Transwestern Pipeline Co. v. Monsanto Co., B083489

• Citation: 46 Cal.App.4th 502,53 Cal.Rptr.2d 887
• Decision Date: 17 June 1996
• Docket Number: No. B083489,B083489
• Court: California Court of Appeals Court of Appeals
• Parties: , 29 UCC Rep.Serv.2d 1178, 96 Cal. Daily Op. Serv. 4354, 96 Daily Journal D.A.R. 7002 TRANSWESTERN PIPELINE COMPANY, Plaintiff and Respondent, v. MONSANTO COMPANY, Defendant and Appellant.

Page 887

53 Cal.Rptr.2d 887

46 Cal.App.4th 502, 29 UCC Rep.Serv.2d 1178,

96 Cal. Daily Op. Serv. 4354,

96 Daily Journal D.A.R. 7002

TRANSWESTERN PIPELINE COMPANY, Plaintiff and Respondent, v. MONSANTO COMPANY, Defendant and Appellant.

No. B083489.

Court of Appeal, Second District, Division 7, California.

June 17, 1996.

Rehearing Denied July 10, 1996.

Review Denied Sept. 18, 1996.

Charles F. Preuss and Alan J. Lazarus, San Francisco, for Defendant and Appellant.

Fred J. Hiestand, Sacramento, on behalf of Defendant and Appellant as Amicus Curiae.

James Tallon, Pacific Palisades, Janet Grady, San Francisco, and Jerry Marks, Los Angeles, for Plaintiff and Respondent.

JOHNSON, Associate Justice.

Plaintiff, whose business is the interstate transportation of natural gas, contaminated the Southern California Gas Company's pipeline with gas containing polychlorinated biphenyls (PCBs). After settling the gas company's damage claim, plaintiff sought equitable indemnity from the PCB manufacturer on several theories including strict liability for design defect and negligent failure to warn of the environmental hazards of PCBs. A jury found the manufacturer 37.5% responsible for the PCB contamination and awarded plaintiff damages accordingly.

We conclude the PCB manufacturer cannot avoid liability based on the conflicting terms of purchase and invoice forms exchanged by the parties and that plaintiff is not guilty of laches. On the merits, we find contamination of the gas company's pipeline system constituted property damage, not economic loss, and therefore the PCB manufacturer is liable to plaintiff for equitable indemnity based on the jury's finding of comparative negligence. We also uphold the award of future damages based on plaintiff's continuing legal obligation to contribute to the gas company's remediation costs.

FACTS AND PROCEEDINGS BELOW

The Transwestern Pipeline Company (Transwestern) is in the business of transporting natural gas from Texas and Oklahoma to California where its pipes connect with pipes belonging to the Southern California Gas Company (SoCalGas). On its way to California the gas passes through stations which compress it, thus allowing more gas to be transported through the pipeline. In 1968, a Transwestern compressing station in New Mexico was destroyed in a gas explosion. In the process of rebuilding the station Transwestern installed a new turbine-driven gas compressor. The compressor used a lubricant manufactured by the Monsanto Company (Monsanto) known as Turbinol. Turbinol is a synthetic fire-resistant lubricant consisting mostly of PCBs.

The Texas Eastern Transmission Company (Texas Eastern), Transwestern's parent company, began using Turbinol in the late 1950's or early 1960's as a substitute for flammable petroleum-based lubricants in its gas compressors. Texas Eastern was among the first companies to use Turbinol and participated in its development. The Turbinol used in Transwestern's new compressor came from supplies Texas Eastern purchased from Monsanto. We discuss the facts surrounding the sales agreements between Texas Eastern and Monsanto in Part I below.

In 1966, Monsanto learned PCBs were turning up in the environment. Traces were found in plants, animals and humans. Although no one was sure at the time how much of a risk this chemical posed, its presence in the environment was a serious concern to Monsanto. In 1970, Monsanto began placing a supplemental warning label on some of its products containing PCB's but not on drums of Turbinol. Not until 1972 did Monsanto reveal to Texas Eastern and Transwestern that PCBs posed a substantial risk of environmental contamination. At the same time, Monsanto also informed Texas Eastern and Transwestern it was going to stop making Turbinol. It offered to sell its remaining Turbinol to the two companies but only if they signed an agreement to indemnify and hold Monsanto harmless for any damages Turbinol caused them or their customers. Texas Eastern and Transwestern refused to sign the agreement. In late 1972 Transwestern found and began using a substitute for Turbinol which did not contain PCBs.

