INTHE SUPREPIE COURT OF THE STATE OF MONTANA

IOFJA MANUFACTURING COMPAPSJ

### , I %!?A24LL Plaintiff and

### &,

JOYMANUFACTURING COMPANY, Defendant and 

# I

Appeal from: DistrictCourtof theSecond Judicial~istrict, Inand fortheCountyof SilverBow HonorableArnold Olsen, Judgepresiding. Counsel of Record: ForAppellant: Ilenningsen & Purcell, Butte, Montana Mark Vucwvich arqued, Butte, Montana For Respondent: Corette, Smith, Pohlman andAllen, Butte, Montana GregoryBlack argued, Butte, Montana

Filed:

# $%? %B

# 183 Submitted: June 7, 1983 Decided: September 19, 1983

ClerkMr. Justice Frank B. Morrison, Jr. delivered the Opinion 

### of the Court. Joy ~anufacturingCompany (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 asphaltmixing plant for its operation in Butte. The plant included pollution control equipmentwhich was designed and/ormanufactured 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 bhr). 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 forair pollution problems. In 1975, the Montana Department of Health and Environmental Sciences (DHES) began questioning Gilman concerningpollution 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 toTake Corrective Action" onNovember 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 limitationsand 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 againstJoy,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 tobe indemnifiedby Joy. Iowa then filed 

### a motion for summary judgment in the underlying Gilman action, seekinga ruling on the defenses of statute of limitations and release. Joy joined in Iowa's motion for summary judgment,whichwas 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 todo so. Thereafter, the action proceeded to trial on the third party complaint. Before trial, Iowa filed amotion in limine asking that the District Court prohibit Joy from producing evidence of the release entered intobetween 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'smotion 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 Iowahad given Gilman a specificwarranty 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 admittanceof this documentbecause the standardwarrantywas 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.tin 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 standardwarranty." Iowa responded to Joy's offer of proof by stating that interrogatoryno. 34



### was in response towhat conversationswere 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 standardwarranty

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'smotion fornew trialwas denied,and theDistrict 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 expiredwhen Iowa filed its complaint againstJoy? 2. Did Iowa sustain its burden in proving that the settlement with Jim Gilman Excavating, Inc. (Gilman) was reasonableand that Iowawas 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 onactive/passivenegligence in this action? Joy argues that Iowa'scause of actionwasbarred 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 thetemporal scope of that warranty. This argument is well taken. To hold otherwisewould 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 forbreach of any contract for sale must be commencedwithin 

### 4years 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 ismade, 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 havebeen discovered." Where avendor warrants the quality or specificationsof goods, such warranty is breached when tender of delivery is made, absent explicit extension of the warranty to a future date. But,where avendorwarrants theperformance of goods, that warranty necessarily contemplates a reasonable period ofperformance 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 leastis 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 fromdelivery. This rulingwas 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 toprove that Iowawas liable to Gilman and that the settlementwas 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 ~.2d 7, 10,wherein theNew 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 theburden 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

### factsof its case and the lawof this state. The jurywas so instructed. There is evidence in the record to support potential liability. Iowaproved that the settlementwas 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 evidencegiven supportsthe 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 anywarranty given to Gilman to the "initial operating period." Joy argues that the standard warranty isrelevantbecause 1) 

### it showsthat Iowa'swarranty

was limited to the initial operating period of theplant, and 2) 

### it places the credibility of Ronald Dunmire at issue. Ronald Dunmire testified that the standardwarrantywas not given because the invoice received from Gilman asked for 

### - a specific guarantee that the pollution equipmentmet certain Montana standards. Without foundation that the standard warrantywas given,the text of the warranty isnot 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 interrogatoriesto impeach Dunmire's testimony. While the interrogatoriesmay have had impeachmentvalue the textof the warranty alonewould 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,as between 

### - Iowa and Gilman,were relevant to demonstrate that Iowawas 

## -- 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 dowith the airpollution problems involved inGilman'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 toproof. Appellantdid not seek to showthat the statute had run since discovery,nor did appellantoffer any instruction coveringthe subject. Finally, Joy contends that the jury should have been instructedon activeand 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 conductproximately 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 Iowawasmore than passively at fault because its conductwas aproximate cause of the injury

### to Gilman, Joy's instructionwould 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 controlproblem. Therefore, a jury instructionon active/passivenegligencewould nothave beenproper. The judgmentof the District Court isaffirmed.

We 

### concur:

Chief Justice

### Mr. Chief JusticeHaswell,specially concurring: I concur with the foregoing opinion on all issues excepting the issue concerningthe statute of limitations. I

concur in the result of that issuebut 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 limitationson implied contracts. This case is an action for indemnitybased onbreach 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 

### - to Indemnity Action, 57 ALR3d 833, 838, and copious case authority cited therein fromnumerous jurisdictions. An action on an implied contract of indemnity is wholly independent as a cause of action from the transaction or situationwhich 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 federalcase similar to the one involvedhere. Stephensonv. Duriron (D.C. Ohio 1968), 292 F.Supp. 66, aff'd., (6thCir. 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 causedby a fracture in ametal valve in the gas distribution system of 

### a utility. The defectivevalve had been purchased by the utility from a supplier who warranted the valve to conform to certain specifications based on the samewarranty given to itby 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 federalcourt in Ohio to enforce the Alaska judgment against the supplier and also sought judgment against the manufactureras 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 themanufacturer 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 contrarywere seeking to enforce the implied contract for indemnification in favorof 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 theproposition that thewarranty 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 anexpress written warranty without a time limitation, the warrantor isbound by it. The express writtenwarranty 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 specifiedbelow: "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.ESSUREDROP

## - "Vh7C@Oper. Condm

## ---------- 6 "VI. SCRUBBER OUTLET CONDITIONS "A. Volume 

## - acfm 

## -------------- 35,200

"C. Moisture Content

## - Saturated I'D. Dust Loading 0.25 gr/scf dry" The right of indemnity accrued here when payment was made by Iowa to the GilmanExcavating Company under the terms of the compromise settlement. St. Paul Fire & Marine InsuranceCo. v. Thompson (19691,152Mont. 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 inMontana is fiveyears. Section 27-2-202(2), MCA. Accordingly, Iowa'saction for indemnity isnotbarred. 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 indemnitydoes not accrue until payment ismade or judgment secured in the underlyingaction, that right may be rendered meaningless and illusory to the indemnitee in some situations. For example, the statute of limitations in the underlyingactionmay well have runbefore the right of indemnity accrues to the indemnitee. If the statute of limitationsin theunderlying 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 indemnitywould be barred if the statute of limitations in the underlying actionwere applied. Hence, this special concurringopinion. 

# s;-a,J,pL&&,&QQ ChiefJustice

I

### concur in the foregoing opinionof Mr. Chief,,,Justice Haswell.

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### Justice