Professional Lens Plan, Inc. v. Polaris Leasing Corp.

• Decision Date: 13 January 1984
• Docket Number: No. 55584,55584
• Citation: 675 P.2d 887,234 Kan. 742
• Parties: , 38 UCC Rep.Serv. 69 PROFESSIONAL LENS PLAN, INC., Plaintiff/Appellee/Cross-Appellant, and Dr. Ronald E. Price and Ann M. Price, Plaintiffs, v. POLARIS LEASING CORPORATION, Defendant/Appellee, v. IMPACT SYSTEMS, a Corporation, and Ohio Scientific, a Corporation, Third-Party Defendants, and Okidata Corporation, Third-Party Defendant/Appellant.
• Court: Kansas Supreme Court

Page 887

675 P.2d 887

234 Kan. 742, 38 UCC Rep.Serv. 69

PROFESSIONAL LENS PLAN, INC., Plaintiff/Appellee/Cross-Appellant, and Dr. Ronald E. Price and Ann M. Price, Plaintiffs, v. POLARIS LEASING CORPORATION, Defendant/Appellee, v. IMPACT SYSTEMS, a Corporation, and Ohio Scientific, a

Corporation, Third-Party Defendants,

and

Okidata Corporation, Third-Party Defendant/Appellant.

No. 55584.

Supreme Court of Kansas.

Jan. 13, 1984.

Syllabus by the Court

1. Privity of contract is that connection or relationship which exists between two or more contracting parties. It is essential to the maintenance of any action on any contract that there should subsist a privity between the plaintiff and defendant in respect of the matter sued on.

2. An implied warranty does not arise from any agreement, as such, between the parties, but is imposed by operation of law on the basis of public policy for the protection of the people.

3. Implied warranty functions as an exception to the common law requirement of privity in buyers' actions against manufacturers and intermediate dealers with whom they are not in privity.

4. The nature of the allegedly defective product in each case should be of manifest importance in determining whether or not warranty protection should be extended to transactions where privity is absent.

5. K.S.A. 84-2-318 is discussed and its purpose is held to extend to certain persons who are not the buyers of the goods the same warranty rights as are possessed by the buyer.

6. Implied warranties of fitness and merchantability are held not to extend to a remote seller or manufacturer of an allegedly defective product, which is not inherently dangerous, for only economic loss suffered by a buyer who is not in contractual privity with the remote seller or manufacturer.

7. An interlocutory appeal pursuant to K.S.A. 60-2102(b ) may only be taken from an order of the district court upon which appellate review is sought. Such an appeal may not be taken on a matter not determined by the district court.

Frederick K. Starrett of Ralston & Frieden, Topeka, argued the cause and was on brief for third-party defendant/appellant.

John C. Fay, Manhattan, argued the cause and was on briefs for plaintiff/appellee/cross-appellant.

Sam Brownback of Stites, Hill & Wilson, Manhattan, argued the cause and was on brief for defendant/appellee.

Dorothy L. Thompson of Everett, Seaton, Knopp & Thompson, Manhattan, argued the cause and was on brief for third-party defendant Ohio Scientific.

McFARLAND, Justice:

This case involves two interlocutory appeals, pursuant to K.S.A. 60-2102(b ) and Supreme Court Rule 4.01 (230 Kan. 1ii), concerning the propriety of some of the district court's rulings concerning implied warranty and allowing amendment of pleadings after the alleged expiration of the statute of limitations. The Court of Appeals permitted the appeals to be taken and the case was subsequently transferred to this court for determination.

Plaintiff Professional Lens Plan, Inc., is a corporation wholly owned by plaintiffs Dr. Ronald E. Price and Ann M. Price. Loren H. Shellabarger is the operator of Shellabarger Systems, a company which consults with, and assists businesses in selecting and programming computers. Sometime in 1979, Dr. Price and Mr. Shellabarger entered into an agreement whereby Shellabarger would recommend appropriate computer hardware for Professional Lens Plan, Inc. Five computer systems were presented to Dr. Price and he selected a computer manufactured by Ohio Scientific, a corporation.

Professional Lens Plan, Inc., reached an agreement with Impact Systems for acquisition of an Ohio Scientific computer on or about August 15, 1979. For purposes of tax benefits to the ultimate purchaser and other business considerations, Impact Systems purchased the computer from Ohio Scientific but sold the same to its wholly owned subsidiary, defendant Polaris Leasing Corporation. Polaris then executed an agreement with Professional Lens whereby it would lease the equipment to Professional Lens.

The computer was delivered in September, 1979, to Professional Lens by Impact (the computer having never been in the possession of Polaris). Problems in the operation of the computer commenced shortly after its delivery which were ultimately traced, at least in part, to an allegedly defective hard disc, a computer component part, which had been purchased by Ohio Scientific from the disc's manufacturer, Okidata Corporation.

