Opinion
Civil No. 99-547(DSD/JMM)
July 6, 2001
Larry A. Hanson, James E. Blaney, and Moore, Costello Hart, St. Paul, MN, counsel for plaintiff.
Dale O. Thornsjo, Esq., Mark R. Azman, Esq. and Johnson Condon, Edina, MN, counsel for defendant.
Paul C. Peterson, Esq. and Lind, Jensen, Sullivan Peterson, Minneapolis, MN, and Kirk D. Evenson, Thomas A. Marra, and Marra, Wenz Johnson, Great Falls, MT, counsel for Montana Speciality Mills.
ORDER
This matter is before the court on: (1) the motion for summary judgment filed by third-party defendant Montana Specialty Mills; (2) the motion for partial summary judgment filed by third-party plaintiff Chr. Hansen, Inc.; (3) the motion of Hansen to strike the affidavit of Peter Cocotas; and (4) the motion of Hansen to strike the affidavit of Jonathan Schlueter.
Based on a review of the file, record and proceedings herein, the court grants MSM's motion for summary judgment, denies Hansen's motion for partial summary judgment and denies Hansen's motions to strike as moot.
BACKGROUND
The plaintiff in this action, Hormel Food Corporation, ("Hormel"), alleges that defendant Chr. Hansen, Inc. ("Hansen") sold Hormel numerous bags of a specially formulated dry spice product, "Select Mustard," which were adulterated with pieces of rubber. Hansen does not produce the special mustard blend itself. Instead, Hansen contracts with Montana Specialty Mills, LLC ("MSM") to produce the mustard blend. After Hormel sued Hansen to recover the damages it incurred from using the contaminated product, Hansen joined MSM as a third-party defendant. MSM in turn sued the manufacturers of the rubber conveyor belt which had been identified as the source of the contamination found in the Hormel pepperoni product.
Hormel incorporates the spice blend into its "Lightening Bolt" pepperoni product, which it manufactures for a national pizza restaurant chain.
Hormel and Hansen have settled with each other, as have MSM and the fourth-party defendant manufacturers. The only remaining claims involve Hansen's suit against MSM. The undisputed facts regarding their contractual relationship are as follows.
In the early 1990's, Hansen, through its wholly-owned subsidiary Diversitech Inc., joined with Koch Agriservices to develop a high protein mustard product. Their joint efforts resulted in the creation of Diversitech Select Mustard, a unique high protein spice blend with particular appeal to the dry sausage industry. For the next several years, Diversitech contracted with Koch to purchase the Select Mustard product. On February 7, 1997, Diversitech entered into a fixed quantity contract with Koch, referred to as Contract No. 0300480, which required Koch to supply and Hansen to purchase 20,000 cwt (2 million pounds) of the mustard at a price of $36.50 per cwt. The contract expressly provided that the two million pounds were to be delivered during the shipment period of September 1, 1997 to August 31, 1998.
The 1997-98 contract and possibly several of the prior Select Mustard contracts were negotiated by Richard White, for Koch, and Michael Casamento, for Diversitech. In mid-1997, Koch sold its production facility and assigned the Diversitech contract to MSM. White left MSM shortly thereafter. Casamento left Diversitech in February 1998. Based on this chronology of events, neither of the individuals who were responsible for negotiating contract 0300480 between Koch and Diversitech were still employed by those companies as August 31, 1998 drew near.
Hansen's practice under the contract was to request shipments of the Select Mustard by telephoning or faxing MSM with the shipment request and providing MSM with a purchase order. In response to a purchase order, MSM would generally ship the order to Hansen's warehouse in Kansas, where Hansen would either reship the pallets of mustard to its customers or use the spice in its own blending operations. The bags were already identified with Hansen's label, therefore in the case of reshipment directly to Hormel, Hansen had no need to open, rebag or relabel the bags.
