Downriver Internists v. Harris Corp., s. 89-1807

• Decision Date: 11 April 1991
• Docket Number: Nos. 89-1807,89-1808,s. 89-1807
• Citation: 929 F.2d 1147
• Parties: 14 UCC Rep.Serv.2d 446 DOWNRIVER INTERNISTS, formerly known as West Outer Drive Medical Center, a Michigan co-partnership, Plaintiff-Appellant, Cross-Appellee, v. HARRIS CORPORATION, a Delaware corporation, Defendant-Appellee, Compucare, Inc., a division of Travenol Laboratories, Inc., a Virginia corporation; Travenol Laboratories, Inc., Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1147

929 F.2d 1147

14 UCC Rep.Serv.2d 446

DOWNRIVER INTERNISTS, formerly known as West Outer Drive Medical Center, a Michigan co-partnership Plaintiff-Appellant, Cross-Appellee, v. HARRIS CORPORATION, a Delaware corporation, Defendant-Appellee Compucare, Inc., a division of Travenol Laboratories, Inc. a Virginia corporation; Travenol Laboratories Inc., Defendants-Appellees, Cross-Appellants.

Nos. 89-1807, 89-1808.

United States Court of Appeals, Sixth Circuit.

Argued March 14, 1991.

Decided April 11, 1991.

Dennis A. Dettmer (argued), Detroit, Mich., for Downriver Internists.

Donald S. Young (argued), and Terrance E. Haggerty, Dykema, Gossett, Spencer, Goodnow & Trigg, Detroit, Mich., for Harris Corp.

Stuart Smith (argued), Gordon & Glickson, Chicago, Ill. and John A. Stevens, Troy, Mich., for Compucare, Inc. and Travenol Laboratories, Inc.

Before MARTIN and MILBURN, Circuit Judges, and ENGEL, Senior Circuit Judge.

ENGEL, Senior Circuit Judge.

This diversity case, originating in the United States District Court for the Eastern District of Michigan, concerns a dispute over a contract for computer hardware and software. Suit for breach of that contract was brought by the purchaser of the equipment against the manufacturers of the hardware and software. A jury verdict and partial JNOV resulted in the entry of judgment in favor of the defendant suppliers and against the purchaser. We affirm.

Plaintiff and appellant, West Outer Drive Medical Center, is a Michigan medical partnership now known by the name Downriver Internists, hereinafter "the Center", its designation at trial. The Center alleges that it contracted with the defendant Harris Corporation to buy computer hardware, and with the defendant Hospital Resources Inc. (or "HRI" as it was referred to at trial, though today known as Compucare, Inc., which is now a subsidiary of Travenol Laboratories, Inc.) to buy computer software. For reasons which the parties dispute, the computer system did not work properly, and the Center brought suit for breach of contract and breach of warranty.

A trial was first held in 1982, resulting in a directed verdict for the defendant Harris. The Center did not sue HRI in the first complaint, although HRI had been joined as defendant in a third-party action by Harris. After the directed verdict for Harris was entered in the underlying suit by the Center, Harris and HRI settled their claims against each other. On appeal we reversed the directed verdict in Harris's favor.

In a second trial, held in 1989, the jury ruled in favor of Harris and HRI on the contract and warranty claims. The district court denied the Center's motion for a JNOV and granted HRI's and Harris's motions to conform the judgment to the special verdict the jury returned. It also granted a motion for JNOV on the jury's finding that the Center was a third-party beneficiary of the contract for the computer equipment. HRI also filed a counterclaim against the plaintiff Center for breach of the Center's obligation to provide a working computer system on which HRI could develop the software for Lynn Hospital under the contract. The jury ruled that although the Center breached its duty, HRI suffered no damages. The Center appeals the judgment for the defendants, and HRI cross-appeals the district court's denial of its motions for summary judgment.

I.

