Sanco, Inc. v. Ford Motor Co.

• Decision Date: 29 August 1985
• Docket Number: Nos. 84-1503,84-1566,s. 84-1503
• Parties: 41 UCC Rep.Serv. 766, Prod.Liab.Rep.(CCH)P 10,679 SANCO, INC., Plaintiff-Appellant, v. FORD MOTOR CO., Defendant-Appellee. SANCO, INC., Plaintiff-Cross-Appellee, v. FORD MOTOR CO., Defendant-Cross-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1081

771 F.2d 1081

41 UCC Rep.Serv. 766, Prod.Liab.Rep.(CCH)P 10,679

SANCO, INC., Plaintiff-Appellant, v. FORD MOTOR CO., Defendant-Appellee.

SANCO, INC., Plaintiff-Cross-Appellee, v. FORD MOTOR CO., Defendant-Cross-Appellant.

Nos. 84-1503, 84-1566.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 22, 1985.

Decided Aug. 29, 1985.

J.J. Paul, III, Indianapolis, Ind., for plaintiff-appellant.

Ice Miller, Donadio & Ryan, Indianapolis, Ind., for defendant-appellee.

Before CUDAHY and ESCHBACH, Circuit Judges, and BROWN, Senior District Judge. ^*

ESCHBACH, Circuit Judge.

In this diversity action in which Indiana law controls, Sanco, Inc. sued Ford Motor Company alleging negligence in the design and manufacture of Ford Model CLT 9000 trucks purchased by Sanco, and breach of an implied warranty of merchantability covering the trucks. The district court entered summary judgment for Ford on the negligence count, 579 F.Supp. 893 (S.D.Ind.1984), and a jury found for Ford on the warranty count.

In this appeal, ¹ we are required to decide whether the district court correctly determined that Indiana would not recognize a cause of action in tort for the recovery of purely economic injury arising out of a transaction covered by the Uniform Commercial Code. We are also asked to decide whether trial error requires a reversal of the jury's verdict. We affirm.

I.

Philip Wiseman is president of Fairway Ford, Inc., a Ford dealership that sells, among other things, tractor-trailer trucks. Wiseman is also president and controlling shareholder of Sanco, Inc., a heavy truck leasing company. In the spring of 1977, Wiseman met with Charles Hennessey, a Ford heavy truck salesman. Hennessey informed Wiseman that Ford was introducing a new model heavy truck, and discussed with Wiseman the possibility of placing a model fleet of these trucks with Sanco through Fairway Ford. No agreement on the model fleet was reached.

Soon after this discussion, Sanco ordered thirty of the new model CLT 9000 trucks through Fairway Ford. (Sanco eventually purchased 42 CLT 9000 trucks through Fairway Ford, 36 of which are involved in this lawsuit.)

Sanco experienced a myriad of difficulties with the trucks. The most serious of the problems centered on the malfunction of many of the engines. The engines were manufactured by Detroit Diesel Allison Division of General Motors ("DDA"). After Sanco attempted without complete satisfaction to get relief from the problems from Ford and DDA, it parked the trucks in April 1980. The trucks were repossessed by a finance company in January 1981.

Sanco then filed its two-count complaint against Ford in the district court. Count I alleged that Ford had negligently designed and manufactured the CLT 9000 trucks. Count II alleged that Ford had breached an implied warranty of merchantability. Ford moved for summary judgment on both counts. The district court granted Ford's motion for summary judgment on Count I, finding that Indiana law, which controls in this diversity action, precluded Sanco from recovering for purely economic losses under a negligence theory. Count II, Sanco's implied warranty claim, was tried before a jury.

At trial, Ford's defense was based upon the existence of an express warranty, contained in warranty booklets that accompanied the trucks, that disclaimed all implied warranties and that limited Sanco's remedies in certain ways. Under the terms of the warranty as expressed in the warranty booklet, Ford did not warrant the DDA engines. Rather, the engines were warranted solely by DDA.

Ford's dealership agreement with Fairway Ford included the following provision:

The Company [i.e., Ford] shall from time to time establish, by notice to the dealer, the warranty to the owner applicable to each HEAVY DUTY TRUCK. There shall be NO OTHER WARRANTY, express or implied, including any warranty of MERCHANTABILITY OR FITNESS or any other obligation of the Company to the Dealer or the owner with respect to the HEAVY DUTY TRUCK or any part thereof except the warranty established pursuant to this subparagraph. The Dealer shall expressly incorporate the warranty as a part of each buyer's order form or other contract for the sale of a HEAVY DUTY TRUCK and shall deliver a copy of the warranty in the form furnished by the Company, to the owner at the time the HEAVY DUTY TRUCK is delivered to the owner....