In April 1998, Diversitech and MSM negotiated a new contract, Contract No. S980027, whereby Diversitech would purchase 2,750,000 pounds of Select Mustard at $33.50 per hundred weight. (MSM Exh. 4.) The contract period was designated as October 1, 1998 through September 30, 1999. Meanwhile, shipments continued under the prior contract. As the August 31, 1998 shipping deadline on the prior contract approached, Hansen had not yet called for the entire 2 million pounds of spice blend as the contract required. Neither party contacted the other to discuss the remaining quantity or in any way attempt to renegotiate the contract or combine it with the upcoming contract for 1998-99. However, MSM was ready to ship additional product, and when it began receiving a series of purchase orders from Hansen in late August, it responded by shipping the requested amounts.
MSM made seven shipments of Select Mustard to Diversitech from late August to early October 1997. Each shipment was accompanied by an invoice which referenced Contract No. 0300480 (the 1997-98 contract) and the $36.50 price per hundred weight established by that contract. (Chambers Aff. Exh. 2.) The invoice also showed the declining balance of the Select Mustard quantity still remaining on the contract after each shipment. (Id.) The final invoice on contract number 0300480, dated October 15, 1998, showed a contract balance of zero. (Id.) Hansen paid each invoice without question.
Several invoices reflect a higher price, a change which relates only to various destination charges.
On October 19, 1998, Hormel first discovered pieces of rubber in its pepperoni production area. On November 16, 1998, Hormel contacted Hansen's Select Mustard sales person to determine whether Hansen was aware of the presence of rubber contaminants in its Select Mustard product. Hansen contacted MSM, who ultimately traced the contaminants to a rubber belt utilized to lift the mustard to a sacking bin. MSM provided Hansen with a list of all lots from the early August 1998, Select Mustard production run which were suspected of containing rubber. It was later determined that the suspect lots were part of MSM's shipments to Hansen in September 1997.
Hormel sued Hansen for breach of contract, breach of implied warranty of merchantability and breach of warranty of fitness for a particular use, claiming damages in excess of $1.3 million. Hansen tendered suit to MSM, but MSM rejected the tender. Thereafter, Hansen joined MSM, asserting claims of breach of contract, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, negligence, indemnification and/or contribution, and failure to accept tender of defense and indemnification. Hansen's prayer for relief seeks recovery of all amounts Hormel claims from Hansen, plus attorney fees.
MSM now moves for summary judgment, and Hansen cross-moves for partial summary judgment on the issue of MSM's liability for the damages sought. MSM asserts that the 1997-98 contract expressly disclaims all implied warranties, limits Hansen's remedies to replacement of the mustard or a refund of the difference between the contractual price and the fair market value, and excludes recovery of incidental or consequential damages. Hansen argues that because the adulterated mustard product was shipped after August 31, 1997, the contract does not control any dispute arising out of the September shipments therefore Hansen is entitled to the full range of remedies available under contract and tort law.
DISCUSSION
Summary judgment is appropriate where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party bears the burden of demonstrating to the court that no genuine issue of material fact exists. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). A fact is material only when its resolution affects the outcome of the case. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is genuine if the evidence is such that it could cause a reasonable jury to return a verdict for either party. See id. at 250.
On a motion for summary judgment, all evidence and inferences are to be viewed in a light most favorable to the nonmoving party. See id. at 255. The nonmoving party, however, may not rest upon mere denials or allegations in the pleadings, but must set forth specific facts sufficient to raise a genuine issue for trial. See Celotex, 477 U.S. at 324. Moreover, if a plaintiff cannot support each essential element of its claim, summary judgment must be granted because a complete failure of proof regarding an essential element necessarily renders all other facts immaterial. See id. at 322-23. With this standard at hand, the court considers the parties' cross-motions for summary judgment.
I. Interpretation and Applicability of Contract No. 0300480
Contract No. 033480 between Koch and Diversitech contains the following relevant provisions:
The terms and conditions set forth herein constitute a complete and exclusive statement of agreement between the parties hereto and may not be changed or modified except in writing signed by both parties. This contract shall control over any other documents sent the other party containing different or additional terms and conditions. The parties agree that both parties are merchants as defined in the Uniform Commercial Code operating in the ordinary course of business.
(Chambers Aff. Exh. 1.)
The contract also contains a choice of law provision designating the Kansas state law as the governing legal authority, and Koch' disclaimer of any liability for delay or performance failure beyond its control. Further, Koch disclaims any and all express or implied warranties and precludes Diversitech from seeking consequential damages. (Id.)
