Case Name: NEIBARGER v. UNIVERSAL COOPERATIVES, INC; HOUGHTON v. ALFA-LAVAL, INC
Court: Michigan Supreme Court
Jurisdiction: Michigan
Decision Date: 1992-05-20
Citations: 439 Mich. 512
Docket Number: Docket Nos. 88206, 89140
Parties: NEIBARGER v UNIVERSAL COOPERATIVES, INC HOUGHTON v ALFA-LAVAL, INC
Judges: Brickley, Riley, and Mallett, JJ., concurred with Griffin, J.
Reporter: Michigan Reports
Volume: 439
Pages: 512–549

Head Matter:
NEIBARGER v UNIVERSAL COOPERATIVES, INC HOUGHTON v ALFA-LAVAL, INC
Docket Nos. 88206, 89140.
Argued October 8, 1991
(Calendar Nos. 5-6).
Decided May 20,1992.
Darwin E. Neibarger and Patricia L. Neibarger, owners and operators of a dairy farm, brought an action in the Mecosta Circuit Court against Universal Cooperatives, Inc., and others, alleging that the entire vacuum system of their milking equipment had been improperly designed and instálled, and claiming breach of express warranty, breach of implied warranty, and negligence. The court, Lawrence C. Root, J., granted summary disposition for the defendants, finding that the Uniform Commercial Code controlled and that its four-year period of limitation had expired before the complaint was filed. The Court of Appeals, D. E. Holbrook, Jr., P.J., and Sawyer and Neff, JJ., affirmed in an opinion per curiam (Docket No. 111029). The plaintiffs appeal.
Charles F. Houghton and Jeanette Houghton, owners and operators of a dairy farm, brought an action in the Mecosta Circuit Court against Alfa-Laval, Inc., and others, alleging negligence in design, installation, and maintenance of a milking machine system and breach of express and implied warranties. The court, Lawrence C. Root, J., granted summary disposition for the defendants. The Court of Appeals, Mackenzie, P.J., and D. E. Holbrook, Jr., and Weaver, JJ., affirmed in an opinion per curiam, holding that the remedies lay exclusively within the ucc and were subject to the four-year period of limitation which began to run upon the delivery of the milking system (Docket No. 112417). The plaintiffs appeal.
In an opinion by Justice Griffin, joined by Justices Brickley, Riley, and Mallett, the Supreme Court held:
Where a plaintiff seeks to recover for economic loss caused by defective product purchased for commercial purposes, the exclusive remedy is provided by the Uniform Commercial Code, including the four-year statute of limitations.
References
Am Jur 2d, Limitations on Actions §§ 89-99, 107-117, 138 et seq.; Sales §§ 928-953.
See the Index to Annotations under Defects and Irregularities; Sales; Uniform Commercial Code.
1. Article 2 of the Uniform Commercial Code governs relationships between parties involved in transactions in goods. Such transactions are accompanied by implied warranties of merchantability and fitness; express warranties may be created by negotiation or by the conduct of the seller. Thus, under the ucc, the purchaser of defective goods may recover the benefit of the bargain as well as incidental and consequential damages. An action for breach of warranty under the ucc must be commenced within four years of tender of delivery of the goods, regardless of the time of the discovery of the breach. Where a claim arises from a commercial transaction in goods and the purchaser suffered an economic loss, the ucc’s period of limitation may not be avoided by pleading in tort. The economic loss doctrine, which provides that the remedy for a purchaser’s frustrated expectations of a product is in contract alone, bars such claims.
2. The economic loss doctrine distinguishes between transactions involving the sale of goods for commercial purposes where economic expectations are protected by commercial and contract law, and those involving the sale of defective products to individual consumers who are injured in a manner traditionally remedied by the law of torts. The individual consumer’s tort .remedy for products liability is not premised upon an agreement between the parties, but derives either from a duty imposed by law or from policy considerations which allocate the risk of dangerous and unsafe products to the manufacturers and sellers in order to encourage the design and production of safe products. However, in a commercial transaction, the parties to a sale of goods have the opportunity to negotiate the terms and specifications, including warranties, disclaimers, and limitation of remedies. Where a product proves to be faulty after the parties have contracted for sale and the only losses are economic, the policy considerations supporting products liability in tort fail to serve the purpose of encouraging the design and production of safer products.
3. The ucc represents a carefully considered approach to governing the economic relations between suppliers and consumers of goods. Rejection of the doctrine in effect would create a remedy not contemplated by the Legislature in adopting the ucc by permitting a potentially large recovery for a minor defect in quality. Adoption of the doctrine will allow sellers to predict with greater certainty their potential liability for product failure and to incorporate those predictions into the price or terms of the sale. The doctrine also is consistent with the stated purposes of the ucc to simplify, clarify, modernize, and unify commercial law.
