Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc.

• Decision Date: 09 May 2001
• Docket Number: No. 49S02-0003-CV-219.,49S02-0003-CV-219.
• Citation: 746 N.E.2d 941
• Parties: RHEEM MANUFACTURING COMPANY, Appellant (Defendant below), v. PHELPS HEATING & AIR CONDITIONING, INC., Appellee (Plaintiff below).
• Court: Indiana Supreme Court

746 N.E.2d 941

RHEEM MANUFACTURING COMPANY, Appellant (Defendant below), v. PHELPS HEATING & AIR CONDITIONING, INC., Appellee (Plaintiff below).

No. 49S02-0003-CV-219.

Supreme Court of Indiana.

May 9, 2001.

Stephen L. Vaughan, Thomas J. Campbell, Locke, Reynolds, Boyd & Weisell, Indianapolis, IN, Attorneys for Appellant.

Robert A. Garelick, Bryan S. Redding, Cohen, Garelick & Glazier, Indianapolis, IN, Attorneys for Appellee.

ON PETITION TO TRANSFER

SULLIVAN, Justice.

Phelps expended considerable sums repairing Rheem furnaces that Phelps had sold and installed. We hold that the language of the UCC precludes Phelps from recovering consequential damages from Rheem for breach of express warranty and that the language of the express warranty at issue precludes Phelps from recovering for labor expenses. However, Phelps may still have valid claims for indemnity and breach of implied warranty.

Background

We will briefly explain the background of this case; for a complete discussion, see the Court of Appeals opinion in Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218 (Ind.Ct. App.1999).

Rheem Manufacturing Company ("Rheem") makes furnaces for use in homes and offices. During the late 1980s and early 1990s, Rheem sold its furnaces through a distributor, Federated Supply Corporation ("Federated"). Federated in turn sold Rheem furnaces to Phelps Heating and Cooling ("Phelps"), a central Indiana contractor.

The box in which every furnace was shipped contained the following warranty:

Manufacturer, RHEEM AIR CONDITIONING DIVISION, warrants ANY PART of this furnace against failure under normal use and service within the applicable periods specified below, in accordance with the terms of this warranty.

(R. at 105.) This express warranty was limited by three clauses that are at the heart of this appeal. First, Rheem limited the remedies available for breach of the warranty to replacement of parts:

Under this Warranty, RHEEM will furnish a replacement part that will be warranted for only the unexpired portion of the original warranty....

(Id.)¹ Second, Rheem disclaimed consequential and incidental damages:

ANY CLAIMS FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES ARE EXPRESSLY EXCLUDED.

(Id.) Finally, Rheem disclaimed any liability for the cost of servicing the furnaces:

This Warranty does not cover any labor expenses for service, nor for removing or reinstalling parts. All such expenses are your responsibility unless a service labor agreement exists between you and your contractor.

(Id.)

During the early 1990s, several types of Rheem furnaces malfunctioned after Phelps installed them. A Phelps executive testified that from "late 1989 until 1993, Rheem had virtually no high efficiency furnaces on the market that were not experiencing reliability problems ...." (R. at 326.) While Rheem issued numerous "technical service bulletins" offering instructions on how to fix these problems, Phelps customers experienced difficulties for another three to four years.

Phelps executives met with a Rheem service representative on May 11, 1994. At this meeting, Phelps requested between $40,000 and $65,000 to compensate it for the cost involved in servicing the furnaces. Rheem rejected this request.

Phelps brought suit against Rheem and Federated on August 8, 1994, claiming that Rheem breached its express and implied warranties and was negligent in its manufacture of the furnaces. Underlying all of these claims is Phelps's assertion that the furnaces "shut down and were not operational after installation. Among other things, the pilot assemblies, hot surface ignitors, flame sensors and ignition controls failed." (R. at 26.) The complaint first contended that Rheem breached the implied warranty of fitness for a particular purpose because Rheem and Federated "knew that Phelps intended to use the furnaces and install them in properties serviced by Phelps" (R. at 21) but the furnaces were "defective, and after they had been installed ... they failed to function properly." (Id.) Similarly, Phelps sought damages for breach of the implied warranty of merchantability, contending that Rheem and Federated were merchants but that the defects in the furnaces made them "unsuitable and posed a risk of personal injury and property damages to customers serviced by Phelps ...." (R. at 23.) Phelps also asserted a claim under the express warranty, arguing that it "incurred substantial expenses and other damages in remedying the problems caused by the defective furnaces." (R. at 25.) Finally, Phelps claimed that "Rheem and Federated Supply were negligent and careless in their design and sale of the furnaces by failing to manufacture and provide furnaces which were operational and in reasonable working order." (R. at 26.)