It is well-established under Kansas law that unambiguous contracts are to be enforced according to their plain, general, and common meaning in order to ensure that the intentions of the parties are enforced. Jayne v. Kennedy Coe, LLC, 978 P.2d 951, 953 (Kan.Ct.App. 1999). The intent of the parties is determined from the four corners of an unambiguous instrument, harmonizing the language therein if possible. Hall v. JFW, Inc., 893 P.2d 837, rev. denied 257 Kan. 1092 (Kan. 1995). Hansen emphasizes these familiar canons of construction and argues that because the 1997-98 contract between Koch and Hansen contains an unambiguous requirement that any modifications be memorialized in a writing signed by both parties, MSM could not possibly have extended the shipping period beyond the August 31, 1999, deadline merely by shipping additional Select Mustard in September and October. Hansen urges the court to conclude that the September and October purchase orders constituted Hansen's offer to purchase specified quantities of grain, which MSM accepted by shipping, and that these new "contracts" control the dispute, subject to the gap-filler provisions under the Kansas UCC.
While this simple outcome is inviting, the law also provides that an interpretation of a contractual provision should not be reached merely by isolating one particular sentence or clause, but by construing and considering the entire instrument from its four corners. City of Manhattan v. Galbraith, 945 P.2d 10, 14 (Kan.Ct.App. 1997). "The law favors reasonable interpretations, and results which vitiate the purpose of the terms of the agreement to an absurdity should be avoided." Id. In addition, under Kansas statutory law, the parties' course of performance may operate as a waiver of any contract term which is inconsistent with such performance, even where the contract requires all modifications of the contract to be in writing. Kan. Stat. Ann. §§ 84-2-208(3), 84-2-209(2) and (4). See also 1 Hawkland, Uniform Commercial Code Series, § 2-209:5 (1984) ("Notwithstanding the protective features of the no-modification-unless-in-writing clause and the statute of frauds, the conduct of the parties may make it clear that certain aspects of the written contract have not been taken seriously by them.")
Based on these legal guidelines, and the facts of this case, the court concludes that the conduct of both parties in September and October, 1998 operated as a mutual waiver of the August 31, 1998 shipping deadline, precluding either party from strictly enforcing that deadline.
The parties do not dispute that as of August 31, 1998, Hansen had failed to timely call for the quantity of Select Mustard remaining under the contract. Hansen describes various scenarios by which the parties could have responded to this situation. For example, in a buyer's market, Hansen might choose to notify MSM that it wished to negotiate a new price for the remaining balance, whereas in a seller's market, MSM could notify Hansen that it must take shipment before the end of the shipment period, or risk expiration of the favorable pricing terms. In fact, no such negotiations occurred.
The court notes that the negotiators of the original contract each agreed during their depositions that such negotiations typically did occur between these two parties before the expiration of the shipment period. (Azman Aff. Exh. 3, White dep. at 73, 84-85; Exh 2, Casamento dep. at 72-76, 125-26.) However, both White and Casamento had left the employ of their respective companies and their successors apparently did not pursue the same course of conduct.
Hansen contends that it was incumbent on MSM to enforce Hansen's obligations to perform and that if Hansen failed to call for the required quantity, MSM could have pursued the remedies available to it under the contract. MSM undoubtedly had the right to sue Hansen for its failure to timely order the remaining mustard, however, the court concludes that MSM waived that right by continuing to ship pursuant to Hansen's belated purchase orders and invoicing those shipments as part of the 1997-98 contract. Likewise, Hansen waived its right to strictly enforce the deadline by calling for additional quantities of Select Mustard and accepting delivery pursuant to invoices which unambiguously indicated that the shipments were made pursuant to the 1997-98 contract, at the price and quantity established under that contract.
Hansen argues that it would not have waived its right to strictly enforce the shipping deadline because the end date was specifically linked to the end of the growing season and the beginning of a new commodities market. Essentially, Hansen contends that the shipment period reflected its intent to establish a contract under which time was of the essence.