4. In these cases, because the damages sought are economic losses resulting from the commercial sale of goods, the plaintiffs’ exclusive remedies are provided by the ucc. Because proceedings in each case were not commenced within the four-year period of limitation, the actions are barred.
Affirmed.
Justice Levin, joined by Chief Justice Cavanagh and Justice Boyle, dissenting, stated that the plaintiffs should be permitted to maintain an action in tort, and should not be limited to the remedy for breach of implied warranty provided in the sale of goods article of the ucc.
Courts in other jurisdictions that have considered whether the remedy for breach of implied warranty provided in the ucc is the exclusive remedy have universally agreed that a tort action may be maintained to recover for personal injuries or death resulting from product defect.
Where personal injury or death is not involved, and the loss is essentially economic, one line of authority, adopted by most courts that have considered the matter, precludes maintenance of a tort action, and confines the purchaser to an action for breach of warranty under the ucc, where the damage is essentially to the defective product sold by the seller and no other property is damaged. A second line of authority permits a purchaser of a defective product to maintain a tort action for loss of the defective product without regard to whether property other than the defective product is also damaged by reason of the defect.
Under either of the established lines of authority, the purchaser may maintain an action in tort where the product defect causes damage to other property. Accordingly, under either established line of authority, this action may be maintained because plaintiffs claim injury to their dairy herds, property other than the purchased automated milking system.
While a tort action must be commenced within three years of the accrual of a claim, the action does not accrue before the plaintiff should have discovered the claim.
181 Mich App 794; 450 NW2d 88 (1989) affirmed.
184 Mich App 731; 459 NW2d 42 (1990) affirmed.
Southgate Community School Dist v West Side Construction Co, 399 Mich 72; 247 NW2d 884 (1976) modified.
Sales — Uniform Commercial Code — Economic Loss — Period of Limitation.
Where a plaintiff seeks to recover for economic loss caused by a defective product purchased for commercial purposes, the exclusive remedy is provided by the Uniform Commercial Code, including the four-year statute of limitations (MCL 440.2101 et seq., 440.2725[2]; MSA 19.2101 et seq., 19.2725[2]).
Reber, Greer, Schuiteman, Stariha & Greer, P.C. (by Paul L. Greer), for the plaintiffs.
Foster, Swift, Collins & Smith, P.C. (by David H. Aldrich and Michael S. Wellman), for defendant Universal Cooperatives, Inc.
Mika, Meyers, Beckett & Jones (by Douglas A. Donnell) for defendant Brinker.
Cholette, Perkins & Buchanan (by Robert J. Riley) for defendant Alfa-Laval, Inc.
Petersmarck, Callahan, Bauer & Maxwell, P.C. (by Richard W. West) for defendant Howard’s Dairy System, Inc.
Amicus Curiae:
Simpson Moran (by Philip J. Goodman and Steven G. Silverman) for Wayne County.

Opinion:
Griffin, J.
We granted leave to consider the applicability in these consolidated cases of the "economic loss doctrine," which bars tort recovery and limits remedies to those available under the Uniform Commercial Code where a claim for damages arises out of the commercial sale of goods and losses incurred are purely economic. If plaintiffs in these cases are limited by the doctrine to a warranty action governed by the ucc and its four- year statute of limitations, which recognizes no discovery rule, their claims are time-barred.
The courts below so held. Upon review we agree and affirm the decisions of the Court of Appeals.
i
The facts and procedural background of these cases are very similar. Indeed, both were brought in the Mecosta Circuit Court and were considered by the same circuit judge. With supplementation to be provided in the course of our analysis, we borrow from the concise statement of facts set forth in each case by the Court of Appeals.
NEIBARGER V UNIVERSAL COOPERATIVES, INC
Plaintiffs, owners and operators of a dairy farm, contracted with defendant Charles Brinker to install a milking system. According to plaintiffs, the milking system was designed by defendants Universal Cooperatives, Inc., and Brinker, and was installed by Brinker to begin milking operations on September 1, 1979.
Plaintiffs allege that, after the milking system had been in operation for a period of time, their cattle became ill and died or had to be sold for beef because of their nonproductivity and unsuitability as milking animals, suffered a loss of milk production, had severe instances of mastitis, and experienced a loss of a portion of their udders. Consequently, plaintiffs claim, they were prevented from reaching their herd potential.
Plaintiffs alleged that it was not until fall of 1986 that they discovered that the entire vacuum system on the milking equipment had been improperly designed and installed. Plaintiffs brought suit against defendants on April 13, 1987, and proceeded against them on three theories: breach of express warranty, breach of implied warranty, and negligence. [181 Mich App 794, 796; 450 NW2d 88 (1989).]