On June 12, 1980, plaintiff Professional Lens Plan, Inc., filed this action against defendant Polaris Leasing Corporation alleging the computer was defective and, as a result thereof, plaintiff corporation had suffered lost profits of $43,356.00 and incurred $11,911.31 for such expenses as computer forms, equipment, lease payments made, consultation and programming, insurance, additional office space, additional rent, telephone charges and labor. These figures were amended upward on the pretrial questionnaire filed herein by Professional Lens. On July 15, 1980, defendant Polaris Leasing filed a third-party complaint against Impact Systems and Ohio Scientific for indemnity of any judgment rendered against it in favor of plaintiff Professional Lens. On the same day, Professional Lens filed a motion to join Dr. and Mrs. Price as additional parties plaintiff (this motion was granted on February 26, 1981). Plaintiffs Price are in this litigation as guarantors of the lease (purchaser's) agreement. Third-party defendant Impact Systems, on August 21, 1980, filed a cross-petition against third-party defendant Ohio Scientific for indemnity for any judgment it might have to pay third-party plaintiff, Polaris Leasing. On March 5, 1981, third-party defendant Ohio Scientific filed a third-party petition against Okidata Corporation.

On September 3, 1981, Judge Innes overruled Okidata's motion to dismiss the third-party petition against it holding:

"[B]ased upon Kennedy v. City of Sawyer, 228 Kan. 439, 618 P.2d 788 (1980) indemnification is inappropriate, but the Motion to Dismiss will not be granted. Instead, prior to trial, the Court will properly align the parties for purposes of submitting the issue of comparative negligence to the jury." (Emphasis supplied.)

Thereafter a snowstorm of summary judgment motions was filed. The case was reassigned to Judge Mershon. On February 28, 1983, Judge Mershon issued his 48-page "Court Journal Entry and Memorandum of Decision on Motion for Reconsideration [of the September 3, 1981, decision] and on All Motions for Summary Judgment." Without attempting to summarize the entire tome, the key holdings for purposes of these interlocutory appeals are as follows:

1. The September 3, 1981, decision was rescinded with the court concluding the laws of breach of contract, breach of warranty and indemnity, rather than comparative negligence, were to be applied.

2. Plaintiff Professional Lens would be permitted to amend its pleadings by bringing an action directly against Okidata and Ohio Scientific despite the nature of the damages, the lack of privity and the alleged running of the statute of limitations; and

3. Impact's motion for summary judgment against Polaris was sustained on the basis there was no buyer-seller relationship between the two as Polaris was merely the financing agent in the transaction between Impact and Professional Lens.

Interlocutory appeals were duly perfected by Okidata Corporation and Professional Lens. We shall first discuss the issues raised by Okidata.

The first such issue concerns whether the district court erred in finding Professional Lens had a cause of action against Okidata. Stated more specifically, the question is whether Kansas permits a corporate ultimate purchaser, who has incurred only economic loss, as opposed to personal injury or property damage, to recover on theories of breach of implied warranty of fitness and merchantability, from a manufacturer with whom the ultimate purchaser was not in contractual privity.

Privity of contract is defined by Black's Law Dictionary 1362 (4th ed. rev. 1968) as follows:

"Privity of contract is that connection or relationship which exists between two or more contracting parties. It is essential to the maintenance of an action on any contract that there should subsist a privity between the plaintiff and defendant in respect of the matter sued on."

In Booth v. Scheer, 105 Kan. 643, 185 Pac. 898 (1919), 8 A.L.R. 663, the general common law rule requiring privity in sales contracts was stated as follows:

"Ordinarily there is no privity of contract between the original vendor of personal property and third persons who may purchase or acquire the property from the original vendee; and the original vendor's warranty is a personal obligation between him and his own vendee, and it does not run with the property like covenants concerning real estate." Syl. p 1.

See also Lumber Co. v. Mercantile Co., 114 Kan. 10, 216 Pac. 815, modified 114 Kan. 17 (1923), 35 A.L.R. 242.

Problems arose with the strict application of the requirement of privity where manufacturers sold inherently dangerous products to dealers who, in turn, sold them to consumers. An exception to the rule requiring privity was frequently held to exist in situations where a manufactured human foodstuff caused personal injury by virtue of a defect. In Chandler v. Anchor Serum Co., 198 Kan. 571, 426 P.2d 82 (1967), this court was asked to impose an implied warranty, in the absence of contractual privity, for defectively manufactured animal vaccines which resulted in death and disease to plaintiff's cattle. The court, in Chandler, analyzed the law of implied warranty as follows:

"Where personal injury or death is caused by unwholesome or contaminated food or drink, we have consistently held that liability may be imposed on the basis of an implied warranty that the food is fit for human consumption. (Parks v. Pie Co., 93 Kan. 334, 144 P. 202; ...