Salt River Project Agr. Imp. and Power Dist. v. Westinghouse Elec. Corp.

• Decision Date: 29 September 1983
• Docket Number: CA-CIV,No. 1,1
• Citation: 143 Ariz. 437,694 P.2d 267
• Parties: , 37 UCC Rep.Serv. 75 SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, Plaintiff- Appellant, v. WESTINGHOUSE ELECTRIC CORPORATION, a Pennsylvania corporation, Defendant- Appellee. 5817.
• Court: Arizona Court of Appeals

Page 267

694 P.2d 267

143 Ariz. 437, 37 UCC Rep.Serv. 75

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, Plaintiff- Appellant, v. WESTINGHOUSE ELECTRIC CORPORATION, a Pennsylvania corporation, Defendant- Appellee.

No. 1 CA-CIV 5817.

Court of Appeals of Arizona,

Division 1, Department A.

Sept. 29, 1983.

Black, Robertshaw & Copple, P.C. by Richard A. Black, Philip C. Thorpe, Phoenix, for plaintiff-appellant

Lewis & Roca by Douglas L. Irish, Paul G. Ulrich, Edward M. Lewis, Phoenix, for defendant-appellee.

OPINION

CORCORAN, Judge.

This is an appeal from a final partial summary judgment entered in favor of appellee Westinghouse Electric Corporation (Westinghouse) in a commercial products liability case. We affirm.

In 1970 Westinghouse sold a gas turbine unit to appellant Salt River Project Agricultural Improvement and Power District (SRP) for use at SRP's Kyrene Power Plant in Tempe, Arizona. The turbine was sold along with a device, known as a "P-50 computer," which automatically started and operated the turbine. The price was $4,517,815. SRP operated two such Westinghouse turbines. Three years later, in 1973, SRP purchased from Westinghouse a secondary control device, known as a Local Maintenance Controller or "LMC." This device was designed to permit operation of the gas turbine unit during periods when the P-50 computer was being maintained or repaired. SRP's annual report for 1973 showed that it was Arizona's second largest electric utility with net profits of $17,459,416 on power production revenues of $128,334,924. Its assets were $706,407,886 and it generated 7,152,198,900 kilowatt hours of electricity.

The sale of the LMC was documented in part by SRP's "Purchase Order" and Westinghouse's "Acknowledgement." Paragraph 1 of the "Terms and Conditions of [SRP's] Purchase Order" states:

This Purchase Order becomes a binding contract, subject to the terms and conditions hereof, upon receipt by Buyer at its Purchasing Department of the acknowledgement copy hereof, signed by Seller, or upon commencement of performance by Seller, whichever occurs first. Acceptance of this Purchase Order must be made on its exact terms and if additional or different terms are proposed by Seller such response will constitute a counter-offer, and no contract shall come into existence without Buyer's written assent to the counter-offer. Buyer's acceptance of or payment for material shipped shall constitute acceptance of such material subject to the provisions herein, only, and shall not constitute acceptance of any counter-offer by Seller not assented to in writing.

(Emphasis added.) Westinghouse's "Acknowledgement" states:

YOUR ORDER HAS BEEN ENTERED AS OUR GENERAL ORDER (GO) NUMBER AS SHOWN ABOVE. Our Regional Order Correspondent will be better able to serve you if our GO Number is referred to in all communications ... SEE REVERSE SIDE FOR TERMS AND CONDITIONS

[Reverse Side]

TERMS AND CONDITIONS

The conditions stated below shall take precedence over any conditions which may appear on your standard form, and no provisions or condition of such form except as expressly stated herein, shall be binding on Westinghouse.

....

WARRANTY--Unless a different warranty was stated or referred to in the Westinghouse quotation ... Westinghouse warrants that the products sold hereunder shall be of the kind and quality described in this quotation and shall be free of defects in workmanship or materials, and Westinghouse shall, in complete fulfillment of its liabilities under this warranty and if given prompt notice by the Purchaser, correct, by repair or replacement, f.o.b. its factory, any nonconformity which shall appear under proper and normal use of the products within one year after the date of shipment. THIS WARRANTY ... IS EXCLUSIVE AND IS IN LIEU OF ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR PURPOSE, OR OTHER WARRANTY OF QUALITY, WHETHER EXPRESS OR IMPLIED.

LIMITATION OF LIABILITY--Neither party shall be liable for special, indirect, incidental or consequential damages. The remedies of the Purchaser set forth herein are exclusive, and the liability of Westinghouse with respect to any contract or sale or anything done in connection therewith, whether in contract, in tort, under any warranty, or otherwise, shall not, except as expressly provided herein, exceed the price of the product or part on which such liability is based.

