On certification to the Superior Court, Appellate Division, whose opinion is reported at 191 N.J. Super. 22 (1983).
For reversal -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern and Garibaldi. For affirmance -- None. The opinion of the Court was delivered by Pollock, J. Handler, J., concurring. Handler, J., concurring in the result.
[98 NJ Page 560] The fundamental issue on this appeal concerns the rights of a commercial buyer to recover for economic loss caused by the purchase of defective goods. More specifically, the question is whether the buyer should be restricted to its cause of action under the Uniform Commercial Code (hereinafter U.C.C. or the Code) or should be allowed to pursue a cause of action predicated on principles of negligence and strict liability. The difference is important because the buyer in the present case instituted its action beyond the four-year period provided by the U.C.C., N.J.S.A. 12A:2-725, but within the six-year period applicable to tort actions, N.J.S.A. 2A:14-1.
The defendants are a motor vehicle manufacturer, its dealer, and a supplier of transmissions. The gravamen of the complaint is that defects in the transmissions, which were installed in commercial trucks, caused the buyer to sustain a loss in the benefit of its bargain and consequential damages. Specifically, the buyer sought recovery for repair, towing, and replacement parts, as well as for lost profits and a decrease in the value of the trucks.
The trial court perceived the matter as sounding in contract and found that the plaintiff had not instituted its action within the four-year period provided by the U.C.C. N.J.S.A. 12A:2-725. In an unreported decision, the court granted summary judgment for defendants. The Appellate Division reversed on the ground that the action was more appropriately characterized as one in strict liability in tort, not contract, and that the six-year period of limitations applicable for tort actions had not expired. 191 N.J. Super. 22 (1983). We granted defendants' petition for certification. 95 N.J. 208 (1983).
We hold that a commercial buyer seeking damages for economic loss resulting from the purchase of defective goods may recover from an immediate seller and a remote supplier in a distributive chain for breach of warranty under the U.C.C., but not in strict liability or negligence. We hold also that the buyer need not establish privity with the remote supplier to maintain an action for breach of express or implied warranties. Accordingly, the four-year period of limitations provided by the Code, N.J.S.A. 12A:2-725, not the six year general statute of limitations, N.J.S.A. 2A:14-1, determines the time within which an action must be commenced against the immediate seller and remote supplier.
Because this matter is presented on defendants' motion for summary judgment, we accept as true plaintiff's version of the facts, according that version the benefit of all favorable inferences.
Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58, 61 (1980). Plaintiff, Spring Motors Distributors, Inc. (Spring Motors), which is in the business of selling and leasing trucks, operates a fleet of 300 vehicles. Spring Motors agreed to purchase from defendant Turnpike Ford Truck Sales, Inc. (Turnpike) 14 model LN8000 trucks made by defendant Ford Motor Company (Ford) at a purchase price of $265,029.80. Turnpike is a Ford dealer, and throughout these proceedings the two defendants have been treated as a single entity.
In the agreement, Spring Motors specified that the trucks should be equipped with model 390V transmissions made by Clark Equipment Company (Clark), a supplier to Ford. Spring Motors specified Clark transmissions because of "excellent service and parts availability on past models" and because of Clark's advertisements and brochures.
At the time of the sale to Spring Motors, Ford issued a form warranty with each truck to
repair or replace any of the following parts that are found to be defective in factory material or workmanship under normal use in the United States or Canada on the following basis: * * * any part during the first 12 months or 12,000 miles of operation, whichever is earlier * * * transmission case and all internal transmission parts (including auxiliary transmission) * * * after 12,000 miles and during the first 12 months or 50,000 miles of operation, whichever is earlier, for a charge of 50% of the dealer's regular warranty charge to Ford for parts and labor. * * * For series 850 and higher trucks, any part of the * * * transmission * * * for the first 12 months or 100,000 miles of operation, whichever is earlier * * *.
The warranty also stated: "To the extent allowed by law, this WARRANTY IS IN PLACE OF all other warranties, express or implied, including ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS." Furthermore, the Ford warranty expressly stated: "Under this warranty, repair or replacement of parts is the only remedy, and loss of use of the vehicle, loss of time, inconvenience, commercial loss or consequential damages are not covered."
