I N THE SUPREPIE COURT OF THE STATE OF M N A A
OTN
IOFJA MANUFACTURING C M A S ,
O P PJ I
%!?A24LL
P l a i n t i f f and &,
J O Y MANUFACTURING COMPANY,
I
Defendant and
Appeal from: D i s t r i c t C o u r t o f t h e Second J u d i c i a l ~ i s t r i c t ,
I n a n d f o r t h e County o f S i l v e r Bow
H o n o r a b l e Arnold O l s e n , J u d g e p r e s i d i n g .
C o u n s e l o f Record:
For Appellant:
Ilenningsen & P u r c e l l , B u t t e , Montana
Mark V u c w v i c h a r q u e d , B u t t e , Montana
F o r Respondent :
C o r e t t e , S m i t h , Pohlman and A l l e n , B u t t e , Montana
Gregory B l a c k a r g u e d , B u t t e , Montana
Submitted: June 7 , 1983
Decided : September 1 9 , 1 9 8 3
Filed : $%?B 13
% 8
Clerk
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of
the Court.
Joy ~anufacturing Company (Joy) appeals from a judgment
entered on a $50,000 jury verdict in favor of Iowa
Manufacturing Company (Iowa) in the District Court of the
Second Judicial District, Silver Bow County. The judgment
also awarded to Iowa $14,349.40 in attorneys' fees.
We affirm.
On February 3, 1971, Jim Gilman Excavating Company
(Gilman) purchased from Iowa an asphalt mixing plant for its
operation in Butte. The plant included pollution control
equipment which was designed and/or manufactured by Joy. In
connection with Gilman's order, Iowa guaranteed that the
particulate emissions from the plant would not exceed the
amount allowed by Montana law as of February 1971 (61
b h r ) . Iowa's guarantee to Gilman was made in reliance
upon Joy's guarantee to Iowa that the particulate emissions
would not exceed 38 lbs./hr.
The asphalt mixing plant was shipped to Gilman in June,
and was operating by late August 1971. In 1973, a
controversy arose between Gilman and Iowa which was based
upon the late delivery of the plant. The controversy was
resolved, and Gilman executed a release. Gilman testified in
a deposition, however, that the release did not include any
claims for air pollution problems.
In 1975, the Montana Department of Health and
Environmental Sciences (DHES) began questioning Gilman
concerning pollution problems and complaints. On October 6,
1975, the DHES served a "Notice of Violation" on Gilman.
Thereafter, an independent testing firm conducted several
tests to determine the particulate emissions from the Gilman
plant. Based upon these tests, the DHES issued an "Order to
Take Corrective Action" on November 22, 1976. Another test,
conducted on October 19, 1977, showed that the average
emissions from the Gilman plant were 62 lbs./hr. Following
this test, the DHES wrote a letter to Gilman stating that he
could start up his plant only to demonstrate compliance.
Gilman then purchased different pollution control equipment
and filed a complaint against Iowa to recover damages in
excess of $71,000 for negligence, breach of warranty, and
strict liability.
In responding to the allegations of the complaint, Iowa
raised the affirmative defenses of statute of limitations and
release. Iowa then gave Joy the opportunity to defend and
indemnify Iowa in the action. When Joy declined to do so,
Iowa filed a third party complaint against Joy, alleging that
Joy designed the pollution control equipment and guaranteed
that the equipment would meet the Montana Air Pollution
Standards. As a result of this alleged breach of warranty,
Iowa sought to be indemnified by Joy.
Iowa then filed a motion for summary judgment in the
underlying Gilman action, seeking a ruling on the defenses of
statute of limitations and release. Joy joined in Iowa's
motion for summary judgment, which was denied by the District
Court.
Approximately one week prior to trial, Iowa settled the
underlying Gilman action for $50,000. Joy was given the
opportunity to participate in this settlement, but it
declined to do so.
