McGraw-Edison Co. v. Northeastern Rural Elec. Membership Corp.

• Decision Date: 22 April 1997
• Docket Number: No. 35S04-9507-CV-800,GRAW-EDISON,35S04-9507-CV-800
• Citation: 678 N.E.2d 1120
• Parties: Prod.Liab.Rep. (CCH) P 14,976 McCOMPANY, Appellant, v. NORTHEASTERN RURAL ELECTRIC MEMBERSHIP CORPORATION, Appellee.
• Court: Indiana Supreme Court

Page 1120

678 N.E.2d 1120

Prod.Liab.Rep. (CCH) P 14,976

McGRAW-EDISON COMPANY, Appellant, v. NORTHEASTERN RURAL ELECTRIC MEMBERSHIP CORPORATION, Appellee.

No. 35S04-9507-CV-800.

Supreme Court of Indiana.

April 22, 1997.

Richard E. Steinbronn, D. Randall Brown, Barnes & Thornburg, Fort Wayne, for Appellant.

Peter L. Obremskey, Parr Richey Obremskey & Morton, Lebanon, Stanley H. Matheny, Matheny, Michael, Hahn & Bailey, Huntington, for Appellee.

ON PETITION TO TRANSFER

BOEHM, Justice.

The parties are buyer and seller of a piece of equipment under an agreement that included a limitation of liability among its "Standard Terms and Conditions." This case deals with the ability of such a provision to limit the seller's liability under Indiana's Product Liability Act. We hold that the waiver in this case was ineffective.

In 1978, Northeastern Rural Electric Membership Corp. (Northeastern) purchased electrical power station equipment from McGraw-Edison for approximately $71,000. The quotation that Northeastern accepted stated that it was "subject to the terms and conditions" accompanying the quotation. Among these three pages of printed terms was:

Limitation of Liability: Seller's liability for any claim of any kind (except "Protection Against Infringement") shall not exceed the purchase price of equipment, or portion thereof, which gives rise to the claim, whether such claim shall be for breach of contract, breach of warranty or negligence, and whether such claim arises out of or results from this contract, or from the design, manufacture, sale, delivery, resale, installation, technical direction of installation, inspection, repair, operation or use of any equipment furnished under this contract....

On January 30, 1982, a fire at the Northeastern substation broke out, resulting in property damage and other losses that Northeastern claims to aggregate in excess of $750,000. There were no personal injuries. Northeastern alleges that the fire was caused by an electrical surge, perhaps lightning, that reached Northeastern's transformer, and that McGraw-Edison's equipment, by reason of a design defect, did not act as a breaker to prevent the surge from reaching the transformer. Northeastern sued McGraw-Edison asserting strict liability pursuant to Indiana's Product Liability Act. IND.CODE § 33-1-1.5 (1993 & Supp.1995). McGraw-Edison moved for partial summary judgment based on its contractual limitation of liability. The trial court denied the motion for summary judgment and the Court of Appeals affirmed, holding the limitation of liability provision unenforceable under Indiana law. McGraw-Edison Co. v. Northeastern Rural Elec. Membership Corp., 647 N.E.2d 355 (Ind.Ct.App.1995).

The issue is whether the disclaimer of liability incorporated in McGraw-Edison's quotation bars Northeastern's claim for strict liability under Indiana's Product Liability Act that has been in place since 1978. That Act, prior to 1995 amendments, applied to claims asserting "strict liability" by a "purchaser," giving rise to "sudden, major damage to property" from a "defective product." ¹ Section 2.5 of the Act, added in 1983, defined a defective product as one that "will be unreasonably dangerous to the expected user or consumer, when used in reasonably expectable ways" and is in a condition "not contemplated by reasonable persons among those considered expected users or consumers." Prior to 1983, the term "defective product" was not defined. The statute now explicitly excludes from the definition of defective products those that are incapable of being made safe for their reasonably expected use. Thus, the Act does not purport to deal with all transactions. Rather, it creates strict liability only for a limited group of products and requires a plaintiff to prove several things to trigger that liability.

McGraw-Edison contends that "sophisticated" parties cannot invoke the Indiana Product Liability Act based on well established notions of freedom of contract and on the Uniform Commercial Code, Section 2-719. There is nothing in the record to support the sophistication of Northeastern. As a result, McGraw-Edison's position boils down to the view that the Act is inapplicable to products purchased in commercial transactions. Other states, in the development of their common law, have reached varying conclusions as to the effect in a commercial transaction of a disclaimer such as McGraw-Edison invokes here. Compare Florida Steel Corp. v. Whiting Corp., 677 F.Supp. 1140 (M.D.Fla.1988) (invalid under Florida law) and Elite Professionals, Inc. v. Carrier Corp., 16 Kan.App.2d 625, 827 P.2d 1195 (1992) (invalid) with Idaho Power Co. v. Westinghouse Elec. Corp., 596 F.2d 924 (9th Cir.1979) (valid under Idaho law). And some courts have found that strict liability can be waived effectively "between business entities of relatively equal bargaining strength." Keystone Aeronautics Corp. v. R.J. Enstrom Corp., 499 F.2d 146, 149 (3d Cir.1974). At least at the time Indiana enacted its Product Liability Act, a minority of courts found strict liability to apply only to personal injury claims, not property damage. Hawkins Constr. Co. v. Matthews Co., 190 Neb. 546, 209 N.W.2d 643, 652-53 (1973), overruled by National Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 332 N.W.2d 39, 43-44 (1983).

