Hydra-Mac, Inc. v. Onan Corp.

• Decision Date: 05 January 1990
• Docket Number: No. C9-88-662,HYDRA-MA,INC,C9-88-662
• Parties: 10 UCC Rep.Serv.2d 740 , Plaintiff, International Harvester Company, Respondent, v. ONAN CORPORATION, petitioner, Appellant.
• Court: Minnesota Supreme Court

Page 913

450 N.W.2d 913

10 UCC Rep.Serv.2d 740

HYDRA-MAC, INC., Plaintiff, International Harvester Company, Respondent, v. ONAN CORPORATION, petitioner, Appellant.

No. C9-88-662.

Supreme Court of Minnesota.

Jan. 5, 1990.

As Amended on Denial of Rehearing Jan. 30, 1990.

Syllabus by the Court

1. A disclaimer of certain express and implied warranties by a manufacturer and seller of component engines for use in industrial vehicles limited the manufacturer's and seller's liability for breach of warranty only when such claims were asserted by ultimate users of the industrial product.

2. Express warranties, made by a manufacturer of component engines to manufacturers and distributors of industrial vehicles, which were inconsistent with the manufacturer's purported disclaimer, prevail over that disclaimer.

3. A manufacturer and seller of component engines, who properly pleaded and proved that the statutory limitations period had lapsed on a distributor's claims alleging breach of warranties did not waive that defense, nor was it as a matter of law equitably estopped from asserting it, by mere omission to note existence of that defense in a pre-trial order.

4. Equitable estoppel does not toll the expiration of the statute of limitations if, within the statutory period, the claimant failed to exercise due diligence in asserting claims known to it, or which should have been known to it.

5. The verdict of the jury awarding consequential damages for lost profits to a purchaser of component engines to be incorporated into industrial vehicles was supported by sufficient evidence.

Lawrence J. Field, Harold D. Field, Marc D. Simpson, Leonard, Street & Deinard, and Henry H. Feikama, and Stacey A. Dekalb, Smith, Juster, Feikama, Malmon & Haskvitz, Minneapolis, for petitioner, appellant.

Craig W. Gagnon, Mark P. Wine, and David L. Bishop, Oppenheimer, Wolff & Donnelly, Minneapolis, for Hydra-Mac, Inc.

John Q. McShane, Janice K. O'Grady, and Lezlie Ott Marek, Bowman and Brooke, Minneapolis, for Intern. Harvester Co.

Heard, considered and decided by the Court en banc.

KELLEY, Justice.

Hydra-Mac, Inc. (Hydra-Mac), the manufacturer of a gear driven skid loader, and respondent International Harvester Company (International Harvester), a purchaser from Hydra-Mac of a number of skid loaders, instituted this joint action against the appellant Onan Corporation (Onan), the manufacturer and seller of an engine incorporated into the skid loaders. International Harvester asserted damage claims arising from alleged breach of warranty. Onan defended by asserting a disclaimer of warranties and by alleging that most, if not all, of the plaintiffs' claims were barred by the statute of limitations. The jury returned a special verdict favoring the plaintiffs on all claims and assessed both compensatory and punitive damages--the latter to Hydra-Mac only. ¹ The trial court denied Onan's alternative post trial motions for summary judgment, judgment notwithstanding the verdict, for a new trial, for additional findings of fact, and for a remittitur. In affirming this trial court decision, the court of appeals panel held that the terms of Onan's warranty disclaimers were inapplicable to either plaintiff; that the statute of limitations was not a bar to any of the claims because (a) Onan had waived it, or (b) was estopped from asserting it, or (c) it was tolled by Onan's conduct; and that sufficient evidence supported the jury's award of lost profits. Hydra-Mac, Inc. v. Onan Corp., 430 N.W.2d 846, 851-56 (Minn.App.1988), pet. for rev. granted (Minn., Jan. 13, 1989). We affirm in part, reverse in part, and remand for further proceedings.

Onan manufactures engines and generators which it markets worldwide. Hydra-Mac was a small manufacturer of skid loaders--four wheeled vehicles whose right and left sides can be controlled independently of each other, thereby permitting the machine to turn by skidding. Onan, which for some time had supplied engines to Hydra-Mac, in 1975 recommended its new NHCV engine to Hydra-Mac for use in a Model 8C skid steer loader Hydra-Mac was then developing. Onan represented to Hydra-Mac that the NHCV engine was reliable, durable, would cool better than other engines, and was suitable for use in the new skid loaders. In reliance on those representations, Hydra-Mac selected Onan's NHCV aluminum engine for incorporation into its new Model 8C skid loader. Onan delivered to Hydra-Mac 2,556 NHCV engines between November 1975 and July 1979.

