U.S. District Court in Minnesota Rejects Owner’s Implied Warranty Claims Against Installation Contractor – Also Holds Recovery of Lost Profits Barred By Limitation of Damages Clause
Spectro Alloys Corp. v. Fire Brick Eng’rs Co., Inc., 2014 U.S. Dist. LEXIS 140817 (D. Minn. Oct. 3, 2014).
Spectro Alloys Corporation (“Spectro”) operates a smelter, and it hired Fire Brick Engineers (“FBE”) to install refractory lining to two furnaces in Spectro’s plant. When that refractory lining failed prematurely, Spectro sued FBE for breach of express and implied warranties and for breach of contract. Spectro sought recovery of repair costs and profits lost while its plant was shut down for repairs.
Under the parties’ contract, FBE agreed to install lining material manufactured by a third party, and FBE warranted that FBE’s work would be free from defects. FBE’s warranty expressly excluded materials manufactured by third parties, but provided that materials purchased by FBE for the installation would carry the warranty extended to FBE by the material’s manufacturer. In capital letters, the warranty excluded consequential damages.
FBE sought summary judgment on the implied warranty claims, and the court was first tasked with determining whether the UCC applied. Finding the UCC inapplicable, the court held that the predominant purpose of the parties’ contract was FBE’s provision of installation services. Critical to the court’s decision were FBE’s disclaimer of warranties for goods manufactured by others and the significant amount and skilled nature of the labor FBE supplied to install the lining. Because the UCC was inapplicable, Spectro could recover for implied warranty only under Minnesota common law. The court dismissed the implied warranty counts after finding that Minnesota common law does not recognize an implied warranty of merchantability and that Minnesota’s common law implied warranty of fitness does not survive where the predominant purpose of a contract is the provision of services.
Spectro argued that it could recover, in the alternative, under a theory of breach of contract. The court acknowledged that a plaintiff can effectively assert breach of warranty and breach of contract claims together, such as where a defendant warrants a good and also promises to provide a service, but fails in both respects. However, the only contractual obligations that Spectro claimed had been breached were FBE’s warranty obligations. Having identified no separate contractual obligations, the court dismissed Spectro’s breach of contract counts.
FBE also sought summary judgment on the basis that Spectro exclusively sought consequential damages, which the contract disclaims. The court rejected FBE’s argument as to repair costs, finding that those were direct damages resulting from alleged defects in workmanship, but agreed with FBE that Spectro’s claimed lost profits were consequential damages. The court found that the contract’s exclusion of consequential damages was enforceable because it was not unconscionable – the UCC’s standard for enforceability. The court analyzed the disclaimer “through the lens of the UCC,” despite previously determining that the UCC did not apply to the contract, because the parties were sophisticated entities that negotiated at arm’s length.
To view the full text of this decision, courtesy of Lexis ®, click here.