PCBs were first discovered in residential gas lines in 1981. As a result, all natural gas pipeline companies in the United States tested for PCB contamination. When SoCalGas tested its pipelines it discovered they were contaminated with PCBs. SoCalGas notified Transwestern of the PCB contamination and its belief Transwestern was the source. Transwestern's own tests revealed Turbinol leaking from its compressor in New Mexico had contaminated its entire pipeline west to Needles where it entered the SoCalGas pipeline thus introducing PCBs into the entire SoCalGas distribution system.

Because they could not readily ascertain the extent of contamination and the costs of repair, Transwestern and SoCalGas entered into a "standstill agreement." This agreement tolled applicable statutes of limitations in order to allow time to ascertain the nature and extent of SoCalGas's damages and for settlement negotiations between the parties. The period of investigation and negotiation lasted nine years until the parties finally reached a settlement in 1990. Neither Transwestern nor SoCalGas informed Monsanto they had discovered PCBs in their pipelines. Monsanto first learned about this contamination in 1989 when its records were subpoenaed in an arbitration proceeding between Transwestern and SoCalGas.

If the PCBs remained confined inside the SoCalGas pipelines they would pose no danger. But PCBs cannot be confined inside the pipes. The PCBs mix with pipeline condensate, liquids which form naturally inside the pipes. This pipeline condensate must be removed on a regular basis or else it will clog up the pipes and impede the flow of gas. The PCBs enter the outside world when the condensate is removed from the pipes. Even though Transwestern stopped using Turbinol in 1972, once the PCBs entered the SoCalGas pipelines they coated and clung to the pipe walls and thus continued to infect the pipeline condensate more than 20 years later. No technique exists for removing PCBs once they have entered a pipeline. As one expert testified, once the PCBs entered its pipeline system, "SoCal was done for."

Because the condensate in its pipelines contained detectable levels of PCBs, federal regulations required SoCalGas to take special precautions in its collection, storage and disposal, to monitor the PCB levels in the condensate and to conduct special training of its employees in the handling of condensate removed from the pipelines. This special handling and cleanup effort cost SoCalGas over $1 million a year.

In 1987, SoCalGas initiated an arbitration proceeding against Transwestern to recover damages resulting from the costs associated with the collection, storage and disposal of the contaminated condensate and the efforts to remove the PCBs from its pipelines. In 1990, the parties entered into a settlement under which Transwestern paid SoCalGas approximately $10 million for costs associated with the PCB contamination. Two years later, the parties entered into a further agreement under which Transwestern agreed to pay 86 percent of the continuing costs of handling the PCB contamination. The initial term of this agreement was three years with automatic renewal for two-year periods until canceled by either party.

Following its settlement with SoCalGas, Transwestern brought this action for equitable indemnity against Monsanto. The parties stipulated as of the date of trial Transwestern had paid SoCalGas $12 million for PCB remediation. The parties further stipulated these expenses were either legally required or incurred by SoCalGas out of caution and were paid pursuant to a reasonable settlement between Transwestern and SoCalGas. As to future damages, the current and former heads of the PCB program at SoCalGas testified the company's PCB-related costs had been running approximately $1.3 million annually for the past three to four years and would continue at that rate for the next 10 to 20 years assuming no change in federal environmental regulations.

The case was tried to a jury. The jury returned a special verdict in favor of Transwestern on two theories: strict liability for design defect and negligent failure to warn. It also found Transwestern was negligent or failed to mitigate damages. The jury apportioned 62.5 percent of the responsibility for SoCalGas's damages to Transwestern and 37.5 percent to Monsanto. It fixed the present value of SoCalGas's future damages at $11.4 million. Judgment was duly entered and Monsanto filed a timely notice of appeal.

DISCUSSION

I. THE LIMITATIONS ON LIABILITY CONTAINED IN MONSANTO'S INVOICES DID NOT BECOME PART OF THE CONTRACTS BETWEEN MONSANTO AND TEXAS EASTERN OR TRANSWESTERN.

In defending against Transwestern's claims, Monsanto relied in part on the limitation of liability clauses contained in its invoices for the sale of Turbinol to Texas Eastern, Transwestern's parent company. These clauses purported to disclaim any liability for consequential damages and limited the buyer's other damages to the purchase price of the particular order. Monsanto contended Texas Eastern assented to these limitations on liability at the outset of the parties' relationship. It further contended the limitations clauses had become part of the contracts for sale of Turbinol to Texas Eastern through a course of dealing between the parties over a 12-year period from 1960 to 1972. Therefore, Monsanto concluded, because Texas Eastern acted as Transwestern's agent in purchasing Turbinol, the limitations on liability were imputed to Transwestern.

The trial court directed a verdict against Monsanto on this defense. The court concluded Monsanto had failed to establish the limitations on liability contained in its invoices had become part of its sales agreements with Texas Eastern through express agreement or a course of dealing. Thus,...