These are all issues that are fairly debatable, but we are not developing the common law of Indiana in this case. We are interpreting the interplay between the provisions of the Uniform Commercial Code--Sales, IND.CODE § 26-2-2-719, which generally supports the enforceability of limitations of liability in commercial transactions, and the Indiana Product Liability Act, IND.CODE § 33-1-1.5-3, which codified strict liability and makes some of these choices that would otherwise be left to the court. The Act was effective June 1, 1978, before the parties began their exchange that led to the purchase of the product in question. It is clearly based on § 402A of the Restatement of Torts Second. Indiana was among the early jurisdictions to adopt § 402A, at least as Indiana law was predicted by its federal bench. In 1965, Judge Eschbach concluded that the Restatement § 402A was the law of Indiana. In a frequently quoted passage, he stated:

Where there is implied in law a certain duty to persons not in contract privity, it seems preposterous that the seller should escape that duty by inserting into a noncontractual relationship a contractual disclaimer of which the remote injured person would be unaware. Even as between parties to a contract, where the law would imply in a sale the reasonable fitness of the product for ordinary purposes, it seems unconscionable that the seller should by disclaimers avoid the duty of selling merchantable products or shift the risk of defect unless the total circumstances of the transaction indicate the buyer's awareness of defects or acceptance of risk.

Greeno v. Clark Equip. Co., 237 F.Supp. 427, 431 (N.D.Ind.1965). Citing Greeno, the Appellate Court explicitly adopted § 402A as the law of Indiana five years later in Cornette v. Searjeant Metal Prod., Inc., 147 Ind.App. 46, 258 N.E.2d 652 (1970), a development we noted with approval in Ayr-Way Stores, Inc. v. Chitwood, 261 Ind. 86, 300 N.E.2d 335 (1973).

Against this background the General Assembly enacted the Product Liability Act in 1978. Since that time this court has not had occasion to deal directly with the effect of a disclaimer, an issue explicitly left unresolved in Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078, 1088 (Ind.1993). ² Among the comments to § 402A at that time, and now, is comment m. It observes, among other things: "The consumer's cause of action ... is not affected by any disclaimer or other agreement...." Indiana's Product Liability Act did not restrict its application to "consumers." Rather it has always explicitly permitted any "purchaser" to assert a strict liability claim if the other requirements of the Act are satisfied. Section 2. In addition, the Act has always expressly permitted recovery of property damage and is not limited to personal injuries. Section 3(a). Both of these features suggest that the legislature contemplated the Act's application to commercial transactions as well as consumer products.

We have frequently observed that as a general proposition contracts are to be enforced and we do not deviate from that proposition today. However, where the legislature has spoken on a point, we should not substitute our judgment for that of the General Assembly. Accordingly cases dealing with limitation of liability clauses that predate the Product Liability Act ³ or that do not deal with products that meet the Act's definition of defective and inherently dangerous products ⁴ are simply inapposite. It is also true that, with some exceptions, UCC § 2-719 has permitted enforceable limitations on liability. ⁵ Indeed, some courts have found that strict liability is barred by enforceable disclaimer clauses because the UCC, as a statute, overrides the common law, including the Restatement. See, e.g., Kaiser Steel Corp. v. Westinghouse Elec. Corp., 55 Cal.App.3d 737, 746-48, 127 Cal.Rptr. 838, 844-45 (1976); see generally Larry D. Scheafer, Annotation, Pre-Emption of Strict of Liability in Tort by Provisions of UCC Article 2, 15 A.L.R.4th 791 (1982). In Indiana, however, the Product Liability Act is both later in time and more specific in subject matter than the UCC. The Product Liability Act imposes "strict liability." It previously identified four, and only four defenses. IND.CODE § 33-1-1.5-4 (1982). There are now only three. IND.CODE § 33-1-1.5-5 (Supp.1995). None of these defenses has ever been that the seller has included a boilerplate limitation of liability in the invoice or other routine (and typically unread) documents. Nowhere does the statute refer to "sophisticated" parties, whatever that may mean. Nor is it limited to "consumers." As a...