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Decision augurs broad application of the economic loss doctrine broadly.

Earlier this year in the Travelers Indem. Co. v. Dammann & Co., Inc., al. decision, the United States Third Circuit Court of Appeals predicted that the New Jersey Supreme Court would hold that the economic loss doctrine precludes potential products liability claims against a seller of vanilla beans contaminated with mercury. Noting that New Jersey law was "muddled" and that there was tension between the economic loss doctrine and the New Jersey Product Liability Act ("NJPLA"), the Third Circuit held that the economic loss doctrine applied despite the buyer's claim that the tainted vanilla beans damaged "other property" in the form of other flavoring products that were mixed with the tainted beans. Since no New Jersey Court has clarified the interaction between the "the product itself" or "other property" language in the NJPLA and the economic loss doctrine, which prohibits tort remedies where the damage is limited to the product itself, the Dammann decision is noteworthy.

I. Facts

In January 2004, pursuant to a written contract, International Flavors & Fragrances ("IFF") received three shipments of vanilla beans from Dammann & Co., Inc. ("Dammann"), which received the beans from another entity. IFF incorporated the beans into vanilla extract, which it subsequently sold to customers. In February 2004, IFF learned that some of the beans may have contained mercury. The information received by IFF indicated that the beans may have been intentionally injected with mercury by Indonesian farmers to increase their weight. In May 2004, IFF sent a letter to Dammann claiming damages of $5,189,924.00, which included the cost of cleaning IFF machines that were contaminated by the tainted beans. Dammann, in turn, wrote to its insurance carrier, Travelers Indemnity Co. ("Travelers"), asking that Travelers provide insurance coverage for any liability arising out of IFF's claim.

In November 2004, Travelers filed a lawsuit suit against Dammann and IFF asking the court to declare that its liability policy did not cover IFF's damage claim. Dammann's Answer contained a counterclaim seeking a declaration from the court that Travelers was obligated to cover IFF's claim and asserted additional claims for breach of contract, breach of fiduciary duty, and breach of the duty of good faith and fair dealing.

In June 2007, Travelers filed a motion asking the court to declare that its liability policy did not afford insurance coverage to Dammann. On February 11, 2008, the United Stated District Court for the District of New Jersey denied Travelers' motion against Dammann. However, shortly before the District Court issued its decision, IFF sought permission from the court to add cross-claims against Dammann for breach of express warranty, breach of implied warranty, and product liability. In August 2008, Magistrate Judge Shipp denied IFF's motion, noting that IFF's February 2008 request for permission to add its cross-claims against Dammann came more than four years after its January 2004 receipt of the beans but less than four years after IFF's discovery of the contamination in February 2004. Magistrate Judge Shipp determined that the Uniform Commercial Code ("UCC") was applicable to the IFF/Dammann contract and imposed a four-year statute of limitations and determined that a cause of action for breach of contract accrues at the time of the breach except where a warranty in the contract is expressly extended to future performance. Magistrate Judge Shipp concluded that there was no warranty for future performance in the IFF contract and as a result, IFF's breaches of warranty cross-claims were untimely and barred by the statute of limitations. With regard to IFF's products liability cross-claim, Magistrate Judge Shipp reasoned that it was barred by the economic loss doctrine. He also found that IFF exhibited undue delay in seeking permission to file its cross-claims and as a result denied IFF's motion. IFF appealed the ruling to the District Court.

The District Court agreed that IFF's cross-claims were contract-based and governed by the UCC and its four-year statute of limitations. The District Court also rejected IFF's argument that its cross-claims were based upon tort principles and were therefore governed by the NJPLA and its six-year statute of limitations. The District Court reviewed New Jersey's economic loss doctrine and the NJPLA and noted that the interplay between the two was unsettled. The District Court predicted that the New Jersey Supreme Court would interpret the economic loss doctrine to bar tort claims where a plaintiff seeks economic damages for foreseeable losses for which a plaintiff could have contractually allocated its risk. Concluding that IFF was such a plaintiff, the District Court reasoned that the economic loss doctrine barred the application of the NJPLA and its six-year statute of limitations. The appeal to the United Stated Third Circuit Court of Appeals ensued.

