Vidimos, Inc. v. Laser Lab Ltd.

• Decision Date: 24 October 1996
• Docket Number: No. 95-3676,95-3676
• Parties: 30 UCC Rep.Serv.2d 1075 VIDIMOS, INC., Plaintiff-Appellant, v. LASER LAB LTD., et al., Defendants, and Wysong Laser Co., Inc., and Wysong & Miles Co., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 217

99 F.3d 217

30 UCC Rep.Serv.2d 1075

VIDIMOS, INC., Plaintiff-Appellant, v. LASER LAB LTD., et al., Defendants and Wysong Laser Co., Inc., and Wysong & Miles Co., Defendants-Appellees.

No. 95-3676.

United States Court of Appeals Seventh Circuit.

Argued Sept. 16, 1996.

Decided Oct. 24, 1996.

J.B. Smith, Randall J. Nye (argued), Beckman, Kelly & Smith, Hammond, IN, for Plaintiff-Appellant.

C. Joseph Yast (argued), Northfield, IL, for Defendants-Appellees.

Before POSNER, Chief Judge, and COFFEY and KANNE, Circuit Judges.

POSNER, Chief Judge.

The plaintiff in this diversity suit, Vidimos, Inc., claims to be a third-party beneficiary of a contract between Laser Lab Ltd. and Wysong Laser Co., a contract that includes a guarantee of Wysong's undertakings by its parent, Wysong & Miles Co. (We shall refer to the two companies collectively as "Wysong.") The district court rejected the claim, granting summary judgment for Wysong. Laser Lab and its affiliates are defunct, but remain defendants in the district court. The court entered final judgment in favor of Wysong under Fed.R.Civ. P. 54(b), thus enabling Vidimos to appeal without having to wait for the formal disposition of its claims against the other defendants. The appeal raises interesting questions concerning both the doctrine of third party beneficiaries and--because Vidimos wishes to add theories of contractual liability not mentioned in its complaint--the limits of notice pleading under the federal civil rules.

In November of 1988 Vidimos, a metal fabricator in northern Indiana, bought for about $400,000 a laser metal-cutting machine from Laser Lab, an Australian manufacturer. The contract of sale included a number of warranties of the performance of the machine. The machine was installed in Vidimos's plant in May of the following year, and from the outset (if, as we are obliged to do, we view the facts as favorably to Vidimos as the record permits) the machine did not work properly. Laser Lab tried to fix it and when these efforts failed replaced it with a new machine, but the new machine did not work either. Finally, in March of 1991, it wrote Vidimos that, lacking the resources in the United States to service its machines properly, it had "signed an agreement with an old established American company, Wysong & Miles Co.," which henceforth would be responsible for distributing, installing, and doing warranty service for Laser Lab's machines in the United States and would "also be responsible for any outstanding warranty commitments to existing customers." Wysong Laser wrote Vidimos confirming a further one-year extension of Laser Lab's warranty and "Wysong Laser's commitment to Vidimos Inc." Vidimos then permitted employees of Wysong Laser to work on its machine and did not object when Laser Lab turned over its U.S. operations to Wysong Laser and closed its U.S. facilities. Employees of Wysong Laser--who were Laser Lab's former U.S. service personnel flying a new flag--kept trying to fix Vidimos's machine, but without success. Not until August 1992, more than three years after the first machine had been installed, was the replacement machine finally fixed (by another company--not Wysong or Laser Lab) and performing as warranted. Vidimos claims to have lost more than a million dollars in profits as a result of the breach of Laser Lab's warranty. Laser Lab is insolvent, so Vidimos seeks to recover its loss from Wysong under the latter's contract with Laser Lab.

The contract, which provides that Michigan law shall govern any legal disputes arising out of it, appoints Wysong Laser the exclusive distributor in North America of laser machine tools manufactured by Laser Lab. Along with the standard undertakings of an exclusive distributor, Wysong Laser "assumes and agrees to perform [Laser Lab's] service obligations under [Laser Lab's] express repair or replace warranties" on machines previously sold in North America, including the machine sold to Vidimos. Laser Lab in turn warrants that the parts it furnishes Wysong Laser will be free from defects. But Wysong Laser's remedy for breach of this warranty (which is expressly in lieu of any other warranties) is limited to the cost of repair or replacement of the defective parts and expressly excludes consequential damages. The contract is signed by Wysong & Miles as well as by Wysong Laser, with the accompanying explanation that one of the purposes for Wysong & Miles's being a signatory is "to guarantee the performance of the obligations of [Wysong Laser] under this Agreement."