In addition to the parol evidence concerns raised by this assertion, the court notes that time is not ordinarily regarded as of the essence of a contract unless it is so stipulated by express or implied terms. T.S.I Holdings, Inc. v. Jenkins, 924 P.2d 1239, 1251 (Kan. 1996). There are no express time of the essence terms in the agreement and Hansen's conduct does not support an inference that such terms were implied. If time were of the essence, the court would expect that Hansen would have attempted renegotiation of the remaining quantity, since the price of mustard had gone down, or at the very least insist that the October shipments count toward the 1998-99 quantity, which was to be shipped at the lower price of $33.50 cwt. (MSM Exh. 3.) Instead, MSM shipped the mustard through October under the terms of the 1997-98 contract, including the $36.50 per cwt. price, and Hansen paid the invoices without question.
Hansen asserts that it continued to accept shipments merely because Hormel continued to want product. It further contends that it had no control over MSM's invoicing and had no ability to know the meaning of "obscure references" to the contract on the invoices. This argument fails to persuade, in light of Hansen's status as a sophisticated merchant and the court's belief that the references to the 1997-98 contract are no way "obscure." As Hansen's corporate representative Kim Bright admitted at his 30(b)(6) deposition, there is no reason to dispute that the purchase orders, the references to contract number, quantity and price contained in the MSM invoices and the references to invoice number contained on Hansen's check stubs all match up and evidence Hansen's agreement to pay for the September and October shipments of Select Mustard under contract number 0300480. (MSM Exh. 2, Bright dep. at 137-144.)
The court is well aware that its function is not to make contracts; rather it is the function of the courts to enforce contracts as made. Fourth Nat'l Bank Trust Co. v. Mobil Oil Corp., 582 P.2d 236, 241 (Kan. 1978); Springer v. Litsey, 345 P.2d 669, 673 (Kan. 1959). However, based on Hansen's decision to call for the remaining quantity without seeking more favorable terms and its failure to question or any way object to MSM's unambiguous invoices, the court must conclude that Hansen waived the August 31, 1998, shipping deadline and is precluded from asserting that deadline at this juncture.
Hansen argues that MSM may not rely on a defense of the existence of a valid contract or a waiver of its terms, as it failed to plead either theory as a defense to the third-party complaint. Waiver is indeed an affirmative defense which must be affirmatively pleaded, Fed.R.Civ.P. 8(c), and MSM's answer to Hansen's third-party complaint did not contain the word "waiver." However, MSM did assert an estoppel defense, arguing that Hansen was "estopped by their own conduct from asserting misconduct on the part of MSM." (Thornsjo Aff. Exh. 2 ¶ 46.) While the terms waiver and estoppel are not entirely interchangeable, they are frequently referred to in tandem, and under the liberal pleading requirements of the Federal Rules of Civil Procedure, the court deems the estoppel assertion sufficient notice to Hansen that MSM intended to rely on Hansen's own conduct as a defense. Barnwell Hays, Inc. v. Sloan, 564 F.2d 254, 255-56 (8th Cir. 1977).
II. Application of Contract No. 0300480 to Hansen's Claims
Having determined that Contract No. 0300480 applies to the shipments of adulterated mustard product, Hansen's claims for breach of implied warranty of merchantability and breach of implied warranty for fitness of purpose are precluded under the terms of that contract. Specifically, the express disclaimer of warranties and limitation of remedies contained in paragraphs 2 and 3 of the contract terms for Koch sales provide that:
2. KOCH MAKES NO WARRANTY AND HEREBY SPECIFICALLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE GOODS SOLD HEREUNDER, INCLUDING BUT NOT LIMITED TO, ANY WARRANTIES ARISING FROM COURSE OF DEALING AND USAGE OF TRADE, FITNESS FOR A PARTICULAR PURPOSE, OR MERCHANTABILITY, EXCEPT THOSE WARRANTIES, IF ANY, SPECIFICALLY SET FORTH ON THE FRONT SIDE OF THIS CONTRACT. THE GOODS ARE SOLD AS IS IN THEIR CURRENT CONDITION WITH ALL FAULTS.