The warranty that Clark extended to Ford provided: "WARRANTY. Clark Equipment Company ('Clark') warrants to Buyer
that each new Clark axle, transmission, torque converter and drive train product, and components thereof, shall be free from defects in material and workmanship under normal use and maintenance" for 12 months or 12,000 miles for on-highway vehicles used on highways or 2,000 miles for off-highway equipment. At Clark's option, the warranty could be limited to repairs or replacements. The warranty also stated: "THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES (EXCEPT OF TITLE), EXPRESSED OR IMPLIED, AND THERE IS NO IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL CLARK BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES."
Spring Motors took delivery of the trucks in November 1976, and leased them to Economic Laboratories, Inc. (Economic), which used the trucks in cities and on highways for their intended purpose of hauling. Spring Motors, which serviced the trucks during the period of the lease, began experiencing problems with the performance of the Clark transmissions as early as February 1977. The problems persisted, and Spring Motors communicated directly with Clark, writing in October 1977 that it had "had nothing but trouble" with the transmissions. Later correspondence, dated January 26, 1978, confirmed that Clark analyzed the transmissions and found that "the failure in these gear boxes was a result of improper angle degree in the way certain gears were cut," resulting "in additional strain on the actual gear and the mating gear and related shafts." Still later, Spring Motors pointed out that the transmission failures had cost it "several thousand dollars in out of pocket expenses plus many additional thousands of dollars in lost revenues, customer ill will, replacement equipment, etc."
Clark provided Spring Motors with replacement parts, but the transmission failures continued. On July 11, 1978, Spring Motors wrote to Clark that in the absence of a satisfactory response by August 1, it would remove and replace the Clark transmissions and "take whatever action is necessary to hold
you financially responsible." Thereafter, on November 1, 1979, Spring Motors and Economic terminated the truck lease and, as part of a settlement, Economic purchased the trucks for $247,580.97. Four years and one month after the delivery of the trucks, on December 23, 1980, Spring Motors instituted this action.
In the complaint, which contained three counts, Spring Motors sought judgment against all defendants for consequential damages: the expenses of towing, repairs, and replacement of parts; lost profits; and decrease in market value of the trucks. The first count asserted that the defendants breached certain express and implied warranties; the second count claimed a violation of the Magnuson-Moss Act, 15 U.S.C. §§ 2301 to -2312, a claim that Spring Motors no longer pursues; and the third count sought recovery in strict liability and negligence.
The trial court found that a lack of privity barred the action between Spring Motors and Clark and that the four-year period of limitations under the U.C.C., N.J.S.A. 12A:2-725, barred any action against Ford and Turnpike. The Court further found the six-year statute of limitations, N.J.S.A. 2A:14-1, pertaining to tort actions for property damage, inapplicable. Consequently, the trial court dismissed the complaint as to all defendants.
The Appellate Division affirmed the dismissal of the breach of warranty claim in the first count, but reversed the dismissal of the tort claims, without discussing the negligence aspect of the third count. That court concluded that Spring Motors, as a commercial buyer, could maintain its strict liability claim against all defendants. 191 N.J. Super. at 41. The court also determined that the six-year limitation period provided by N.J.S.A. 2A:14-1 applied and that plaintiff's action was, therefore, timely. Id. at 44.
We granted petitions for certification by Ford, Turnpike, and Clark to review that part of the Appellate Division judgment that reversed the dismissal of the tort claims. Spring Motors
did not file a cross-petition seeking review of the dismissal of the warranty claims, and that issue is not before us.
If the legal relationships among the parties are governed by the U.C.C., then plaintiff's action, which was instituted more than four years after the delivery of the trucks, is time-barred. Hence, one question is whether the Code provides the exclusive remedies available to Spring Motors. In answering that question, we turn to the structure and purpose of the Code, which constitutes a comprehensive system for determining the rights and duties of buyers and sellers with respect to contracts for the sale of goods. Ramirez v. Autosport, 88 N.J. 277, 285-90 (1982). Its underlying purpose is to clarify and make uniform throughout the United States the law governing commercial transactions. N.J.S.A. 12A:1-102.
The Code provides for express warranties regarding the quality of goods, N.J.S.A. 12A:2-313, as well as implied warranties of merchantability, N.J.S.A. 12A:2-314, and of fitness for a particular purpose, N.J.S.A. 12A:2-315. As is subsequently discussed in greater detail, a seller's warranty, whether express or implied, extends to members of the buyer's family or his household guests, who are viewed as third-party beneficiaries, and a seller may not exclude or limit the extension of those warranties to such persons. N.J.S.A. 12A:2-318.