Thereafter, the action proceeded to trial on the third
party complaint. Before trial, Iowa filed a motion in limine
asking that the District Court prohibit Joy from producing
evidence of the release entered into between Iowa and Gilman
in 1973; and also to prohibit any testimony relating to the
defense of the statute of limitations as between Iowa and
Gilman. The District Court granted Iowa's motion in limine
with respect to the release. The District Court also ruled
as a matter of law, that as between Gilman and Iowa the
statute of limitations commenced from the date of discovery
of the defect.
During the trial, Ronald Dunmire, an Iowa employee,
testified that Iowa had given Gilman a specific warranty that
the plant would meet Montana's air pollution control
standards. On cross-examination of Dunmire, Joy attempted to
place into evidence a copy of Iowa's Standard Air Pollution
Control Performance Warranty. Iowa objected to the
admittance of this document because the standard warranty was
not given to Gilman and therefore was not relevant. Iowa's
objection was sustained. Thereafter, Joy made an offer of
proof and attempted to show that Dunmire's testimony was
contrary to Iowa's answer to interrogatory no. 34. In the
interrogatory, Gilman asked Iowa to describe all
conversations between Iowa and Gilman relating to the
warranty. Iowa responded in the interrogatory tha.t in one
conversation, an Iowa employee represented that "the Plant
would meet the State of Montana Air Pollution Standards
subject to certain limitations such as contained in Iowa
Manufacturing's standard air pollution control performance
warranty in effect at the time of sale." Joy argued in its
offer of proof that the standard warranty should be admitted
"for the purpose of consideration by the jury as to whether
or not Mr. Dunmire's testimony indicated that the warranty
given was in lieu of the standard warranty." Iowa responded
to Joy's offer of proof by stating that interrogatory no. 34
was in response to what conversations were held regarding the
warranty. The ultimate warranty given to Gilman did not
include the terms of the standard warranty. In this case,
Iowa argued, the specific express warranty should displace
any inconsistent implied warranties. The District Court
agreed with Iowa, and again ruled that the standard warranty
was irrelevant.
The case was submitted to the jury on the question of
whether the damages suffered by Gilman were caused by a
breach of warranty of Joy entitling Iowa to indemnification
for the sum paid to Gilman. Thereafter, a jury returned a
verdict of $50,000 for Iowa. Joy's motion for new trial was
denied, and the District Court awarded $14,349.40 in attorney
fees to Iowa.
Joy raises five issues on appeal:
I. Had the statute of limitations for this action
expired when Iowa filed its complaint against Joy?
2. Did Iowa sustain its burden in proving that the
settlement with Jim Gilman Excavating, Inc. (Gilman) was
reasonable and that Iowa was liable to Gilman?
3. Did the District Court err in refusing to admit into
evidence Iowa's Standard Air Pollution Control Performance
Warranty?
4. Did the District Court err in granting Iowa's motion
in limine with regard to a release and the statute of
limitations?
5. Did the District Court err in refusing to instruct
the jury on active/passive negligence in this action?
Joy argues that Iowa's cause of action was barred by the
applicable statute of limitations for breach of warranty,
section 30-2-725, MCA, since Iowa did not bring the action
against Joy for more than four years after Joy tendered the
air pollution equipment. Joy points out that a warrantor
cannot be an indemnitor based on the warranty beyond the
temporal scope of that warranty. This argument is well
taken. To hold otherwise would allow a vendee to circumvent
the warranty statute of limitations by retaining the goods
beyond the term of the statute of limitations and then sell
it with his own warranty and, having made good on his own
warranty, hold his vendor upon a claim of indemnity. Acc.
L.E. Talcott & Sons, Inc. v. Aurora Corp. (D. Del. 19591, 176
F.Supp 783, 786.