3. Koch's liability and Buyer's exclusive remedy for any cause of action of any nature or kind arising out this contract is expressly limited, at Koch's option, to replacement of the non-conforming goods at the F.O.B. point stated herein (freight for Koch's account to the extent the terms of sale so provide) or payment, not to exceed the purchase price, of the goods for which damages are claimed. WITHOUT LIMITATION ON THE FOREGOING, IN NO EVENT SHALL KOCH BE LIABLE FOR LOST PROFITS OR ANY OTHER SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
(MSM Exh. 1.)
Hansen argues that even if the 1997-98 contract controls and the court must apply these liability and remedy limiting provisions, Hansen's claim for breach of contract remains viable. However, the court fails to see how MSM's expansive disclaimer of warranty, including its express statement that "the goods are sold as is in their current condition with all faults," would allow Hansen to sue MSM for breach of contract based on the delivery of adulterated Select Mustard. Accordingly, the court grants summary judgment to MSM on Hansen's breach of contract claim.
With respect to the allegations of negligence, the economic loss doctrine makes it clear that a buyer of allegedly defective goods cannot sue in tort where the injury consists only of damages to the goods themselves. East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 871-73 (1986); Koss Constr. v. Caterpillar, Inc., 960 P.2d 255, 260 (Kan.Ct.App. 1998). Therefore, Hansen's claim for negligence must also be dismissed.
Finally, with respect to Hansen's remaining claims of indemnification, contribution, and failure to accept tender, the court notes that the contract expressly provides that "Buyer [Diversitech] shall indemnify and hold Koch harmless from any liability of whatsoever nature or kind to which Koch might become subject resulting from Buyer's use, misuse or disposal of the goods purchased hereunder." (MSM Exh. 1.) Although private contracts exculpating a party from the consequences of its own acts are generally looked upon with disfavor by Kansas courts, an exculpatory clause will nonetheless be enforced where there is "no vast disparity in the bargaining power between the parties and the intention to do so is expressed in clear and unequivocal language." Belger Cartage Serv., Inc. v. Holland Const. Co., 582 P.2d 1111, 1119 (Kan. 1978) (quoting Kansas City Power Light Co. v. United Tel. Co., 458 F.2d 177, 179 (10th Cir. 1972). Cf. Elite Professionals, Inc. v. Carrier Corp., 827 P.2d 1195 (Kan.Ct.App. 1992) (quoting Mostyn v. Delaware, L. W.R. Co., 160 F.2d 15, 19 (2d Cir. 1947) ("'[I]f the indemnitee means to throw the loss upon the indemnitor for a fault in which he himself individually shares, he must express that purpose beyond any peradventure of a doubt.'").
While the exculpatory clause in this case does not specifically refer to acts of negligence on the part of MSM or its suppliers, and Hormel has not directly sued MSM, the broadly-worded exculpatory clause of the contract is unambiguous: Hansen shall indemnify and hold MSM harmless from "any liability whatsoever nature or kind" derived from Hansen's use of the spice blend. These parties are sophisticated merchants, and in light of this indemnification provision, together with the explicit warranty disclaimer and remedy limiting language cited above, the court must conclude that Hansen's claims for negligence, indemnification, contribution and failure to accept tender of defense cannot withstand summary judgment.
For these reasons, the court denies Hansen's motion for partial summary judgment and grants MSM's motion for summary judgment.
III. Motions to Strike
Hansen moves to strike the affidavits of Jonathan F. Schlueter and Peter Cocotas, arguing that affidavits contains assertions which exceed the scope of the testimony disclosed by MSM in its required expert disclosure under Fed.R.Civ.P. 26(a). Because the court relies on neither affidavit, the motions to strike are denied as moot.
CONCLUSION
For the foregoing reasons, IT IS HEREBY ORDERED that:
1. The motion for summary judgment filed by third-party defendant Montana Specialty Mills is granted.
2. The motion for partial summary judgment filed by third-party plaintiff Chr. Hansen, Inc. is denied.
3. The motion of third-party plaintiff Chr. Hansen, Inc. to strike the affidavit of Peter Cocotas is denied as moot.
4. The motion of third-party plaintiff Chr. Hansen, Inc. to strike the affidavit of Jonathan Schlueter is denied as moot.
LET JUDGMENT BE ENTERED ACCORDINGLY.