Opinion
Civil No. A2-01-138, Docket Number: 57
January 30, 2004
MEMORANDUM AND ORDER DENYING MOTION FOR SUMMARY JUDGMENT
Summary: The Court denies the defendant's motion for summary judgment because it finds a question fact remains as to the plaintiff's status as a third party beneficiary under NDCC § 9-02-04. The Court limits the plaintiff's theories of recovery by declining to abolish the vertical privity requirement in actions for breach of express warranty and holds that a non-privity commercial purchaser seeking recovery for economic losses is not an "injured" person for purposes of NDCC § 41-02-35.
I. INTRODUCTION
On January 27, 2004, the Court, having read the parties' submissions, considered the defendant's motion for summary judgment and held a teleconference to announce its decision and to discuss the pending trial. This Memorandum and Order follows.
II. BACKGROUND
In March of 2000, North Central Commodities, Inc. ("NCC"), a North Dakota corporation, contracted with Gedco, a Canadian company, to sell Great Northern Beans. Gedco was purchasing the beans for resale to Falcon for Import and Trade Company ("Falcon"), an Egyptian company and the plaintiff in this case. The contract between NCC and Gedco required the beans to be of United States Department of Agriculture ("USDA") Grade No. 1 and/or Grade No. 2. Camex, Inc., a Colorado company, acted as a broker for the transaction between NCC and Gedco.
NCC contracted with Maple River Bean Company ("Maple River") to purchase USDA Grade No. 1 and/or Grade No. 2 "Great Northern Beans." Upon receiving the shipment from Maple River, the USDA tested the beans in a Grand Forks, North Dakota field office. The beans were certified as being of USDA Grade No. 1 and/or Grade No. 2 quality. The USDA presented NCC with Commodity Inspection Certificates to verify the quality before shipping.
When Falcon received the shipment of beans in June of 2000 it was suspicious of the quality of the product. Falcon arranged for the USDA to retest the beans, and Camex informed NCC of this arrangement. Gedco later informed NCC that Falcon had rejected the shipment due to its perceived low quality. Upon reviewing the shipment, the USDA Board of Appeals and Review found a substantial portion of the shipment to be of Grade No. 3, a lower grade than that required by the contract. At that point Gedco informed NCC that it was in default of its contract.
Falcon brought suit against NCC for breach of express warranty and breach of contract. As part of its answer, NCC filed a third-party complaint against Maple River. NCC subsequently filed the current motion for summary judgment against Falcon claiming it is entitled to judgment as a matter of law because Falcon was not a party to the contract between NCC and Gedco, nor was it a third party beneficiary to the contract.
III. DISCUSSION
For the Court to grant summary judgment, the record, when viewed in the light most favorable to the nonmoving party, must conclusively show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c). With this standard in mind, the Court begins its discussion of the legal issues presented.
The legal issues presented arise out of a simple fact — NCC in its contract with Gedco expressly warranted beans of a specific grade and quality. As a non-party to the contract between NCC and Gedco, Falcon cannot directly recover for breach of this express warranty, assuming there was a breach, unless the Court abolishes the vertical privity requirement. Otherwise, to recover for breach of this express warranty, or to recover for breach of contract, Falcon must demonstrate it was a third party beneficiary to the contract between NCC and Gedco. Falcon cites two North Dakota statutes, N.D. Cent. Code §§ 9-02-04 and 41-02-35, that it contends allow it to recover damages as a third party beneficiary.
A. Vertical Privity of Contract
The old common law rule required privity of contract between the original seller and subsequent purchaser in an action for breach of express or implied warranty. Wood v. Advanced Rumely Thresher Co., 234 N.W. 517, 519 (N.D. 1931) (common law rule). The Uniform Commercial Code (§ 2-318) relaxed the privity requirement allowing non-privity purchasers to recover personal injury damages on a claim for breach of warranty. Spieker v. Westgo, Inc., 479 N.W.2d 837, 847-48 (N.D. 1992). There is now a somewhat controversial trend, as this Court recognized in AgGrow Oils LLC v. National Union Fire Insurance Co. of Pittsburgh, 276 F. Supp.2d 999, 1014 (D. N.D. 2003), where some courts allow a non-privity purchaser to recover direct economic losses that occur as a result of a breach of warranty.
Scholars criticize the modern trend's relaxation of the privity requirement as anti-business and cost prohibitive. See White and Summers, Uniform Commercial Code § 11-7.
Direct economic losses, as opposed to consequential economic losses, are those losses flowing directly from insufficient product quality-the difference between the actual value of goods accepted and the value they have if they had been as warranted. Black's Law Dictionary 531 (7th ed. 1999). Falcon argues it suffered direct economic losses.
