Leon's Bakery, Inc. v. Grinnell Corp.

Decision Date31 March 1993
Docket NumberD,No. 620,620
Citation990 F.2d 44
PartiesProd.Liab.Rep. (CCH) P 13,455 LEON'S BAKERY, INCORPORATED, Plaintiff-Appellant, v. GRINNELL CORPORATION, Defendant-Appellee-Third-Party-Plaintiff, v. INDUSTRIAL ELECTRIC SERVICE, INC., Third-Party-Defendant-Appellee. ocket 92-7855.
CourtU.S. Court of Appeals — Second Circuit

Mark T. Mullen, New York City (Kenneth Bloom, Cozen & O'Connor, New York City, on the brief), for plaintiff-appellant.

Alison L. Bonds, New Haven, (R. Bradford Fawley, Eric E. Grondahl, Murtha, Cullina, Richter & Pinney, on the brief), for defendant-appellee-third-party-plaintiff.

Before: KEARSE, ALTIMARI, and JACOBS, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiff Leon's Bakery, Incorporated ("Leon"), whose business property was damaged by fire, appeals from a final judgment of the United States District Court for the District of Connecticut, Jose A. Cabranes, Judge, dismissing its complaint seeking to recover for property damage and lost profits from defendant Grinnell Corporation ("Grinnell") because of the malfunctioning of a fire-detection and sprinkler system manufactured by Grinnell. The district court granted summary judgment in favor of Grinnell on the ground that Leon's claims were foreclosed by provisions in the contract between Leon and Grinnell. On appeal, Leon contends principally that the district court erred in failing to apply Connecticut law, and that under that law the contract clauses limiting liability were unenforceable. We disagree and affirm the judgment.

I. BACKGROUND

The following facts are not in dispute. Leon is a Connecticut corporation that produces fresh dough, baked goods, and frozen baked goods, which it distributes to supermarkets and retail bakeries. Prior to 1984, it enlarged its operations by installing several large freezers and expanding its loading dock. Its then-existing sprinkler system did not reach the new freezers and loading dock, and Leon was informed by its insurance carrier that unless it installed a fire protection system to protect these new items, its insurance premiums would increase sharply. Accordingly, Leon contacted Grinnell, a Delaware corporation in the business of the design, manufacture, sale, installation, and maintenance of fire protection systems, to inquire into the purchase and installation of a sprinkler and fire detection system.

In March 1984, Grinnell submitted a proposal to install sprinklers and heat detectors, inter alia, in connection with the new freezers and loading dock area. The proposal was accompanied by a document entitled "General Terms and Conditions of Grinnell Fire Protection Systems Company, Inc." ("Terms and Conditions"), which contained a provision for a one-year warranty against defects in materials or workmanship ("Warranty"), and a provision limiting Grinnell's liabilities ("Limitation Clause") to those set forth in the Warranty:

LIMITATIONS OF LIABILITY

In no event shall Seller be liable for special or consequential damages and Seller's liability on any claim whether or not based in contract or in tort or occasioned by Seller's active or passive negligence for loss or liability arising out of or connected with this contract, or any obligation resulting therefrom, or from the manufacture, fabrication, sale, delivery, installation, or use of any materials covered by this contract, shall be limited to that set forth in the paragraph entitled "Warranty".

WARRANTY

Seller agrees that for a period of one (1) year after completion of said installation it will, at its expense, repair or replace any defective materials or workmanship supplied or performed by Seller. Upon completion of the installation, the system will be turned over to the Purchaser fully inspected, tested and in operative condition. As it is thereafter the responsibility of the Purchaser to maintain it in operative condition, it is understood that the Seller does not guarantee the operation of the system. Seller further warrants the products of other manufacturers supplied hereunder, to the extent of the warranty of the respective manufacturer.

ALL OTHER EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OR OTHERWISE ARE HEREBY EXCLUDED.

The proposal, including the Terms and Conditions, was accepted by Leon by purchase order dated April 6, 1984.

Thereafter, Leon hired third-party-defendant Industrial Electric Service, Inc. ("Industrial Electric"), to install the fire-detection portion of the system pursuant to Grinnell's design and under Grinnell's supervision. Grinnell installed the sprinkler portion of the system. Installations were completed in January 1985. Thereafter, Leon had the sole responsibility for inspection, maintenance, and repair of the system.