After some discovery, defendants filed motions for summary disposition, arguing that because plaintiffs' claim arose from the commercial sale of goods and they sought only economic damages, their exclusive remedy was a breach of warranty action under Article 2 of the ucc. Further, defendants contended that such an action was barred in this case by the code's four-year limitation period, which begins running "when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach." MCL 440.2725(2); MSA 19.2725(2).
Plaintiffs, on the other hand, preferred the three-year statute of limitations for product liability actions set forth in the Revised Judicature Act, MCL 600.5805(9); MSA 27A.5805(9), arguing that it would not begin to run until the cause of the action was discovered, or reasonably should have been discovered. Concluding that the ucc controlled and that its limitation period had expired before the complaint was filed, the trial court granted summary disposition for defendants. Plaintiffs appealed, and the Court of Appeals affirmed. After finding that the transaction involved was "a sale of goods with services incidentally involved," and the damages sought "consisted solely of economic loss," the Court concluded that "plaintiffs' remedies fall within the ucc, with its attendant four-year period of limitation, which began to run at the time of delivery." Id. at 802.
HOUGHTON v ALFA-LAVAL, INC
Plaintiffs, owners and operators of a dairy farm, purchased a milking machine system in July, 1976, from defendant Alfa-Laval, Inc. It was installed according to Alfa-Laval's design and instructions by its agent, defendant Howard's Dairy System, Inc.
Plaintiffs represent that they purchased the system in the hopes of increasing milk production. Milk production, however, did not increase despite numerous service calls from Howard's and advice and inspections from several milk production agencies and nutritionists. The cattle in plaintiffs' herd began to experience severe instances of mastitis, losses of a quarter of their udders and decreased milk production. Some of the herd became so sick that they died or were sold off for beef due to nonproductivity. Another problem plaintiffs discovered following the installation of the new system was an unacceptably high cell and bacteria count in the milk. Plaintiffs also claim that, due to faulty wiring, stray voltage would enter the system and injure the cattle and that there were problems with the system's cooling and vacuum systems.
Plaintiffs allege that it was not until some time in 1984 that they were able to pinpoint their problems as stemming from the improper installation of the machine's washing system. Plaintiffs thereupon filed suit against defendants alleging negligence in design, installation and maintenance of the system and breach of express and implied warranties. [184 Mich App 731, 732-733; 459 NW2d 42 (1990).]
As in Neibarger, and for similar reasons, the trial court granted defendants' motion for sum mary disposition. The Court of Appeals affirmed, concluding that plaintiffs' remedies "laid exclusively within the ucc and were subject to the four-year limitation period which began running upon delivery of the milking system in 1976." Id. at 734.
We granted leave to appeal in both cases to consider the applicability of the economic loss doctrine as well as the proper limitation period. 437 Mich 928 (1991).
II
Michigan adopted the Uniform Commercial Code with the passage of 1962 PA 174, effective January 1, 1964. The stated purposes of the code are "(a) to simplify, clarify and modernize the law governing commercial transactions; (b) to permit the continued expansion of commercial practices through custom, usage and agreement of the parties; [and] (c) to make uniform the law among the various jurisdictions."
To achieve these goals, Article 2 of the code governs the relationship between the parties involved in "transactions in goods." Under Article 2, a sale of goods is accompanied by the implied warranties of merchantability and fitness and an express warranty may be created by negotiation or by the conduct of the seller. Thus, under the code, the purchaser of defective goods may recover the benefit of the bargain (the difference between the value of the goods as delivered and the value the goods would have had they complied with the warranty) as well as incidental and consequential damages in a proper case. An action to recover for breach of warranty under the ucc must be commenced within four years of tender of delivery of the goods, regardless of the time of discovery of the breach.
Since the plaintiffs' claims in each of these cases arose out of a sale of goods governed by the ucc, we must determine whether the consequences of its strict limitation period may be avoided by pleading claims sounding in tort. Where, as here, the claims arise from a commercial transaction in goods and the plaintiff suffers only economic loss, our answer is "no" — such claims are barred by the economic loss doctrine. This position is consistent with a considerable body of law that has developed in this state as well as a majority of other jurisdictions.
The economic loss doctrine, simply stated, provides that " '[w]here a purchaser's expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only "economic" losses.' " This doctrine hinges on a distinction drawn between transactions involving the sale of goods for commercial purposes where economic expectations are protected by commer cial and contract law, and those involving the sale of defective products to individual consumers who are injured in a manner which has traditionally been remedied by resort to the law of torts.