The rule allowing someone who is not a party to a contract to sue under it as a "beneficiary" is a relative novelty in the common law (the analogous right of a trust's beneficiary is equitable in its origin), and at first glance invites practical as well as conceptual objections. Contracts often benefit persons besides the signatories, and a breach harms them. To allow all these injured beneficiaries to sue would expose contract promisors to enormous potential liabilities, even for involuntary breaches (which many breaches of contract are), and would be inconsistent with the limitations that tort law imposes on remote liability. See H.R. Moch Co. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896 (1928) (Cardozo, C.J.); Edwards v. Honeywell, Inc., 50 F.3d 484 (7th Cir.1995). And how can there be a meeting of the minds between a party and a nonparty? But these puzzles dissipate when attention is shifted to the intentions of the contracting parties. The parties may for their own purposes want to confer a power of enforcing their contract upon a third party. If they make this intention adequately clear in the contract, the concept of freedom of contract becomes a compelling ground for allowing the third party to enforce the contract. The standard clause making a contract binding upon and enforceable by the parties' successors and assigns does just this--vests enforcement power in third parties, often unidentified and unidentifiable at the time the contract is signed (not the case here), "parties" who are not parties to the contract in the normal sense because they did not agree to anything, yet who have the rights of parties. E.g., Commercial Standard Ins. Co. v. Bryce St. Apartments, Ltd., 703 F.2d 904, 907 (5th Cir.1983); International Paper Co. v. Whitson, 571 F.2d 1133, 1138 (10th Cir.1977).

If the facts are as Vidimos believes, the parties to the contract appointing Wysong Laser the exclusive North American distributor of Laser Lab's machines may well have intended Vidimos to be empowered to enforce the contract, specifically the provision in which Wysong Laser assumed Laser Lab's existing warranty obligations. Laser Lab might want Vidimos to have this power in order to reduce the likelihood that Vidimos would sue it for losses resulting from a breach of warranty. Both Laser Lab and Wysong Laser might want Vidimos to have the power in order to dissuade Vidimos from taking steps to block the transfer of Laser Lab's North American operations to Wysong Laser. The transfer disabled Laser Lab from honoring its warranty obligations, and Vidimos conceivably might have treated the transfer as an anticipatory breach of contract, Mich. Comp. L. § 440.2610 [UCC § 2-610]; Paul v. Bogle, 193 Mich.App. 479, 484 N.W.2d 728, 735-36 (1992); 2 E. Allan Farnsworth, Farnsworth on Contracts § 8.21, p. 479 (1990), although an alternative and more plausible interpretation is that the transfer was a permissible delegation of contractual performance. Restatement (Second) of Contracts § 318 (1981).

Of course the fact that the parties to the distribution agreement might have had motives for conferring party status on Vidimos is not proof that they did so. We must look for clues to their realized intentions in the contract itself. Downriver Internists v. Harris Corp., 929 F.2d 1147, 1150 (6th Cir.1991) (applying Michigan law) ("The contract must indicate with objective clarity that this benefit was intended"); Lawson v. Household Bank F.S.B., 20 F.3d 786, 788 (7th Cir.1994). The express assumption of existing warranty obligations is such a clue, which together with the incentives that we have mentioned creates a genuine issue of material fact concerning Vidimos's right to sue as a third party beneficiary. See Crumady v. "Joachim Hendrik Fisser," 358 U.S. 423, 428, 79 S.Ct. 445, 448, 3 L.Ed.2d 413 (1959); In re Merritt Logan, Inc., 901 F.2d 349, 369 (3d Cir.1990); Armstrong v. Diamond Shamrock Corp., 7 Ohio App.3d 296, 455 N.E.2d 702, 705 (1982).

There is no merit to Wysong's contention that under Michigan law a third party cannot be a third party beneficiary unless the primary purpose of the contract was to benefit him. See Mich. Comp. L. § 600.1405(1). The primary purpose of most contracts is to benefit the signatories. If the parties intend to benefit a third party as well, there is no reason we can think of (and Wysong suggests none) to thwart their intention by reference to the hierarchy of their intentions. Granted, the fact that a third party would be benefited by performance of the contract is not enough to give him the status of a third party beneficiary. Greenlees v. Owen Ames Kimball Co., 340 Mich. 670, 66 N.W.2d 227, 229 (1954); Alcona Community Schools v. State, 216 Mich.App. 202, 549 N.W.2d 356, 357-58 (1996) (per curiam). We explained why earlier. But this is different from insisting that an intended third party beneficiary--as distinct from an incidental, that is, an unintended, beneficiary--be the primary intended beneficiary of the contract. Summary judgment was granted prematurely.

But this cannot be the end of our analysis. Wysong argues that the contract precludes the recovery of consequential damages, and as those are the only damages that Vidimos seeks there is little point in prolonging this litigation if Wysong is right. Under Michigan law, as generally, consequential damages are available in breach of warranty...