In 1975 International Harvester contracted with Hydra-Mac for the latter to manufacture for it skid loaders incorporating Onan's NHCV engine. International Harvester marketed those skid loaders as its Model 4130 skid loader. When it signed the contract, International Harvester was aware that problems relating to engine power, head gasket failure, and high oil consumption were being experienced in skid loaders containing the Onan NHCV engine. Nonetheless, it entered into the contract based on assurance from both Onan and Hydra-Mac that the engine problems would be solved. In a meeting held on December 3, 1976, Onan told International Harvester that the problems were just start-up assembly line "glitches" and that design changes were in progress. International Harvester acknowledged the problem in a pre-shipment audit in early 1977 and then later in February of 1977, when it accepted its first shipment of skid loaders which contained the Onan NHCV engine. Ultimately, 1,045 Model 4130 skid loaders were purchased by International Harvester for resale through its dealer network.

Shortly after the first retail sale, International Harvester began to receive repeated complaints about engine failure, blown head gaskets, excessive heat, low power production, and cylinder head warping. International Harvester and Onan discussed these engine problems repeatedly. In attempts to remedy the various problems, between 1977 and 1979 Onan introduced a variety of "fix-it" programs, none of which were completely successful. In early 1977 Onan replaced the washer in the gasket heads; later that year it changed from a side draft carburetor to a down draft carburetor with a longer chamber head and recommended a new tune-up procedure. Even later, Onan suggested still another change--this time in the head retention hardware and torquing procedures. In February of 1978, Onan began to include a limited warranty and a disclaimer provision on the back of its invoices to Hydra-Mac.

In June of 1979 Onan informed International Harvester that the NHCV engine would never be totally free from heat problems and that a different engine should be used. Although International Harvester then stopped ordering the skid loader, it continued to expect that engines still in inventory and in the field could be made serviceable by what was called a graphoil fix. Earlier that year, Onan had instituted a testing program in an attempt to develop a final solution to the problems the engine was experiencing. The testing resulted in Onan suggesting the use of a graphoil gasket in existing engines. The graphoil fix, known as the C-127 field change package, became available to International Harvester customers in June of 1980 but it, too, proved to be an ineffective solution to the recurring problems.

Trial evidence demonstrated that the NHCV engine had inherent design defects that could not be remedied by repairs. Evidence also indicated that Onan endorsed the use of its NHCV engine in the 8C skid loader even though its own sales engineer, who serviced the Hydra-Mac account, believed the engine was not ready for that application. Moreover, the evidence demonstrated that Onan had failed to inform International Harvester of a 1975 internal study which indicated that the NHCV engine might experience problems of excessive heat unless Onan utilized a stronger aluminum or cast iron in its construction, but that Onan had rejected the suggested material switch because of the high cost involved.

At trial, in its special verdict, the jury ruled in favor of International Harvester on its claims. It found International Harvester had sustained general damages for unreimbursed expenses incurred in its attempt to repair and retrofit the Model 4130 steer loaders in the amount of $635,891 and had sustained lost profits of $2,751,000.

1. On appeal Onan asserts that its disclaimer of all express and implied warranties on the back of sales invoices delivered to Hydra-Mac with the engines, defeats International Harvester's claim that it may recover damages from Onan as a third party beneficiary of product warranties made by, or attributable by law to Onan.

Under Minn.Stat. Sec. 336.2-318 (1988) ² warranties made by Onan extend "to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured by the breach of warranty." Thus, the trial court's ruling that International Harvester, as purchaser of the skid loader containing the Onan engine, was a third party beneficiary of any warranties running to Hydra-Mac was proper, and appellant does not seem to challenge that ruling. But, as beneficiary of those warranties, International Harvester is equally subject to any disclaimers of warranty which would have been effective to bar any of Hydra-Mac's claims. As a seller, Onan may disclaim both express and implied warranties. Minn.Stat. Sec. 336.2-316 (1988). A valid disclaimer extends to the original purchaser as well as to all parties covered as third party beneficiaries. Minn.Stat. Sec. 336.2-318, U.C.C. Comment 1 (West 1966). See also Western Equip. Co. v. Sheridan Iron Works, 605 P.2d 806, 810 (Wyo.1980).

Although Onan concedes that it extended a limited warranty to ultimate consumers (farmers and industrial users), it asserts that to preclude all other parties from asserting warranty claims against it, after February 1978, it included a disclaimer on the back of each sales invoice delivered with engines to...