Falcon challenges this Court to follow the modern trend it recognized in AgGrow and abolish the vertical privity requirement in claims for breach of express warranty. As Falcon's argument suggests, from a historical standpoint, privity is a dying concept. In 1965, Lang v. General Motors Corp., 136 N.W.2d 805, 810 (N.D. 1965), the North Dakota Supreme Court held that parties to an action based on implied warranty in products liability cases need not be in privity of contract. That same year, the court continued its assault on the lack of privity defense, abolishing it in tort actions where a dangerous condition exists that a reasonable manufacturer knew or should have known was dangerous.Lindenberg v. Folson, 138 N.W.2d 573, 582-83 (N.D. 1965). A couple of years later the North Dakota Legislature adopted Alternative C of UCC § 2-318. N.D. Cent. Code § 41-02-35 (1967). The purpose of Alternative C was to follow the trend of strict products liability in tort and extend warranty protection beyond personal injuries. Minnesota Mining and Mfg. v. Nishika Ltd., 565 N.W.2d 16, 22 (Minn. 1997). These cases and events, along with subsequent cases, events and law review articles, lead to this Court's belief, as stated in AgGrow, that privity is an antiquated notion in contractual warranty actions as well as tort actions.
Vertical privity is the legal relationship between parties in a product's chain of distribution. Black's Law Dictionary 1218 (7th ed. 1999).
This Court's personal beliefs aside, the decision to abolish the vertical privity requirement so that a non-privity plaintiff may recover direct economic damages for breach of express warranty is one for the North Dakota Supreme Court. Thus, finding a lack of vertical privity between Falcon and NCC, the Court holds that, without third party beneficiary status, Falcon cannot maintain an action against NCC to recover direct economic damages under a theory of breach of express warranty.
B. Third Party Beneficiary-N.D. Cent. Code § 41-02-35
If the Court declines to abolish the vertical privity requirement, Falcon claims it is allowed to recover direct economic damages for breach of express warranty pursuant to N.D. Cent. Code § 41-02-35, which effectively grants third party beneficiary status to persons that meet its requirements. Section 41-02-35 states:
A seller's warranty whether express or implied extends to any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by the breach of warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends.
Section 41-02-35 codifies UCC § 2-318 (Alternative C), which NCC contends cannot be used to recover purely economic damages because purely economic damages do not constitute "injury" under the statute. NCC cites,Minnesota Mining and Mfg. v. Nishika Ltd., 565 N.W.2d 16, 22 (Minn. 1997), which holds that non-contracting parties who never used, purchased or otherwise acquired the seller's warranted goods may not seek lost profits, unaccompanied by physical injury or property damage.
Falcon attempts to distinguish Nishika. In Nishika, the court's rationale was guided by the fact that the non-privity plaintiff sought consequential economic damages and never dealt directly with the seller, nor had they purchased or otherwise acquired the warranted goods. Id. at 19-20. Here, Falcon asserts it seeks direct economic damages and it acquired and purchased the beans. Falcon also emphasizes that courts interpreting Alternative C recognize the difference between recovery for direct economic damages and consequential economic damages. See, e.g.,Fullerton Aircraft Sales and Rentals Inc. v. Beech Aircraft Corp., 842 F.2d 717, 722 (4th Cir. 1988).
Here, the Court sides with NCC. Although the Court recognizes there is a stronger argument for recovery of direct economic damages, the argument holds up only for consumer purchases. See White and Summers, Uniform Commercial Code § 11-5; see also Nishika, 565 N.W.2d at 20 (emphasizing that Alternative C was intended to provide protections for injured consumers). Therefore, the Court holds that a non-privity commercial purchaser seeking recovery for economic losses is not an "injured" person for purposes of N.D. Cent. Code § 41-02-35.
C. Third Party Beneficiary-N.D. Cent Code § 9-02-04
As previously mentioned, Falcon cannot maintain an action for breach of express warranty or breach of contract without third party beneficiary status. The Court has rejected Falcon's attempt to gain third party beneficiary status through N.D. Cent. Code § 41-02-05; nevertheless, Falcon may also gain such status by operation of N.D. Cent. Code § 9-02-04. Section 9-02-04 states, "[a] contract made expressly for the benefit of a third person may be enforced by him at any time before the parties thereto rescind it."
NCC denies Falcon is a third party beneficiary; at most, NCC claims Falcon is an incidental beneficiary. NCC points out that Falcon was not mentioned in the contract. Falcon argues at the very least a genuine issue of material fact exists as the contract mentioned the term "end receiver," which it contends implied Falcon. The contract further provided for Falcon's bank to directly pay NCC for the beans. The Court agrees with Falcon that a genuine issue of material fact remains as to whether it is a "third party beneficiary" as that term is defined in § 9-02-04. Accordingly, the NCC's Motion for Summary Judgment is DENIED.
IV. CONCLUSION
NCC's Motion for Summary Judgment is DENIED (doc. #43) but Falcon's theories of recovery are limited as noted. Falcon's Motion for Oral Argument is DENIED (doc. #52).
IT IS SO ORDERED.