This distinction stems from the separate and sometimes conflicting purposes of tort and contract law, as explained by the Supreme Court of New Jersey in Spring Motors Distributors, Inc v Ford Motor Co, 98 NJ 555, 579-580; 489 A2d 660 (1985):
The purpose of a tort duty of care is to protect society's interest in freedom from harm, i.e., the duty arises from policy considerations formed without reference to any agreement between the parties. A contractual duty, by comparison, arises from society's interest in the performance of promises. Generally speaking, tort principles, such as negligence, are better suited for resolving claims involving unanticipated physical injury, particularly those arising out of an accident. Contract principles, on the other hand, are generally more appropriate for determining claims for consequential damage that the parties have, or could have, addressed in their agreement.[ ]
This distinction was also recognized by the court in Miller v United States Steel Corp, 902 F2d 573, 574 (CA 7, 1990), where Judge Posner explained that the term "economic loss" may be a misnomer:
It would be better to call it a "commercial loss," not only because personal injuries and especially property losses are economic losses, too — they destroy values which can be and are monetized — but also, and more important, because tort law is a superfluous and inapt tool for resolving purely commercial disputes. We have a body of law designed for such disputes. It is called contract law. Products liability law has evolved into a specialized branch of tort law for use in cases in which a defective product caused, not the usual commercial loss, but a personal injury to a consumer or bystander.
In Parish v BF Goodrich Co, 395 Mich 271, 278; 235 NW2d 570 (1975), Justice Levin alluded to this distinction in explaining the reasons for not applying the ucc (and its statute of limitations) in personal injury cases:
The provisions of ucc §2-725 (a warranty is breached upon tender of delivery), while entirely satisfactory in a commercial setting, are inconsistent with principles developed by the courts in consumer actions against manufacturers for personal injury. While most business losses attributable to a defective product will surface during the four-year period prescribed by § 2-725, consumers often suffer personal injury after a longer period of time has elapsed.
According to Justice Levin, the distinction stems from the bases of tort and contract liability:
Section 2-725 concerns, if not only, primarily claims based on an agreement of the parties to the litigation — including actions based on warranties implied from or in respect of their agreement.
The product liability of a manufacturer, not in direct dealing with the consumer, has, in contrast, been imposed by the courts with little or no regard- to whether there is an agreement between the parties and in the face of attempts by some manufacturers to disclaim liability in recitals accompanying the product into the market place. [Id. at 279-280.]
As developed by the courts, then, the individual consumer's tort remedy for products liability is not premised upon an agreement between the parties, but derives either from a duty imposed by law or from policy considerations which allocate the risk of dangerous and unsafe products to the manufacturer and seller rather than the consumer. Such a policy serves to encourage the design and production of safe products.
On the other hand, in a commercial transaction, the parties to a sale of goods have the opportunity to negotiate the terms and specifications, including warranties, disclaimers, and limitation of remedies. Where a product proves to be faulty after the parties have contracted for sale and the only losses are economic, the policy considerations supporting products liability in tort fail to serve the purpose of encouraging the design and production of safer products.
III
Heretofore, this Court has not explicitly addressed the economic loss doctrine. However, dur ing the past dozen years our Court of Appeals and the federal courts applying Michigan law have regularly invoked the economic loss doctrine in appropriate cases where conflict arises from the disparate goals of tort and contract law. In McGhee v General Motors Corp, 98 Mich App 495, 505; 296 NW2d 286 (1980), the first such decision, the Court adopted the rationale expressed in SM Wilson & Co v Smith Int'l, Inc, 587 F2d 1363, 1376 (CA 9, 1978):
Where the suit is between a nonperforming seller and an aggrieved buyer and the injury consists of damage to the goods themselves and the costs of repair of such damage or a loss of profits that the deal had been expected to yield to the buyer, it would be sensible to limit the buyer's rights to those provided by the Uniform Commercial Code. To treat such a breach as an accident is to confuse disappointment with disaster. Whether the complaint is cast in terms of strict liability in tort or negligence should make no difference. [Citations omitted.]
