBOLINE COMPANY et al.
• Court: Illinois Supreme Court

Page 834

532 N.E.2d 834

125 Ill.2d 498, 127 Ill.Dec. 5, 7 UCC

Rep.Serv.2d 616,

Prod.Liab.Rep. (CCH) P 12,019

COLLINS COMPANY, LTD. v. CARBOLINE COMPANY et al.

No. 66469.

Supreme Court of Illinois.

Dec. 15, 1988.

James A. Clark and Mark E. Gralen, of Schiff, Hardin & Waite, Chicago, for Collins Co., Ltd.

Robert J. Kopka, of Landau, Omahana & Kopka, Ltd., Chicago, for Carboline Co.

Justice STAMOS delivered the opinion of the court:

This cause is before us on a question of Illinois law certified by the United States Court of Appeals for the Seventh Circuit. The certified question is:

"In the absence of original contractual privity, does an express warranty extend to an assignee's right to sue for purely economic loss and consequential damages?"

For the reasons that follow and with the qualifications noted, we answer the question in the affirmative. FACTS

For purposes of our decision, the well-pleaded facts alleged in the underlying complaint will be taken as true, in the same way as they were taken by the district court when entering its order in the cause prior to appeal. Collins Co. v. Carboline Co. (N.D.Ill. Feb. 10, 1987), No. 87-C-1572 (order for judgment on the pleadings) (Norgle, J.).

In March 1981, Chicago Title and Trust Company, as trustee (Chicago Title), and Wachovia Bank and Trust Company, N.A. (Wachovia), owned a warehouse in Elk Grove Village, Illinois. The owners contracted with Flexible Roof Contractors, a wholly owned division of Pureco Systems, Inc. (Pureco), to replace the roofing system at the warehouse. The roofing system was to be replaced with one manufactured by Carboline Company (Carboline).

In manufacturing and supplying the system, Carboline issued an express written warranty, warranting the installed system against leakage for 10 years from the date of completing the installation, which was stated in the warranty as March 17, 1981. The warranty also stated that final inspection of the installation by Carboline occurred on March 19, 1981, and that the warranty would be effective only upon Carboline's inspection and acceptance of the installation. The warranty copy attached to the complaint does not appear to bear a signature in behalf of Carboline, but in its answer Carboline admitted that it issued "to Wachovia Bank & Trust Co., N.A." a warranty as exemplified by the copy and that the warranty "speaks for itself."

The warranty contained numerous terms, limitations, and conditions and disclaimed any warranty of merchantability or of fitness for a particular purpose. It provided that Carboline's sole warranty obligation should be to repair roofing leaks caused by defects in the roofing material or by the roofing applicator's workmanship and that Carboline's financial liability for the repairs should not exceed "the owner's original cost" of the installed system.

The warranty also purported to relieve Carboline of liability for personal injury, damage to other parts of the warehouse or its contents, and consequential or incidental damages in contract or tort, including negligence. However, along with this ostensibly broad exculpation of Carboline, another and perhaps more limited term excluded coverage for failure of the roofing system because of vandalism, negligence, accidents, or attacks "by parties other than Carboline or the roofing applicator" (emphasis added). The combined effect of these possibly contradictory clauses on Collins' claim for consequential damages is not part of the question before us. That question and the appellate opinion that poses it are framed only in terms of whether the assignee of any warranty ("an assignee") could have sufficient privity to sue for purely economic loss and consequential damages. See Collins Co. v. Carboline Co. (7th Cir.1988), 837 F.2d 299, 303 ("whether * * * an express warranty extends to a contractual assignee the original party's right to sue for purely economic loss and consequential damages").

The warranty did not specifically identify the warrantee. In a blank labeled "Project Name and Location," the following legend was inserted: "Jarvis Ave. Job--1441 Jarvis Ave. Elk Grove Village, IL." On a second, unlabeled blank line immediately below was inserted "Chicago Title & Trust Co., Ancillary Trustee/Trust Agreement # 09-64234." On a third blank line labeled "Owner" and appearing immediately below the second line, the name "Wachovia Bank & Trust Co., N.A." was inserted. As completed, the warranty form did not make clear whether the Chicago Title designation was meant to denote an additional "owner" or simply to further identify the "project name and location"; however, at the end of the form, in a blank labeled "OWNER ACCEPTANCE," the words "CT & T CO., as Trustee aforesaid" were inserted, followed by a signature and the designation "Vice President" under date of June 1, 1981. A warranty term provided that Carboline would not be liable under the warranty until "the owner" had accepted the roofing contractor's installation by signing the warranty form. Nowhere did the warranty state that it extended or was limited to the "owner," whoever or of whatever that might be. In fact, one term provided merely that the warranty should be void if reasonable care were not used "by the party occupying the building" in maintaining the roof.