However, Joy fails to recognize that the trial court
properly ruled that section 30-2-725, MCA, does not bar
Iowa's claim on the warranty or on indemnity. That section
provides in part:
"(1) An action for breach of any contract for sale
must be commenced within 4 years after the cause of
action has accrued. * * *
"(2) A cause of action accrues when the breach
occurs, regardless of the aggrieved party's lack of
knowledge of the breach. A breach of warranty
occurs when tender of delivery is made, except that
where a warranty explicitly extends to future
performance of the goods and discovery of the
breach must await the time of such performance the
cause of action accrues when the breach is or
should have been discovered."
Where a vendor warrants the quality or specifications of
goods, such warranty is breached when tender of delivery is
made, absent explicit extension of the warranty to a future
date. But, where a vendor warrants the performance of goods,
that warranty necessarily contemplates a reasonable
period of performance during which the defect or failure
would manifest itself. By letter dated March 5, 1971, ,Soy
warranted that the particulate ommissions from the Cedar
Rapids plant would not exceed 38 pounds per hour (0.25 grams
per standard cubic foot dry) when the equipment is operated
in accordance with specified design conditions. Thus the
warranty contemplates operation of the equipment for at least
is long as would be necessary for the breach to be
discovered.
The trial court, in its ruling on the motion in limine,
did not foreclose the statute of limitations defense. The
court merely ruled that the statute ran from discovery and
not from delivery. This ruling was correct.
We are unable to rule, as a matter of law, that the
defect was or should have been discovered more than 4 years
before the initiation of this action. Joy's next substantive
argument is that Iowa failed to prove that Iowa was liable to
Gilman and that the settlement was reasonable.
Since Iowa settled the underlying action with Gilman, it
was required to prove that it was liable to Gilman and that
the settlement was reasonable. 3A Frumer & Friedman,
Products Liability 544.10 (2) . There is a divergence of
authority on whether an indemnitee must prove actual or
merely potential liability when it settles the underlying
action with a third party. One solution was set forth in
Morrisette v. Sears, Roebuck & Co. ( N . H . 1974), 322 ~ . 2 d7,
1 0 , wherein the New Hampshire court stated:
"'If the indemnitor approves the settlement or
defends unsuccessfully against the original claim,
he cannot later question the indemnitee's liability
to the original claimant. If the indemnitor
declines to take either course, then the indemnitee
will only be required to show potential liability
to the original plaintiff in order to support his
claim over against the indemnitor. ' (citation) ...
In the event that no offer is made to the
indemnitor to either approve or defend, then the
indemnitee should have the burden of showing actual
liability to the original plaintiff." (Emphasis
added. )
To the extent that it applies to this case, we approve
this language. Since Joy failed to approve the settlement or
take the opportunity to defend against the original claim,
all that was required of Iowa was that it demonstrate
potential liability, i.e., exposure to liability under the
facts of its case and the law of this state. The jury was so
instructed. There is evidence in the record to support
potential liability.
Iowa proved that the settlement was reasonable. Ronald
Dunmire testified that Gilman's complaint asked for
approximately $88,000 in damages. Therefore, Dunmire felt a
settlement of $50,000 was realistic. Joy failed to rebut
Dunmire's testimony as to the reasonableness of the
settlement. The evidence given supports the verdict.
Joy next contends that Iowa Company's Standard Air
Pollution Control Performance Warranty should have been
admitted into evidence because it contained language which
limited the operation of any warranty given to Gilman to the
"initial operating period." Joy argues that the standard
warranty is relevant because 1) it shows that Iowa's warranty
was limited to the initial operating period of the plant, and
2) it places the credibility of Ronald Dunmire at issue.
Ronald Dunmire testified that the standard warranty was
- given because the invoice received from Gilman asked for
not
a specific guarantee that the pollution equipment met certain
Montana standards. Without foundation that the standard
warranty was given, the text of the warranty is not relevant.
It is true that Dunmire's testimony is contrary to the
position taken by Iowa in interrogatory No. 34 and
supplemental interrogatory No. 9, wherein Iowa stated that
the specific warranty was "subject to certain limitations
such as contained in Iowa Manufacturings' Standard Air
Pollution Control Performance Warranty." Joy, however, did
not use these interrogatories to impeach Dunmire's testimony.