Since McGhee, the validity of this approach has been recognized in virtually every published opinion applying Michigan law to the issue of economic loss stemming from a commercial sale of goods. In A C Hoyle Co v Sperry Rand Corp, 128 Mich App 557, 561-562; 304 NW2d 326 (1983), the Court affirmed the dismissal of the plaintiff's claim of negligence in the design, manufacture, and delivery of hydraulic motors to be installed on oil tankers, holding that none of the policies supporting products liability law "would be served in the instant case, which involves contracting parties of relatively equal economic strength who, in a commercial setting, bargain for the specifications of the product." The doctrine was also applied in Great American Ins Co v Paty's, Inc, 154 Mich App 634; 397 NW2d 853 (1986), where a farmer sought to recover for damage to a combine which was destroyed by fire, and in Rust-Pruf Corp v Ford Motor Co, 172 Mich App 58, 62; 431 NW2d 245 (1988), where the plaintiff's tort claim was barred because of an express warranty and lack of any injury other than economic loss. Most recently, in Sullivan Industries, Inc v Double Seal Glass Co, Inc, 192 Mich App 333, 344; 480 NW2d 623 (1991), the Court held that "[a]llegations of only economic loss do not implicate tort law concerns with product safety, but do implicate commercial law concerns with economic expectations."
Even where the Court of Appeals refused to apply the economic loss doctrine to bar a plaintiff's claim, in Auto-Owners Ins Co v Chrysler Corp, 129 Mich App 38, 42; 341 NW2d 223 (1983), the Court implicitly recognized the rationale supporting the doctrine, holding only that it "fails when there is no contractual relationship between the parties." In a strong dissent, Chief Judge Danhof stated his belief that "plaintiff's negligence claim should be barred for the reasons stated in McGhee, supra." 129 Mich App 44. His dissent was later adopted by the Court in Sullivan, supra at 339.
This development in the jurisprudence of our state has been recognized by federal courts applying Michigan law. In Sylla v Massey-Ferguson, Inc, 660 F Supp 1044, 1046 (ED Mich, 1984), Judge Harvey explained that "when a plaintiff seeks to impose liability for economic losses only, tort law concerns with product safety no longer apply, and commercial law concerns with economic expectations must govern." A similar result was achieved in Consumers Power Co v Mississippi Valley Structural Steel Co, 636 F Supp 1100, 1105 (ED Mich, 1986), where Judge Joiner noted:
[T]he tort doctrine of products liability is based on the policy of allocating the risk of dangerous or unsafe products to the manufacturer rather than the consumer. Where all parties involved . . . are commercial businesses, this rationale disappears. Placing the burden of the loss on any particular business will only result in that business raising its prices to pass these costs along to consumers. The courts should have no role in deciding which business should raise its prices, especially in light of the parties' ability to allocate those risks among themselves.
The economic loss doctrine was also applied in Frey Dairy v A O Smith Harvestore Products, Inc, 680 F Supp 253 (ED Mich, 1988), aff'd 886 F2d 128 (CA 6, 1989), where Judge Cohn applied the reasoning of the McGhee panel in a case in which the plaintiffs sought recovery for reduced milk production and lost profits allegedly caused by defective silos. Noting that the plaintiffs waited almost six years before filing suit, he held that "summary judgment must be granted to both defendants on the grounds that the expiration of the statute of limitations bars the warranty claims and the economic loss doctrine bars the tort claims . . . ." 680 F Supp 256.
The reasoning of these courts comports with the reasoning of courts in the majority of jurisdictions which have adopted the economic loss doctrine. In the decision generally regarded as the genesis of the doctrine, Seely v White Motor Co, 63 Cal 2d 9, 18; 45 Cal Rptr 17; 403 P2d 145 (1965), the California Supreme Court stated its rationale for barring a tort recovery for economic loss:
A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market. He can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will. Even in actions for negligence, a manufacturer's liability is limited to damages for physical injuries and there is no recovery for economic loss alone.
More recently, in East River Steamship Corp v Transamerica Delaval Inc, 476 US 858, 868; 106 S Ct 2295; 90 L Ed 2d 865 (1986), the Supreme Court explained that in cases such as those before us, "the injury suffered — the failure of the product to function properly — is the essence of a warranty action, through which a contracting party can seek to recoup the benefit of its bargain."
IV
We are convinced that the reasoning of those courts which have adopted the economic loss doctrine compels a similar conclusion on our part. In the absence of legislative direction, we believe such a rule is required to guide trial courts facing cases such as those before us which lie at the intersection of tort and contract. Accordingly, we hold that where a plaintiff seeks to recover for economic loss caused by a defective product purchased for commercial purposes, the exclusive remedy is provided by the ucc, including its statute of limitations.
A contrary holding would not only serve to blur the distinction between tort and contract, but would undermine the purpose of the Legislature in adopting the ucc. The code represents a carefully considered approach to governing "the economic relations between suppliers and consumers of goods." If a commercial purchaser were allowed to sue in tort to recover economic loss, the ucc provisions designed to govern such disputes, which allow limitation or elimination of warranties and consequential damages, require notice to the seller, and limit the time in which such a suit must be filed, could be entirely avoided. In that event, Article 2 would be rendered meaningless and, as stated by the Supreme Court in East River, supra at 866, "contract law would drown in a sea of tort."