In January 1989, there was a fire in Leon's freezer and loading dock areas, causing extensive damage. Leon recovered various amounts from its insurer, including $200,436 for real property damage, $1,119,173 for personal property damage, $843,601 for loss of "business earnings expense," $298,618 for "extraordinary expense," and $743,872 for "extra expense." The insurer was subrogated to Leon's claims against third parties for these amounts.

In March 1991, Leon commenced the present action against Grinnell, asserting (a) a claim under Connecticut's Product Liability Act, Conn.Gen.Stat. § 52-572m et seq. (1991), on theories of strict liability, negligence, and breach of implied and express warranties, and (b) a claim of breach of implied warranty under the Connecticut version of the Uniform Commercial Code, Conn.Gen.Stat. §§ 42a-2-314 and 42a-2-315 (1990). In addition to seeking, on behalf of its insurer, the amounts it had recovered from the insurer, Leon sought damages including $1,000 for real property damage, $72,053 for "business earnings expense," and $2,118,000 for "lost net profit due to lost sales." Grinnell impleaded Industrial Electric.

Following a period of discovery, Grinnell moved for summary judgment on the principal grounds (1) that the fire occurred approximately four years after installation of its system, the Limitation Clause disclaimed all liability not encompassed by the Warranty, and the Warranty, in turn, limited Grinnell's liability to repairs or replacements on account of defective materials or workmanship for one year after installation; and (2) that Leon's claims for commercial losses were not cognizable in a product liability suit under Connecticut law. In opposition, Leon argued, inter alia, (a) that the contract's Limitation Clause was unenforceable under Connecticut law, and (b) that the terms of the Warranty should not be enforced because the Warranty "failed of its essential purpose," the contract having contained a separate promise to provide a fire suppression system in working condition, and the breach of that promise being undiscoverable due to a latent defect.

In an oral ruling, the district court rejected all of Leon's contentions and granted Grinnell's motion for summary judgment dismissing the complaint. The court found it unnecessary to decide whether or not "commercial" losses may be recovered under Connecticut's Product Liability Act because

the parties in this case had explicitly contracted to limit defendant's liability for any deficiency in the manufacture, fabrication, sale, delivery, installation, use, or operation of the fire alarm and suppression system to a replacement of defective materials or workmanship within one year of installation.

(Hearing Transcript, June 8, 1992, at 25.) The court found that Leon's claim of unreasonably unsafe or negligent design was plainly excluded by the contract's limitation. It noted that "[a]s a general proposition, courts will enforce a limitation on products liability in a contract between commercial parties" (id. at 26), and that the considerations underlying this rule include the facts that a commercial customer's potential losses can be enormous and that alarm manufacturers have little or no control over the conditions in which the alarms are used after installation, and the judgment that alarm manufacturers should not be treated as insurers. The court rejected Leon's contentions that the Limitation Clause was unconscionable and that the Warranty failed of its essential purpose, concluding that "the provisions of the contract of sale are easily reconciled: any failure to provide a system in operative condition could be cured by replacement of defective parts or workmanship within one year of installation." (Id. at 27.)

Accordingly, the court found no basis for declining to enforce the terms of the contract between Leon and Grinnell. Grinnell's third-party claim against Industrial Electric was eventually dismissed as moot. Final judgment was entered, and this appeal followed.

II. DISCUSSION

On appeal, Leon contends principally that the district judge failed to apply Connecticut law, and it pursues its contentions that under Connecticut law, (a) contractual disclaimers of strict liability or liability for negligence are not permitted, and (b) the Warranty should not have been enforced because it failed of its essential purpose. We reject the contention that the court did not apply Connecticut law, and we conclude that it did not err in ruling that the Limitation Clause and the Warranty were enforceable.

A. The District Court's Choice of Law

In the present case, the parties agree that Connecticut law governs, and the record does not support Leon's suggestion that the district court believed otherwise. A prior complaint by Leon against Grinnell had been dismissed by the court on the ground that Connecticut statutes provided the exclusive remedies for the claims asserted. The summary judgment motion granted in the present case was grounded in part on the interpretation of Connecticut statutes. And the court, in announcing its decision on that motion, cited a Connecticut case in rejecting Leon's contention that the contract disclaimers were...

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