While the interrogatories may have had impeachment value the
text of the warranty alone would not.
Appellant, Joy, argues that the District Court erred in
granting Iowa's motion in limine, because the existence of a
release or running of the statute of limitations, - between
as
- - Gilman, were relevant to demonstrate that Iowa was
Iowa and
not actually liable to Gilman in the underlying cause of
action.
The evidence all indicates that the release executed by
Gilman to Iowa in January of 1973 was for settlement of a
claim for late delivery of the equipment and had nothing to
do with the air pollution problems involved in Gilman's later
suit against Iowa. The trial court correctly granted the
motion in limine on the release question. The motion was
granted on the statute of limitations question only to
prohibit evidence proving the date of delivery as
representing the starting time. The trial court correctly
ruled that date of discovery governed running of the statute
and left the question of when discovery was or should have
been, open to proof. Appellant did not seek to show that the
statute had run since discovery, nor did appellant offer any
instruction covering the subject.
Finally, Joy contends that the jury should have been
instructed on active and passive fault because Iowa's conduct
proximately caused injury to Gilman. Where a warrantee is
supplied defective goods which constitutes a breach of
warranty on the part of the supplier, but the warrantee's
subsequent conduct proximately causes the injury to the third
party, then the warrantee is not merely passively at fault
and loses his right to indemnity. Town Pump, Inc. v.
Diteman (1981), Mont . , 622 P.2d 212, 38 St.Rep.
54.
Were there evidence that Iowa was more than passively at
fault because its conduct was a proximate cause of the injury
to Gilman, Joy's instruction would be proper. However, in
this case, no evidence was presented to show that Iowa was
actively responsible for the defects in the pollution control
equipment. Although there was evidence that Iowa made
adjustments to the equipment in 1975, no evidence was
presented to show that this was a proximate cause of the
pollution control problem. Therefore, a jury instruction on
active/passive negligence would not have been proper.
The judgment of the District Court is affirmed.
We concur:
Chief Justice
Mr. Chief Justice Haswell, specially concurring:
I concur with the foregoing opinion on all issues
excepting the issue concerning the statute of limitations. I
concur in the result of that issue but not in its rationale.
My quarrel is with the application of the four-year
statute of limitations on sales in the Uniform Commercial
Code, section 30-2-725, MCA. In my view the a.pplica.ble
statute of limitations is the five-year statute of
limitations on implied contracts.
This case is an action for indemnity based on breach of
an express written warranty. An action for common-law
indemnity is based on a theory of implied contract or quasi
contract, and thus is very generally held to be governed by
the statute of limitations applicable to actions on implied
contracts. Annot., Limitation Applicable - Indemnity
to
Action, 57 ALR3d 833, 838, and copious case authority cited
therein from numerous jurisdictions. An action on an implied
contract of indemnity is wholly independent as a cause of
action from the transaction or situation which gives rise to
the right of indemnity. Annot., Limitation Applicable -
to
Indemnity Action, supra, at 839-840; Rieger et al. v.
Frankstram Realties, Inc. (1946), 57 A.D. 411, 68 N.Y.S.2d
243.
This distinction is illustrated and explained in a
federal case similar to the one involved here. Stephenson v.
Duriron (D.C. Ohio 1968), 292 F.Supp. 66, aff 'd., (6th Cir.
1970), 428 F.2d 387, cert. denied, 400 U.S. 943, 91 S.Ct.
245, 27 L.Ed.2d 247. In that case plaintiffs were injured
and their property was damaged due to gas seepage and a
resulting explosion caused by a fracture in a metal valve in
the gas distribution system of a utility. The defective
valve had been purchased by the utility from a supplier who
warranted the valve to conform to certain specifications
based on the same warranty given to it by the manufacturer of
the valve. The supplier assigned its right of
indemnification against the manufacturer to the plaintiffs.