Rejection of the economic loss doctrine would, in effect, create a remedy not contemplated by the Legislature when it adopted the ucc by permitting a potentially large recovery in tort for what may be a minor defect in quality. On the other hand, adoption of the economic loss doctrine will allow sellers to predict with greater certainty their potential liability for product failure and to incorporate those predictions into the price or terms of the sale.
Adoption of the economic loss doctrine is consistent with the stated purposes of the ucc. The availability of a tort action for economic loss would "only add more confusion in an area already plagued with overlapping and conflicting theories of recovery," while preclusion of such actions will lead to the simplification, clarification, and modernization of commercial law called for by § 1-102(2)(a). Moreover, because a majority of other jurisdictions have adopted the economic loss doctrine, our decision here will promote the uniformity called for in § 1-102(2)(c).
In the cases before us, plaintiffs argue that their claims fall within the class of products liability actions defined in MCL 600.2945; MSA 27A.2945, and that the proper statutes of limitation and accrual are those provided by the Revised Judicature Act, MCL 600.5805(9); MSA 27A.5805(9) and MCL 600.5833; MSA 27A.5833. We disagree for the reasons stated above. Application of the rja to the cases before us would effectively negate Article 2 of the ucc; application of the economic loss doctrine ensures that the ucc will remain effective in governing commercial disputes, while the rja serves to govern noncommercial products liability actions.
v
Having decided that the ucc and the economic loss doctrine reflect the proper approach for reso lution of defective product claims in the commercial arena, we now turn to application of that doctrine to the cases before us. In the Court of Appeals, the plaintiffs argued that the economic loss doctrine does not bar their claims because they are asserting damage to property other than the goods themselves. Although there is support for the view that the ucc does not bar a tort claim where the plaintiffs are seeking to recover for property other than the product itself, we find in these cases that, notwithstanding injury to the plaintiffs' dairy herds, the damages claimed are economic losses.
At one end of the spectrum, the economic loss doctrine has been interpreted as permitting recovery in tort for injury to property other than the defective product itself. Nat'l Union Fire Ins Co of Pittsburgh v Pratt & Whitney Canada, Inc, 107 Nev 535; 815 P2d 601 (1991); Kershaw Co Bd of Ed v United States Gypsum Co, 302 SC 390; 396 SE2d 369 (1990). Other courts have allowed tort recovery for physical damage to the product itself caused by a defect which is not merely a "disappointment," but also a safety hazard, Russell v Ford Motor Co, 281 Or 587; 575 P2d 1383 (1978), or which results from a "calamitous" event. Star Furniture Co v Pulaski Furniture Co, 171 W Va 79; 297 SE2d 854 (1982).
In a case factually similar to those before us, Agristor Leasing v Spindler, 656 F Supp 653, 654 (D SD, 1987), the court found that damage to a dairy herd constituted economic loss rather than property damage where the purchasers of a feed storage system alleged that it was negligently designed and manufactured. The plaintiffs claimed that the defective product spoiled the feed it contained and resulted in "their dairy herd suffering medically and reproductively, milk production dropping and, ultimately, lost income." Finding that the plaintiffs were merely seeking "to recover the resulting losses to their dairy farm due to the Harvestore silo failing to perform as expected," id. at 658, the court characterized the injuries as economic loss and denied recovery in tort.
We agree. The proper approach requires consideration of the underlying policies of tort and contract law as well as the nature of the damages. The essence of a warranty action under the ucc is that the product was not of the quality expected by the buyer or promised by the seller. The standard of quality must be defined by the purpose of the product, the uses for which it was intended, and the agreement of the parties. In many cases, failure of the product to perform as expected will necessarily cause damage to other property; such damage is often not beyond the contemplation of the parties to the agreement. Damage to property, where it is the result of a commercial transaction otherwise within the ambit of the ucc, should not preclude application of the economic loss doctrine where such property damage necessarily results from the delivery of a product of poor quality.
In Hapka v Paquin Farms, 458 NW2d 683, 688 (Minn, 1990), the Supreme Court of Minnesota opined that "[t]he steady stream of litigation attempting to qualify for the exceptional treatment of damage to other property has convinced us that the exception represents a retreat to the common law in derogation of the essence of the Uniform Commercial Code: a complete and independent statutory scheme enacted for the governance of all commercial transactions." We agree with this analysis, noting, as did the Hapka court, that the ucc provides remedies sufficient to compensate the buyer of a defective product for direct, incidental, and consequential losses, including property damage. MCL 440.2714; MSA 19.2714, MCL 440.2715; MSA 19.2715. Where damage to other property was caused by the failure of a product purchased for commercial purposes to perform as expected, and this damage was within the contemplation of the parties to the agreement, the occurrence of such damage could have been the subject of negotiations between the parties.