Phelps described its damages as including "but not limited to, lost customers, lost profits, and the additional cost of servicing the defective furnaces and remedying the defects therein." (R. at 22.) In answers to interrogatories, Phelps listed its warranty damages as "lost service charges," "lost labor charges," "lost profits" from two customers who would no longer do business with Phelps, and the "approximate value of office time spent ... comput[ing] damages." (R. at 225.)

Rheem moved for summary judgment on all of these claims. Rheem's brief in support of its motion asserted that the damages Phelps sought on the warranty theories were precluded by the limitations in the express warranty and by lack of privity on the implied warranties. Rheem also argued that Phelps could not claim tort damages for the purely economic injuries that resulted from the failure of the furnaces to operate as intended. The trial court granted Rheem's motion for summary judgment in regards to negligence, but denied it as to the warranties.

Rheem sought an interlocutory appeal on the warranty claims and the trial court certified its order. The Court of Appeals affirmed the denial of summary judgment. Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218 (Ind. Ct.App.1999). As for the express warranties, the Court of Appeals found a genuine issue of material fact as to "whether the cumulative effect of Rheem's actions was commercially reasonable." Id. at 1228 (emphasis in original). On the implied warranty claims, the court stated that the evidence establishing privity was "slight." The court nevertheless held that "perfect vertical privity is not necessary in this case" and then found a genuine issue of material fact as to whether Rheem breached its implied warranties and whether its conduct in doing so was "reasonable." Id. at 1231.

Discussion

When reviewing an entry of summary judgment, we stand in the shoes of the trial court. Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Ind. Trial Rule 56(C). We do not reweigh the evidence, but will consider the facts in the light most favorable to the nonmoving party. See City of Gary v. Indiana Bell Telephone Co., 732 N.E.2d 149, 153 (Ind.2000)

.

Rheem's appeal raises three issues which require us to analyze the operation of express and implied warranties under Indiana's version of the Uniform Commercial Code ("the UCC").

I

Rheem first argues that the trial court should have granted summary judgment as to Phelps's claim for lost profits under the express warranty because the warranty excluded consequential damages.² This argument requires us to examine the interplay between Indiana Code §§ 26-1-2-719(2) and (3), the UCC subsections pertinent to damage exclusions and remedy limitations in express warranties:

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in IC 26-1.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, but limitation of damages where the loss is commercial is not.³

Rheem and Phelps present conflicting constructions of these subsections. Both parties appear to accept that the remedy provided by Rheem failed of its essential purpose and that Phelps is entitled to the benefits of the express warranty.⁴ But Phelps contends that, under § 2-719(2), where a limited remedy "fail[s] of its essential purpose, remedy may be had as provided in IC 26-1," which includes consequential damages. Phelps argues that because Rheem's repair attempts failed for roughly four years, the limited remedy of replacement of parts failed of its essential purpose and Phelps could claim all buyer's remedies provided by the UCC, including consequential damages. Rheem counters that its exclusion of consequential damages is controlled by § 2-719(3). Rheem argues that despite the failure of the limited remedy under § 2-719(2), § 2-719(3) allows an exclusion of consequential damages to operate unless it is unconscionable.⁵

These arguments pose the question of whether an exclusion of consequential damages survives when a separate contract provision limiting a buyer's remedies has failed of its essential purpose. The courts that have faced this issue have fallen into two camps that are divided along the lines of the parties' arguments in this case. One group takes what is known as the "dependent" view and reads § 2-719(2)'s reference to remedies "provided in [the UCC]" as overriding a contract's consequential damage exclusion. See, e.g. Middletown Concrete Prod. v. Black Clawson Co., 802 F.Supp. 1135, 1151 (D.Del. 1992)

(collecting cases). This gloss on § 2-719 makes an exclusion of consequential damages dependent on whether a limited remedy fails of its essential purpose. See Adams v. J.I. Case Co., 125 Ill.App.2d 388, 261 N.E.2d 1, 8 (1970). Other courts take an "independent" view and reason that because §§ 2-719(2) and (...