In an action in an Alaska state court, plaintiffs recovered
judgment against the supplier who was held to be only
secondarily liable with primary liability on the
manufacturer. Plaintiffs then brought an action in federal-
court in Ohio to enforce the Alaska judgment against the
supplier and also sought judgment against the manufacturer as
assignee of the supplier's right of indemnity against the
manufacturer. The federal court applied the Ohio statute of
limitations on oral contracts to the indemnity action
rejecting the contention of the manufacturer that the action
was barred by the statute of limitations governing actions
for personal injuries and property damage. The court
reasoned that plaintiffs were not seeking recovery for their
personal injuries and property damage against the
manufacturer, but on the contrary were seeking to enforce the
implied contract for indemnification in favor of the supplier
against the manufacturer that plaintiffs held by virtue of
the assignment.
The rationale of the majority in the instant case is
bottomed on the proposition that the warranty given by Joy to
Iowa is limited in time and that to hold otherwise would
allow Iowa to destroy the protection afforded to Joy by the
statute of limitations applicable to warranties. This
contention is specious under the facts of this case. The
warrantor can protect itself by inserting a time limitation
in the warranty. But where, as here, the warrantor gives an
express written warranty without a time limitation, the
warrantor is bound by it. The express written warranty given
by Joy to Iowa is set forth verbatim as follows:
"Western Precipitation Division of Joy
Manufacturing Company guarantees not to
exceed the outlet dust loading when the
equipment is operated in accordance with
the design conditions as specified below:
"I. SOURCE OF DUST ---------- Rock Dryer
"11. TYPE OF PRECLEANER ------ 9VGR
Multiclone
"111. SCRUBBER INLET CONDITIONS
"A. Estimated Dust Loading - gr/acf
..................... 6 to 10
"D. Moisture Content % by Wt.--- 27.2
"IV. WATER RATE - GPM ----------- 53 to 76
"V. SCRUBBER PF.ESSURE DROP - "Vh7C@ Oper.
Condm ---------- 6
"VI. SCRUBBER OUTLET CONDITIONS
"A. Volume - acfm -------------- 35,200
"C. Moisture Content - Saturated
ID
'. Dust Loading 0.25 gr/scf dry"
The right of indemnity accrued here when payment was
made by Iowa to the Gilman Excavating Company under the terms
of the compromise settlement. St. Paul Fire & Marine
Insurance Co. v. Thompson (19691, 152 Mont. 396, 451 P.2d 98.
Approximately one week prior to trial, Iowa settled the
underlying Gilman action for $50,000 and the trial proceeded
on the third party complaint for indemnity by Iowa against
Joy. The statute of limitations for an implied or quasi
contract in Montana is five years. Section 27-2-202(2), MCA.
Accordingly, Iowa's action for indemnity is not barred.
The result is the same in this case whether this Court
applies the four-year statute of limitation on sales under
the Uniform Commercial Code or the five-year statute on
implied contracts of indemnity. However, considerable
mischief can result in future cases from the holding of the
majority. Since the right of indemnity does not accrue until
payment is made or judgment secured in the underlying action,
that right may be rendered meaningless and illusory to the
indemnitee in some situations. For example, the statute of
limitations in the underlying action may well have run before
the right of indemnity accrues to the indemnitee. If the
statute of limitations in the underlying action is applied to
the indemnity action, the indemnitee's remedy may be barred
before his claim for relief accrues unless he has filed a
permissive but not mandatory third party complaint prior to
accrual of his substantive right of indemnity. St. Paul Fire
& Marine Insurance Co. v. Thompson, supra, where the
indemnity action was not filed until approximately one year
after final judgment in the underlying action was entered, is
an example of a situation where the right of indemnity would
be barred if the statute of limitations in the underlying
action were applied. Hence, this special concurring opinion.
s;-a,J,pL&&,&QQ
Chief Justice
I concur in the foregoing opinion of Mr. Chief,,,Justice Haswell.
-- -
Justice