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

Decision Date12 August 1999
Docket NumberNo. 49A02-9807-CV-620.,49A02-9807-CV-620.
Citation714 N.E.2d 1218
PartiesRHEEM MANUFACTURING COMPANY, Appellant-Defendant, v. PHELPS HEATING & AIR CONDITIONING, INC., Appellee-Plaintiff.
CourtIndiana Appellate Court

Stephen L. Vaughan, Thomas J. Campbell, Robert W. Wright, Locke Reynolds Boyd & Weisell, Indianapolis, Indiana, Attorneys for Appellant.

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

OPINION

BROOK, Judge.

Case Summary

Appellant-defendant Rheem Manufacturing Company ("Rheem") appeals from the trial court's partial denial of its motion for summary judgment. Specifically, Rheem appeals the trial court's determination that there are genuine issues of material fact as to whether an exclusive remedy in the sales contract between Rheem and appellee-plaintiff Phelps Heating and Cooling, Inc. ("Phelps") failed of its essential purpose; as to whether a third party, Federated Supply Corp. ("Federated"), acted as an agent of Rheem; and as to whether implied warranties may have arisen from the course of dealing between Rheem and Phelps or from the usage of trade. We affirm and remand for further proceedings.

Issues

The parties raise several issues in this interlocutory appeal. We consolidate the issues and restate them as the following four issues:

(1) whether, in the context of a limited remedy which has arguably failed of its essential purpose, IND.CODE § 26-1-2-719(2) ("subsection (2)") and IND.CODE § 26-1-2-719(3) ("subsection (3)") are to be read "independently" of one another, as the majority of U.S. jurisdictions hold, or "interdependently," according to the minority view.

(2) whether, regardless of the construction and interpretation of subsection (2) and subsection (3), Phelps is entitled to a trial on the issue of consequential and incidental damages arising from a putative breach of warranty by Rheem;

(3) whether the trial court erred in denying Rheem's motion for summary judgment on the issue of whether Federated acted as an agent of Rheem; and

(4) whether the trial court erred in denying Rheem's motion for summary judgment on the issue of whether implied warranties may have arisen between Rheem and Phelps by either course of dealing or usage of trade.

Facts and Procedural History

This is a commercial dispute regarding the sale of residential gas furnaces. Rheem manufactures gas furnaces and other heating and air conditioning equipment. Phelps, a central Indiana heating and air conditioning contractor, purchased Rheem equipment through Federated, an authorized distributor of Rheem products, for resale and installation to home builders or individual home owners. Phelps began purchasing the furnaces at issue from Federated in the late 1980's.1 The distributor agreement between Rheem and Federated provided that Federated was an independent contractor and that the relationship of principal and agent was not created between Rheem and Federated.

All Rheem gas furnaces were accompanied by a written limited warranty containing the following provisions: a "quality commitment" provision,2 a limited remedy provision, a service labor exclusion, and a consequential and incidental damages exclusion. The purpose of the "quality commitment" provision was to warrant parts against failure under normal use within a specified time period. The "quality commitment" provision, an express warranty, read in pertinent part:

MANUFACTURER AND RHEEM AIR CONDITIONING DIVISION warrant 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.

The warranty periods varied with the model of furnace and/or with the components.

The limited remedy provision addressed replacement parts only:

Under this Warranty, RHEEM will furnish a replacement part that will be warranted for only the unexpired portion of the original warranty; if a heat exchanger fails and a replacement is not available, a credit will be allowed for the cost of the heat exchanger toward the purchase price of a new furnace as described below.

The consequential and incidental damages exclusion read as follows:

RHEEM'S SOLE LIABILITY WITH RESPECT TO DEFECTIVE PARTS SHALL BE AS SET FORTH IN THIS WARRANTY, AND ANY CLAIMS FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES ARE EXPRESSLY EXCLUDED.

Finally, the limited warranty contained a service labor exclusion. Rheem's brief characterizes this exclusion as "stating that [service labor] expenses are the responsibility of the home owner, unless a service labor agreement exists between the home owner and contractors such as [Phelps]." The exclusion read:

SERVICE LABOR RESPONSIBILITY:

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.

Different models of Rheem furnaces carried different "annual fuel utilization efficiency" (AFUE) ratings. The higher the AFUE rating, the higher the efficiency. The record indicates that Rheem has manufactured furnaces with 60%, 70%, 78%, 80%, and 90% efficiency ratings. In late 1989, Phelps' customers began having problems with Rheem furnaces, particularly with the 80% and 90% efficiency models, and these problems continued for approximately the next four years.