It is also noteworthy that, despite the large number of terms and conditions expressed by the warranty form, no term forbade assignment of rights or obligations by any party.

In June 1984, Collins Company, Ltd. (Collins), acquired the warehouse building from Chicago Title and Wachovia. Beginning in or about May 1985, leaks developed in the roofing system, which have caused Collins to incur expense for temporary repairs, will require a complete replacement of the roofing system in the near future, and have interfered with the conduct of Collins' business. In 1986, Chicago Title and Wachovia assigned to Collins their rights under the warranty and any claims or rights they had against Pureco. The assignment was given in exchange for a covenant not to sue.

On March 6, 1986, Collins filed its three-count diversity complaint in the United States District Court for the Northern District of Illinois, Eastern Division, naming as defendants Carboline, Pureco, and David G. Dearlove. Dearlove, an architect, had been retained on behalf of Collins to inspect the warehouse building during negotiations for its acquisition.

In count I, Collins claimed $500,000 in damages from Carboline for breach of warranty. In that count, Collins asserted that the roofing system was defectively manufactured and installed and that Carboline was obliged under the warranty to replace the system and pay for any damages caused by leakage. Collins also asserted that it had relied on the warranty in deciding to purchase the building and that it had exercised due care in maintaining the roof. In the other two counts against Pureco and Dearlove respectively, Collins sought damages for negligent installation and for negligent inspection and misrepresentation.

As affirmative defenses, Carboline asserted that the warranty was not assignable and therefore denied that Chicago Title and Wachovia had made an assignment to Collins. Carboline also asserted that the warranty was not issued to Collins. In addition, Carboline asserted that Collins' damages against it, if any, were limited by the warranty terms and that the latter barred Collins' claim. Finally, Carboline asserted that the roof leaks and other damage claimed were caused not by a roofing system defect but by sources beyond Carboline's control for which Carboline has no liability.

On October 30, 1986, Carboline filed its motion and supporting memorandum for judgment on the pleadings as to count I. After responsive memoranda were filed, the district court entered an order on February 10, 1987, finding that the warranty covered goods within the scope of the Uniform Commercial Code (UCC) as adopted in Illinois (Ill.Rev.Stat.1979, ch. 26, par. 2-105).

The district court noted that the Illinois legislature's failure to adopt a more expansive version of UCC section 2-318 (Ill.Rev.Stat.1979, ch. 26, par. 2-318), regarding a warrantor's liability to third parties in horizontal privity, has been held to signify an intention to consider none but the classes of third parties specifically enumerated in the section as being in horizontal privity for purposes of breach-of-warranty actions. (E.g., Miller v. Sears, Roebuck & Co. (1986), 148 Ill.App.3d 1022, 1025, 102 Ill.Dec. 664, 500 N.E.2d 557; contra Whitaker v. Lian Feng Machine Co. (1987), 156 Ill.App.3d 316, 320, 108 Ill.Dec. 895, 509 N.E.2d 591 ("overruling" Miller and decided after the district court's decision).) The district court also noted cases that have held privity of contract to be generally a necessary element in Illinois for a warranty action alleging only economic loss as opposed to personal injury. Spiegel v. Sharp Electronics Corp. (1984), 125 Ill.App.3d 897, 899-900, 81 Ill.Dec. 238, 466 N.E.2d 1040; Crest Container Corp. v. R.H. Bishop Co. (1982), 111 Ill.App.3d 1068, 1076, 67 Ill.Dec. 727, 445 N.E.2d 19; R & L Grain Co. v. Chicago Eastern Corp. (N.D.Ill.1981), 531 F.Supp. 201, 208; accord Bagel v. American Honda Motor Co. (1985), 132 Ill.App.3d 82, 88, 87 Ill.Dec. 453, 477 N.E.2d 54.

The district court then discussed our decision in Szajna v. General Motors Corp. (1986), 115 Ill.2d 294, 104 Ill.Dec. 898, 503 N.E.2d 760, and concluded that because we declined in Szajna to abolish the vertical privity requirement in economic-loss actions for breach of implied warranties, we would decline to abolish the requirement in such actions under express warranties as well, "unless there are significant distinctions between express warranties and implied warranties." Despite Collins' arguments based on the law of assignments and an Oregon decision extending express warranties to remote purchasers if warranty terms did...