Subject to requirements of good faith, diligence, and reasonableness, parties may vary the terms of the Code. N.J.S.A. 12A:1-102. A seller may exclude or modify its liability on warranties, and if in writing, the exclusion or modification must be "conspicuous." N.J.S.A. 12A:2-316. Furthermore, a buyer and seller may agree to limit the buyer's remedy to the repair and replacement of parts. N.J.S.A. 12A:2-719(1)(a). Similarly, the parties may agree to limit or exclude consequential damages, "unless the limitation or exclusion is unconscionable." N.J.S.A. 12A:2-719(3). Although a limitation of consequential
damages for personal injuries in the case of consumer goods is prima facie unconscionable, a limitation of damages for a commercial loss is not. Id.
When a seller delivers goods that are not as warranted, the buyer's measure of damage is the difference between the value of the defective goods and the value they would have had if they had been as warranted. N.J.S.A. 12A:2-714. In a proper case, a buyer may also recover incidental damages, which include reasonable expenses incidental to the breach, N.J.S.A. 12A:2-715; consequential damages, including losses resulting from the buyer's particular needs of which the seller had knowledge, id. at (2)(a); and property damage, id. at (2)(b).
Economic loss can take the form of either direct or consequential damages. A direct economic loss includes the loss of the benefit of the bargain, i.e., the difference between the value of the product as represented and its value in its defective condition. Consequential economic loss includes such indirect losses as lost profits. J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code §§ 11-4 to 11-6 at 405-10 (2d ed. 1980) [hereinafter cited as White & Summers]; Note, "Economic Loss in Products Liability Jurisprudence," 66 Colum.L.Rev. 917, 918 (1966); Note, "Manufacturer's Liability to Remote Purchasers for 'Economic Loss' Damages -- Tort or Contract?," 114 U.Pa.L.Rev. 539, 542 (1966). Because it presents a claim for economic loss, which is not normally recoverable in a tort action, rather than a claim for physical harm, this case probes the boundary between strict liability and the U.C.C. The delineation of that boundary requires a brief summary of the history and nature of strict liability.
One year before the adoption of the U.C.C. in New Jersey, this Court delivered its landmark opinion in Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358 (1960). Henningsen involved a defective automobile that crashed and caused property damage to the car and personal injuries to the driver, who
was the owner's wife. The Court affirmed a judgment in favor of the plaintiffs on the theory of breach of implied warranty of fitness. Justice Francis wrote in now familiar language: "[U]nder modern marketing conditions, when a manufacturer puts a new automobile in the stream of trade and promotes its purchase by the public, an implied warranty that it is reasonably suitable for use as such accompanies it into the hands of the ultimate purchaser." 32 N.J. at 384. By extending a warranty of safety to consumers of all products, not just those intended for human consumption, Henningsen removed the notion of privity of contract from all cases involving the sale of defective goods that cause physical injury.
Prosser describes the effect of the Henningsen holding as "the most rapid and altogether spectacular overturn of an established rule in the entire history of the law of torts." W. Prosser & W. Page Keeton, Handbook of the Law of Torts § 97 at 690 (5th ed. 1984) [hereinafter cited as Prosser & Keeton]. Courts throughout the country followed the lead of New Jersey, id., and the American Law Institute (ALI) included a new section, 402A, captioned "Special Liability of Seller of Product for Physical Harm to User or Consumer," in the Restatement (Second) of Torts. The comment to section 402A disavows that the section is governed by the warranty provisions of the U.C.C. or by U.C.C. limitations on the scope and content of the warranties.
Underlying the Henningsen decision was the Court's recognition that consumers were in an unequal bargaining position with respect to automobile manufacturers and dealers, who required them to sign standard contracts. Henningsen, supra, 32 N.J. at 389-404. One of the main purposes of strict liability, as declared in Henningsen, is the allocation of the risk and distribution of the loss to the better risk-bearer. Id. at 379; Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 173 (1979). Generally, the manufacturer, who is better able to eliminate defects from its product and who can spread the cost of the risk among all of its customers, is the better risk-bearer.
Restatement, supra, § 402A comment c. By contrast, the individual consumer is poorly situated to bear the entire risk of loss from injuries caused by a defective product. Through allocation of the risk of loss to the manufacturer, strict liability achieves its objective of protecting the consumer who, because of unequal bargaining power, cannot protect him or herself.