Wiseman, as president of Fairway Ford and Sanco, executed the order for the CLT 9000 trucks. Wiseman had sold 1500 to 2000 heavy duty Ford trucks during his ten years as a Ford heavy truck dealer, and testified that warranty booklets accompanied the trucks he had sold. He also testified that he was aware, before he purchased the trucks, that DDA gave a separate warranty on the engines. ² Moreover, Wiseman had filled out the warranty cards on the CLT 9000 trucks, ³ and Wayne Wiseman, his son, testified that warranty claims for the CLT 9000 trucks were filed with Ford on standard Ford warranty claim forms. Ford paid many of these claims.

Sanco sought unsuccessfully to introduce testimony by Wiseman and another witness to the effect that Ford routinely disregarded the limitations provisions in the warranty booklet and had a practice of helping to repair trucks after the warranty's provisions had expired. The district court excluded the proposed testimony, and instructed the jury that Ford had proved its affirmative defense of exclusion of implied warranty and limitation of remedy. It went on to instruct the jury that, notwithstanding the exclusion of implied warranties, Sanco could still recover if the limited remedies provided by Ford's warranty booklet "failed of their essential purpose" within the meaning of Ind.Code Sec. 26-1-2-719(2). ⁴ The jury returned a verdict for Ford.

II.

A. Count I: Negligent Design and Manufacture

In Count I, Sanco sought recovery under a tort theory of negligent design and manufacture for economic losses occasioned by the problems it had experienced with the trucks. After finding no Indiana authority directly on point, the district court determined that Indiana would not permit recovery for such losses in tort, and held that Sanco was limited to its warranty remedies. Accordingly, the district court granted summary judgment in favor of Ford on Count I. Sanco argues that in so doing, the district court ignored Indiana authority that, it claims, indicates Indiana would allow Sanco to maintain a negligence action under the facts of this case.

The allegations of Sanco's complaint indicate that it seeks to recover the cost of repairs to the trucks and lost profits. As the district court correctly recognized, courts are divided over whether such losses may be recovered in a negligence action or whether, instead, a buyer is limited to his contractual and warranty remedies under the Uniform Commercial Code. The majority of jurisdictions that have considered this issue have not permitted the recovery of purely economic losses in a negligence or strick liability action. ⁵ See, e.g., Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165 (3d Cir.1981) (Pennsylvania law); Vulcan Materials Co. v. Driltech, Inc., 251 Ga. 383, 306 S.E.2d 253 (1983); Clark v. International Harvester Co., 99 Idaho 326, 581 P.2d 784 (1978); Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443 (1982); Arrow Leasing Corp. v. Cummins Arizona Diesel, Inc., 136 Ariz. 444, 666 P.2d 544 (Ariz.App.1983).

Dean Prosser summarized the majority rule with respect to recovery of economic losses as follows:

There can be no doubt that the seller's liability for negligence covers any kind of physical harm, including not only personal injuries, but also property damage to the defective chattel itself, as where an automobile is wrecked by reason of its own bad brakes, as well as damage to any other property in the vicinity. But where there is no accident, and no physical damage, and the only loss is a pecuniary one, through loss of the value or use of the thing sold, or the cost of repairing it, the courts have adhered to the rule ... that purely economic interests are not entitled to protection against mere negligence, and so have denied the recovery.

W. Prosser, Handbook on the Law of Torts, Sec. 101 at 665 (4th ed. 1971). A persuasive explanation for this rule is found in Justice Traynor's majority opinion in Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965). In Seely, the plaintiff sought recovery of lost profits and a refund of the purchase price of a defective truck. The California Supreme Court held that such damages, while recoverable in a breach of warranty action, were not recoverable in a strict liability action:

The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the "luck" of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He cannot be held for the level of performance of his products in the consumer's business unless he agrees that the product was designed to meet the consumer's demands. A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market. He can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will. Even in actions for negligence, a manufacturer's liability is limited to damages for physical injury and there is no recovery for economic loss alone.

63 Cal.2d at 18, 45...