In the two. cases before us, a review of the pleadings and depositions reveals that the damages sought by the plaintiffs are commercial losses which can be remedied only under, the provisions of the ucc.
The physical damage to property alleged by the plaintiffs includes instances of mastitis and other illnesses that allegedly caused the death of some cattle or necessitated culling them from the herd and selling them for beef. However, in his deposition, plaintiff Darwin Neibarger testified that mastitis is a common problem for dairy farmers. Plaintiff Charles Houghton testified that mastitis could occur even where the cows were milked by hand, and his testimony reveals that he was aware that mastitis could be caused by the milking system. Deposition testimony also reveals that culling the cows was a normal part of the dairy business, and that the Houghtons would replace as many as twenty-five percent of their cows every year. Houghton, in fact, testified that he anticipated problems with the new system because some cows would not adapt to the new system and would have to be replaced:
Viewing the complaints in light of this testimony, it is apparent that the damages suffered by the plaintiffs are properly considered to be economic loss, the result of a defect in the quality of the milking systems they purchased. The plaintiffs made business decisions to purchase new milking systems, hoping, as Charles Houghton and Darwin Neibarger testified, to expand the size of their herds and, we presume, thereby increase their incomes. Their commercial expectations were not met, however, and they experienced decreases in milk production and medical problems. Their complaints were properly viewed by the courts below as attempts to recover for lost profits and consequential damages, losses which are compensable under the ucc. Thus, these actions fall squarely within the economic loss doctrine and are governed by the provisions of the ucc, including its four-year statute of limitations.
VI
Plaintiffs also argue that the ucc does not apply to these cases because they are seeking to recover for injuries caused by the services provided by the defendants, rather than for any defect in the products provided by the defendants. If such is the case, their injuries did not arise out of a "transaction in goods" and thus are not governed by the ucc. MCL 440.2102; MSA 19.2102.
In both cases, the Court of Appeals applied the test expressed in Bonebrake v Cox, 499 F2d 951, 960 (CA 8, 1974), to determine whether contracts for mixed goods and services are governed by the code:
The test for inclusion or exclusion is not whether they are mixed, but, granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved . or is a transaction of sale, with labor incidentally involved .
Applying this test, the Court of Appeals found that the transactions in question were sales of goods, governed by the ucc.
We agree. The Bonebrake test represents the view of the majority of jurisdictions which have considered the issue. It is also the most logical approach, one which allows Article 2 to fulfill its purpose of governing the relationships between buyers and sellers of goods in the commercial arena.
As the Court of Appeals noted, some courts have divided a transaction between the parties into its components of goods and services and allowed a claim outside the ucc where the complaint sought recovery for injuries caused by the services provided by the defendant. For example, in H Hirschfield Sons Co v Colt Industries Operating Corp, 107 Mich App 720; 309 NW2d 714 (1981), the plaintiffs sought to recover for injuries caused by the manner in which an in-ground railroad and truck scale was installed. The Court of Appeals, in a decision which it limited to the narrow set of facts before it, found that the action was not governed by the ucc "because plaintiff's claim is based entirely on deficiencies in the rendition of services for which the contract contained a separate price rather than on any defect in the goods themselves." Id. at 727. In reaching this decision, the Hirschfield Court relied on the opinion in Dixie Lime & Stone Co v Wiggins Scale Co, 144 Ga App 145; 240 SE2d 323 (1977), a factually similar case in which the court explained that "[t]here is no claim that the scale itself is defective. The agreement underlying this suit was one for the furnishing of services and labor, and the ucc is clearly inapplicable." Id.
The two decisions referred to do not persuade us that the transactions at issue here were primarily for services rather than goods. In both cases, the contracts included separate prices for products and installation. In the cases now before us, however, the purchase agreements included no mention of installation or service, nor was any separate price stated for installation or service. The services that were provided, then, must be viewed as "incidental" to the contract for the purchase of a milking system.
We prefer the approach that is illustrated by those cases in which courts have examined the overall thrust of the dealings between the parties to determine the character of the transaction. In one such case, Care Display, Inc v Didde-Glaser, Inc, 225 Kan 232; 589 P2d 599 (1979), the Supreme Court of Kansas considered an oral contract for the design and construction of a display booth to be used in a trade show. The court, examining the overall purpose of the dealings between the parties, found that "the construction, transportation and installation of the display booth was a part of the contract between the parties but the major objective contemplated utilizing the knowledge and expertise of Care Display to create a unique setting in which to exhibit and promote to best advantage the products of Didde-Glaser." Id. at 239.