The year after the Henningsen decision, 1961, the Legislature adopted the U.C.C., effective January 1, 1963. L. 1961, c. 120. Then in 1965 this Court decided Santor v. A. & M. Karagheusian, Inc., 44 N.J. 52, which, like Henningsen, involved facts that occurred before the adoption of the U.C.C. In Santor, a carpet manufacturer sold a defective carpet to a consumer through its wholly-owned distributor. The Court found that the consumer could recover against the manufacturer, although there was no privity between the parties and the action was for an economic loss.
The action was couched in terms of a breach of implied warranty of merchantability, id. at 63, but the Court acknowledged that the action could be described better as one in strict liability. Id. at 63-67. In Santor, Justice Francis made clear that neither mass advertising by the manufacturer nor personal injuries to the consumer was essential to the invocation of strict liability. Id. at 65. Echoing his words in Henningsen, he stated that the purpose of a strict liability action was to shift the risk of loss so that it was borne by "the makers of the products who put them in the channels of trade, rather than by the injured or damaged persons who ordinarily are powerless to protect themselves." Id. Like the plaintiff in Henningsen, the plaintiff in Santor was an individual consumer. Furthermore, the action was for a direct economic loss, and the Court limited recovery to the lost benefit of the bargain, i.e., "the difference between the price paid by the plaintiff and the actual market value of the defective carpeting at the time when plaintiff knew or should have known it was defective * * *." Id. at 68-69.
In two later cases, Rosenau v. City of New Brunswick & Worthington Gamon Meter Co., 51 N.J. 130, 143 (1968), and Heavner v. Uniroyal, Inc., 63 N.J. 130, 149-50 (1973), the Court stated that strict liability, not the U.C.C., should apply to an action for damages between a consumer and a manufacturer who were not in privity. Rosenau involved a suit by homeowners against the manufacturer of water meters sold to a municipality for its water system. One of the meters broke, causing property damage to plaintiffs' home, and plaintiffs sued in strict liability and negligence within six years of the date of the damage, but more than twenty years after the sale of the meters to the municipality. After finding that the tort action did not accrue until the damage occurred, the Court found applicable the six-year period provided by the general statute of limitations for property damage, N.J.S.A. 2A:14-1. Justice Jacobs noted that the plaintiffs' action was not "for economic loss or loss of bargain; their claim is for physical harm to their property * * *." Rosenau, supra, 51 N.J. at 142. He then concluded that the U.C.C. "explicitly relates to actions 'for breach of any contract for sale' and presumably was not intended to apply to actions between consumers and manufacturers who were never in any commercial relationship or setting." Id. at 143.
Heavner concerned an action against a manufacturer for damages to a truck and personal injuries to its driver caused by a tire blowout. The action was instituted more than three years after the accident. This Court ruled that the two-year statute of limitations applicable to personal injury actions in tort, N.J.S.A. 2A:14-2, not the four-year period provided by the U.C.C., N.J.S.A. 12A:2-725, applied to the personal injury action and the wife's claim for loss of consortium. Heavner, supra, 63 N.J. at 156-57. In affirming a judgment dismissing the personal injury count, Justice Hall wrote that " N.J.S.A. 12A:2-725 does not apply to strict liability in tort actions for consequential personal injury and property damage against the ultimate seller or supplier and that such actions are governed, like
those against a manufacturer, by our general statutes of limitation." Id. at 157. He carefully noted, however, that "[w]e do not reach the question whether N.J.S.A. 12A:2-725 applies to actions merely for loss-of-the-bargain or economic damage in a commercial sense." Id. at 157 n. 16. Neither Rosenau nor Heavner involved a claim for economic loss, and neither case involved an action between commercial parties.
As the preceding cases demonstrate, the U.C.C. rules pertaining to the sale of goods overlap the doctrine of strict liability for placing a defective product in the stream of commerce. One reason for the overlap is that strict liability, in this regard, evolved from implied warranties of fitness and merchantability under the U.C.C. and its predecessor, the Uniform Sales Act. Those warranties originated as a matter of social policy to compensate consumers who sustained personal injuries from defective food. Prosser & Keeton, supra, § 97 at 690. Neither the ALI, which published the Restatement (Second) of Torts, nor the permanent editorial board of the U.C.C., which operates as a joint project of the ALI and the Commissioners on ...