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The Travelers Indemnity Company v. Dammann & Co., Inc.

2008 WL 5348585 (U.S. Dist. Ct. D. N.J. 2008) (Unpublished)

UCC; NEW JERSEY PRODUCT LIABILITY ACT — New Jersey’s Product Liability Act deals with damage to physical property other than the defective product itself; therefore, in the case of a buyer seeking damages for economic loss consequential to a breach of contract for defective goods, redress is limited to the Uniform Commercial Code.

A seller produced vanilla beans and sold them to a processed food manufacturer who produced vanilla extract from the beans for further sale and use. Two months after receiving shipments of Indonesian beans from the seller, the buyer discovered that the beans may have been contaminated with mercury. Thereafter, the buyer sent a letter to the seller asserting claims for damages for the seller’s alleged failure to deliver conforming beans. Two months later, the buyer sent another letter with a claim for damages arising from these alleged nonconforming lots. In response, the seller filed an insurance claim with its insurer which the insurer denied. Insurance coverage litigation between the seller and its insurer ultimately resulting in a settlement. The buyer of the vanilla beans was a party to this litigation, and more than four years after receiving the suspect lots, but less than four years after discovering of the alleged nonconforming lots, it moved to bring a products liability claim against the seller. It sought damages for economic losses resulting from the adulterated vanilla beans, including for damage to its vanilla extract, other food flavors, and the manufacturing equipment involved in the bean extraction process.

A federal magistrate denied the buyer’s motion, finding that the proposed claim was subject to the four year statute of limitations under the Uniform Commercial Code (UCC), and that the statute had run on the buyer’s claim for economic loss against the seller. The magistrate held that under the UCC the cause of action accrued when tender of delivery was made. The magistrate further found that there was no explicit warranty of future performance under the governing contract that would have made the statute of limitations run from the time the breach was actually discovered (which would have preserved the buyer’s claim). The magistrate also concluded that the New Jersey Product Liability Act (NJPLA), which contains a six year statute of limitations, and which entitles a claimant to damages against a seller of a product that results in physical damage to property (other than to the product itself) did not apply. The magistrate said that in the case of a buyer seeking damages for economic loss consequential to a breach of contract from defective goods, redress is limited to the UCC. The buyer appealed and filed a second motion to amend.

The United States District Court first held that the damages to the buyer’s vanilla extract involved damages to the product itself, rather than damages to other physical property for purposes of the NJPLA. The Court then held that pursuant to the economic loss doctrine, any commercial buyer seeking damages for loss resulting from the purchase of defective goods may recover from an immediate seller for breach of warranty under the UCC, but not in strict liability or negligence. In reaching its holdings, the Court referred to New Jersey case law and concluded that the UCC was the more appropriate vehicle for resolving commercial disputes arising out of business transactions in a chain of distribution. It also noted that the UCC permits consequential damages including direct economic damage to other property unless prohibited by contract. It interpreted such damages to be at the core of this commercial transaction (damages from tainted vanilla beans) and this constituted a risk that could have been accounted for in the contracting process by these sophisticated parties.

The Court agreed with the magistrate’s finding that the governing contract made no specific reference to a future warranty time period so as to trigger the four year statute of limitations upon discovery of the alleged defect. The Court further held that contractual language of a guarantee of quality surviving acceptance of delivery was not sufficient to invoke a future performance warranty. And, even if sufficient, the Court noted this particular guarantee only extended to pesticides, radiation or radioactive contaminants (not mercury). The Court noted that the buyer had received test results for the lots two months after receiving the beans and then had almost four years from that point to preserve its claims against the seller. The Court also denied the buyer’s claim of breach of implied warranty, refusing to extend the warranty to future performance because such an extension must be explicit in a contract.

Additionally, the Court also denied the buyer’s claims for contractual indemnity against the seller for alleged first and third party damages. As to the alleged first party damage, the Court said that any claim for indemnity for a party’s own direct damages controverts the basic tenet that a claim for indemnity results only from payment to or settlement with a third party. As such, the Court found that the buyer’s alleged first party indemnity claim was really a direct liability claim subject to the UCC’s four year statute of limitation that accrued at the time of delivery. As to the alleged third party damage, the Court found the buyer provided insufficient proofs that any third party actually made such a claim that could trigger indemnity rights. The Court found the buyer had not made any claim that it paid monies to customers and distributors based on personal injury or the destruction of property, but merely that it paid monies to others who purchased contaminated products.

Lastly, the Court addressed the buyer’s claim that the doctrine of equitable estoppel tolled the statute of limitations. It found that to apply equitable estoppel, the buyer had to prove that the seller either had tricked it into foregoing a timely filing of its claims or had the buyer believe that its claims were properly and timely filed. The Court found no evidence that the seller engaged in conduct to mislead the buyer or lull the buyer into a false sense of security. The seller never represented that the claim would be amicably settled without the necessity for litigation. The Court stated that the record did not show that anyone made promises to the buyer regarding the resolution of claims or the tolling of the statute of limitations until after the insurance coverage issues were resolved.


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