Rheem periodically issued to its distributors "technical service bulletins" regarding the servicing of its products, and containing product or component updates, field testing and trouble shooting, and extended warranties, and special labor allowances for contractors. Between January 1991 and May 1994, Rheem issued at least eleven such service bulletins. Phelps submitted evidence to the trial court that during the period from late 1989 to mid-1993, it was not uncommon to have a customer visited four times by a Phelps' service representative trying to remedy the defects in Rheem furnaces.

Federated, for its part, had issued service labor "credits" as part of its own warranty program. The record indicates that through April, 1994, Federated had issued $13,715 worth of such credits to Phelps. On May 11, 1994, Phelps requested a meeting with a Rheem field representative, asserting that excessive warranty claims from Phelps' customers were causing Phelps financial hardship. A Rheem representative met with Phelps, at which time Phelps requested $40,575.52 to $65,951.163 in compensation for service labor for service calls to Phelps customers. Rheem responded that all service labor credits allowed by Rheem had already been issued by Federated (and thus, no further remedy would be available under the terms of the limited remedy provision relating to the furnaces).

On August 8, 1994, Phelps filed suit against Rheem and Federated, claiming that the Rheem furnaces shut down and that parts such as pilot assemblies, hot surface igniters, flame sensors and ignition controls failed. Additionally, Phelps contended that the 90% drum furnace heat exchangers often cracked. The theories underlying Phelps' original action were negligence, breach of express warranty, breach of implied warranty of merchantability, and breach of implied warranty of fitness for a particular purpose.

On September 5, 1997, Rheem filed a motion for summary judgment, with a supporting brief and a designation and submission of evidence. The summary judgment theories pertinent to this appeal are that the damages sought by Phelps were excluded by the service labor exclusion, consequential damages exclusion, and incidental damage exclusion of Rheem's written limited warranties. Rheem also asserted lack of privity between the parties as additional grounds for summary judgment on Phelps' implied warranty claims.4

On June 18, 1998, the trial court entered the following order on Rheem's motion for summary judgment:

This matter, having come before the Court on the Motion for Summary Judgment, filed by the Defendant, Rheem Manufacturing Company with regard to the claims of Plaintiff, Phelps Heating & Air Conditioning, Inc., and the Court having held a hearing on said motion on May 14, 1998, and having considered the arguments of counsel, and those matters designated by the parties pursuant to Ind. Trial Rule 56(C), the Court NOW FINDS as follows:
1. There are no genuine issues as to any material facts with regard to the following:
a. The Defendant, [Rheem], manufactured furnaces which were distributed by Defendant, [Federated] and sold to Plaintiff, [Phelps].

b. Each of the furnaces manufactured by Defendant, [Rheem], [is] accompanied with a limited parts replacement warranty, created by Defendant, [Rheem].

c. Problems occurred with certain component parts of the furnaces manufactured by Defendant, [Rheem].
d. Defendant, [Rheem], corrected the problems with the component parts of all its furnaces within a period of approximately three and one half years.
e. The claims of Plaintiff, [Phelps], herein are for economic damages.
f. There is a lack of direct privity between Plaintiff, [Phelps] and Defendant [Rheem], with regard to any sale which is the subject of this action.
2. There are genuine issues as to material facts regarding whether the Defendant [Federated] acted as an agent of Defendant [Rheem], with regard to any sale which is the subject of this action.
3. There are genuine issues as to material facts regarding whether the exclusive remedy of replacement of defective parts failed of its essential purpose.
4. There are genuine issues as to material facts regarding whether implied warranties may have arisen from course of dealing or usage of trade.
5. No recovery may be had in a negligence claim based upon the failure of a product to perform as expected, where the Plaintiff suffers only economic damages.
6. Defendant, [Rheem], is entitled to judgment as a matter of law with regard to the negligence claims of Plaintiff
...

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    ...Simply put, vertical privity exists only between immediate links in a distribution chain. Rheem Mfg. Co. v. Phelps Heating & Air Conditioning, Inc., 714 N.E.2d 1218, 1228 n. 8 (Ind.Ct.App.1999). A buyer in the same chain who did not purchase directly from a seller is "remote" as to that sel......
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    ...in a distributive chain, i.e., between a manufacturer, wholesaler, retailer, and ultimate buyer. Rheem Mfg. Co. v. Phelps Heating & Air, 714 N.E.2d 1218, 1228 n. 8 (Ind.Ct.App.1999), aff'd in relevant part, 746 N.E.2d 941, 956 (Ind. 2001). A buyer within this chain that did not buy goods di......
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