A. Economic Loss Doctrine

New Jersey's economic loss doctrine provides 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 distribution chain for breach of warranty under the UCC, but not in strict liability or negligence. The New Jersey Supreme Court explained that the purpose of the UCC was to provide a comprehensive system for determining the rights and duties of buyers and sellers with respect to contracts for sale of goods and to make the law governing commercial transactions uniform throughout the U.S. The New Jersey Supreme Court stated "tort principles more adequately address the creation of an unreasonable risk of harm when a person or other property sustains accidental or unexpected injury;' while "contract principles, particularly as implemented by the U.C.C., provide a more appropriate analytical framework" where "a product fails to fulfill a purchaser's economic expectations;' "Implicit in the distinction is the doctrine that a tort duty of care protects against the risk of accidental harm and a contractual duty preserves the satisfaction of consensual obligations?'


The NJPLA provides that "a manufacturer or seller of a product shall be liable in a product liability action only if the claimant proves by a preponderance of the evidence that the product causing the harm was not reasonably fit, suitable or safe for its intended purpose?' The statute defines "harm" as "physical damage to property, other than to the product itself." However, while the NJPLA defines "harm;' it does not define or explain the meaning of "physical damage to property, other than to the product itself'

The Third Circuit's Broad Interpretation of New Jersey's Economic Loss Doctrine Decision

The Third Circuit's decision noted that the economic loss doctrine precludes tort claims for purely economic loss without reference to whether the loss stems from damage to "the product itself" or "other property;' while the NJPLA provides a plaintiff with a tort remedy in the event of harm to "other property" without addressing New Jersey's case law preference for "keeping tort out of contract's hair?' Since the New Jersey Supreme Court had "not had occasion to harmonize that apparent tension;' the Third Circuit dove into the flay in an effort to predict how the New Jersey Supreme Court would rule.

The Third Circuit stated "we are convinced that the New Jersey Supreme Court would not permit IFF to pursue its product liability claim under the circumstances presented here?' "To allow IFF to pursue tort remedies for its alleged damages - damages for which the U.C.C. permits recovery and for which IFF could have contractually shielded itself- would effectively authorize duplicative recovery, a result the New Jersey Supreme Court has specifically criticized?' "The majority of jurisdictions employ some variation of a test under which tort remedies are unavailable for property damage experienced by the owner where the damage was a foreseeable result of a defect at the time the parties contractually determined their respective exposure to risk, regardless whether the damage was to the 'goods' themselves or to 'other property."' The Third Circuit noted that the minority states did not look to the nature of the transaction but only to whether physical damage was sustained to property other than that which had been purchased by the claimant. Based upon this analysis, the Third Circuit concluded that "the progression of New Jersey case law offers compelling evidence that the New Jersey Supreme Court has plotted a course straight for some adaptation of the majority view but has simply not yet taken the final steps over the finish line."

What does this all mean? In light of the Third Circuit's broad interpretation of the economic loss doctrine in the Dammann case, contracting parties must protect themselves by including specific references to a future time period in all warranties in order to avoid statute of limitations problems. Although the plaintiffs' bar may argue that this broad interpretation gives insufficient weight to the language of the NJPLA, it will govern diversity jurisdiction cases (where one party is New Jersey based while the other party is an out-of-state entity) cases based upon the application of New Jersey law and will be cited as persuasive authority in state court products liability cases until the New Jersey Supreme Court decides to address the issue. As a result, it is an important decision for insurance claims personnel as well as their products liability counsel to be familiar with.

Timothy B. Parlin *

* Parlin is a senior associate of Carroll McNulty & Kull in Basking Ridge. The views and opinions expressed herein are solely those of the author and do not reflect those of the firm or of this publication.
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Title Annotation:CLAIMS
Author:Parlin, Timothy B.
Publication:Insurance Advocate
Date:Sep 17, 2010
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