Westinghouse's Acknowledgement contained an express warranty and specific exclusions of other warranties, and limitations of liability by: (1) warranting the LMC to be free of defects in workmanship or materials for one year after shipment; (2) excluding implied warranties of merchantability, fitness or otherwise, express or implied; and (3) by providing that in all events Westinghouse's liability, whether in contract, tort or warranty, would not exceed the LMC's purchase price of $15,000.

In May 1976 an explosion and fire occurred in a gas turbine manufactured by Westinghouse for SRP's Kyrene facility damaging the turbine. The damage was estimated at approximately $1,900,000. SRP and its insurers brought an action against Westinghouse in superior court alleging that the explosion and fire occurred when the Westinghouse LMC, which was attached to the damaged turbine, malfunctioned.

In its second amended complaint SRP asserted three claims for relief against Westinghouse. Count I alleged a strict products liability theory of recovery; Count II alleged breaches of express and implied warranties arising from the sale of the LMC unit; and Count III alleged that Westinghouse negligently designed, built, installed or maintained the LMC unit, which failed and caused SRP's losses.

After substantial discovery, Westinghouse moved for a summary judgment on Counts I and II and a partial summary judgment on Count III. Rule 56, Arizona Rules of Civil Procedure. Its motion directed to Count III sought to limit SRP's recovery to $15,000, the price of the LMC unit. The trial court granted Westinghouse's motion in its entirety and this appeal ensued.

SRP asserts in this appeal that the trial court erred because: (1) The doctrine of strict liability in tort was applicable to the sale transaction of the LMC; (2) the exclusions and limitations of warranty and liability are not enforceable against SRP; and (3) in the alternative, enforcement of those limitations and exclusions would be unconscionable, and Westinghouse should not be permitted to raise them as defenses. Obviously, Westinghouse contends that the trial court correctly ruled on each of the above issues and that its ruling should be affirmed.

STRICT TORT LIABILITY

The doctrine of strict liability was developed by the courts to serve certain "social policies" which could not be met in the commercial world of the law of sales and the Uniform Commercial Code (UCC).

As was recognized by the first case to adopt strict liability, Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 63, 27 Cal.Rptr. 697, 701, 377 P.2d 897, 901 (1962):

[R]ules defining the governing warranties that were developed to meet the needs of commercial transactions cannot properly be invoked to govern the manufacturer's liability to those injured by its defective products unless those rules also serve the purposes for which such liability is imposed.

To meet that need the court in Greenman adopted the principle that

A manufacturer is strictly liable in tort when an article he places on the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury to a human being.

59 Cal.2d at 62, 27 Cal.Rptr. at 700, 377 P.2d at 900. Since "[s]ales warranties serve [the] purpose fitfully at best," the doctrine of strict products liability is designed "to ensure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves." Greenman, 59 Cal.2d at 63-64, 27 Cal.Rptr. at 701, 377 P.2d at 901. Arizona decisions since Greenman applying the doctrine of products liability have in general involved the cost shifting rationale. See e.g. Tucson Indus., Inc. v. Schwartz, 108 Ariz. 464, 501 P.2d 936 (1972); and Caruth v. Mariani, 11 Ariz.App. 188, 463 P.2d 83 (1970).

Strict liability can be seen as a device adopted by the courts as a means to avoid the artificial conditions to recovery in warranty created by rules of privity. Kaiser Steel Corp. v. Westinghouse Electric Corp., 55 Cal.App.3d 737, 127 Cal.Rptr. 838 (1976); W. Prosser, The Assault Upon the Citadel, 69 Yale L.J. 1099, 1130-34 (1960). The first issue presented by this appeal is whether strict liability was intended to grant recovery in tort to a substantial commercial purchaser in privity with the manufacturer, beyond that which is contemplated by the UCC where the sale transaction itself is governed by the principles of UCC.

The question currently before us, one of first impression for Arizona courts, has been addressed by a number of other jurisdictions.

In Scandinavian Airlines System v. United Aircraft Corp., 601 F.2d 425 (9th Cir.1979), Scandinavian Airlines, a large international air carrier, sought recovery from United Aircraft, a manufacturer of airplane engines, for the failure of two engines which resulted in damage to the engines and to the aircraft on which they were installed. A summary judgment for the manufacturer on the strict liability theory was affirmed. As in this case, no personal injury or damage to the property of third parties was involved. The suit was between the buyer and seller, both of whom were sophisticated business entities with no disparity in bargaining power. The court held as a matter of law that the doctrine of strict liability does not apply.

In Iowa Electric Light & Power Co. v. Allis-Chalmers Mfg. Co., 360 F.Supp. 25, 32 (S.D.Iowa 1973), the court ruled that, under circumstances similar to those...