The contract at issue was entered into not by the Center but by Lynn Hospital, a named plaintiff along with the Center in the first trial in 1982. It was not involved in the second trial or this appeal. Apparently, the Center was adjacent to the Lynn Hospital in Lincoln Park, Michigan. One of the doctors at the Center, Al Alexander, held an administrative position at Lynn Hospital, and he and the Center's other doctors had admitting privileges at Lynn.

In 1978, Alexander solicited bids from computer companies for a computer system to meet the needs of Lynn and the Center. After several months, Lynn entered into a contract with Harris for computer hardware and with HRI for the software to run on the Harris equipment. Lynn hoped to realize tax benefits from the purchase. It also obviously hoped the hospital would benefit from the added efficiency of the computer. In addition, Lynn hoped the software developed by HRI for the hospital might prove valuable to other medical facilities and hoped to market the software to other hospitals.

Though the contracts were signed by Lynn, not the Center, the Center claims that it was a third party beneficiary of the contracts with the computer companies. The plaintiff's brief refers to the Center as the party which bore the costs of the computer system. The Center claims its total expenditures for the computer hardware and software were $924,916.89.

In October 1978, the computer arrived at the Center. HRI began developing the software needed by the Center. Apparently the system was to have been developed and tested and then installed and operated at Lynn Hospital. The project never got that far however, since the computer did not work properly.

From 1978-1980, HRI tried to make the computer work, with mixed success. An April 1979 electrical storm knocked out power in the computer room, causing the system to overheat and perhaps damaging the hardware. An HRI witness at trial said the Center's failure to turn the computer off caused the machine to "cook" since the machine ran all night after electrical power was restored. Evidently, the Center had to restart the air conditioner manually, and failed to do so until the next morning. There was also a flood in the computer room in July 1979.

Harris claims that the Center insisted upon using the computer after these accidents instead of first seeking needed repairs. Harris also claims the Center employees operating the computer caused some of the problems. Harris also says that Lynn refused to install needed updated versions of software.

HRI and Harris claim that the Center improperly demanded that the computer and the HRI software be put to immediate use rather than allowing time for the software to be carefully developed and tested. HRI says its expectation at the time of contracting was that the computer would not be put to use until all testing and "debugging" for errors had been done. HRI also claims the problems which occurred after April 1979 were "hardware-related", and therefore not the fault of HRI.

While the source or sources of the computer problems are disputed, the system clearly did not work as the Center had hoped. By late summer of 1980, Lynn Hospital and the Center brought suit against Harris for breach of contract. HRI was added as a defendant in the second suit, and now the Center appeals the jury's verdict in favor of the defendants. The Center contends that Harris made and breached express warranties concerning the computer equipment and Harris's obligation to make repairs, as well as implied warranties of fitness for a particular purpose. The Center also argues that HRI breached its contract to provide working software within 14 months. The parties agree that Florida law applies to the breach of warranty claims against Harris, and that Michigan law applies to the breach of contract claims against HRI.

II.

The Center challenges the district court's finding that no privity of contract existed between the Center and the defendants. The contracts were signed by Lynn Hospital, not the Center, but the Center argues that delivery was made to it, not Lynn Hospital. We agree with the district judge that no privity of contract existed between the Center and Harris or between the Center and HRI. Privity is no longer required in Michigan tort law for a plaintiff who has suffered personal injury to recover on a breach of warranty theory. See M.C.L.A. Sec. 440.2318, which extends a seller's warranty to any natural person in the family or household of a buyer of a defective product; Schultz v. Tecumseh Products, 310 F.2d 426, 429 (6th Cir.1962). Yet the Center's suit against HRI is not a warranty case based on personal injury, but a breach of contract action for economic losses, and as such, the privity requirement must still be met. National Sand, Inc. v. Nagel Const., Inc., 182 Mich.App. 327, 451 N.W.2d 618, 620 (1990). The Center must have been a party to the contract to claim economic damages for an alleged breach of...