In Republic Steel Corp v Pennsylvania Engineering Corp, 785 F2d 174 (CA 7, 1986), the court employed a similar approach in examining the character of an agreement for the design, sale, and installation of two steel furnaces. In that case, the court, noting "Illinois law underscoring the broad coverage of the ucc and emphasizing the need for uniformity in commercial transactions," id. at 181, held that the fact that design, engineering and purchase agency services were a substantial part of the contract was not sufficient to preclude application of the ucc and its statute of limitations. Applying the Bonebrake test, the court held that "the predominant character of the Agreement . . . was that of a contract for the sale of goods, not for the rendition of services." Id. at 184.
The same approach is proper in these cases. It is difficult to imagine a commercial product which does not require some type of service prior to its purchase, whether design, assembly, installation, or manufacture. If a purchaser were able to avoid the ucc by pleading negligent execution of one of the services required to produce the product, Article 2 could be easily and effectively negated. A court faced with this issue should examine the purpose of the dealings between the parties. If the purchaser's ultimate goal is to acquire a product, the contract should be considered a transaction in goods, even though service is incidentally required. Conversely, if the purchaser's ultimate goal is to procure a service, the contract is not governed by the ucc, even though goods are incidentally required in the provision of this service.
In these cases, the thrust or purpose of the plaintiffs' contracts with the defendants was not the provision of defendants' design or installation services; rather, the plaintiffs intended to acquire goods, i.e., milking systems that incidentally required design and installation services. This conclusion is supported by the deposition testimony of plaintiffs Darwin Neibarger and Charles Houghton. Neibarger testified that he "bought the system complete" and hoped "just to go to the barn and turn it on and everything worked." Houghton viewed the transaction as a purchase of a product as well, testifying that defendant Howard was to install a milking system which he purchased, at least in part, because "it looked like a good machine." It thus appears from the testimony of the plaintiffs that their goals were to purchase milking systems; whatever design or installation services the systems required were incidental to those goals.
Plaintiffs' attempts to avoid application of the ucc by arguing that there was no defect in the product, but that it was poorly designed or installed, are to no avail. At the heart of the complaints in these cases is the fact that the plaintiffs purchased products which proved inadequate for their purposes, causing them lost profits and, perhaps, consequential losses or property damage compensable in a timely suit under the provisions of the ucc.
VII
Since the damages sought in these cases are economic losses resulting from the commercial sale of goods, the plaintiffs' exclusive remedies are provided by the ucc. Because proceedings in each case were not commenced within the four-year period provided by MCL 440.2725; MSA 19.2725, the actions are time-barred. Accordingly, in each case, we affirm the decision of the Court of Appeals.
Brickley, Riley, and Mallett, JJ., concurred with Griffin, J.
MCL 440.1101 et seq.; MSA 19.1101 et seq.
Although the Neibarger case was originally filed in Montcalm County, the parties agreed to and requested a change of venue, which was ordered.
Honorable Lawrence C. Root.
MCL 440.2101 et seq.; MSA 19.2101 et seq.
Plaintiffs also pointed to MCL 600.5833; MSA 27A.5833, which provides that "[i]n actions for damages based on breach of a warranty of quality or fitness the claim accrues at the time the breach of the warranty is discovered or reasonably should be discovered."
1962 PA 174, § 9991.
MCL 440.1102(2); MSA 19.1102(2).
MCL 440.2102; MSA 19.2102.
MCL 440.2314; MSA 19.2314.
MCL 440.2315; MSA 19.2315:
MCL 440.2313; MSA 19.2313.
MCL 440.2725; MSA 19.2725.
MCL 440.2715; MSA 19.2715.
MCL 440.2725; MSA 19.2725.
Wade, Tort liability for products causing physical injury and Article 2 of the UCC, 48 Mo L R 1, 26, n 87 (1983): "Although there is some disagreement on the matter, the substantial majority rule has come to be . . . that economic loss deriving from a failure of the product to perform in accordance with the implied warranties is not actionable in tort, whether negligence or strict liability." See also 63A Am Jur 2d, Products Liability, § 970, p 118.
Kershaw Co Bd of Ed v United States Gypsum Co, 302 SC 390, 393; 396 SE2d 369 (1990), quoting Kennedy v Columbia Lumber & Mfg Co, 299 SC 335, 345; 384 SE2d 730 (1989).
See Clark v Int'l Harvester Co, 99 Idaho 326, 335; 581 P2d 784 (1978), Waggoner v Town & Country Mobile Homes, Inc, 808 P2d 649, 653 (Okla, 1990).
See also Wade, n 15 supra, p 24:
Contract law protects the expectation interest. It seeks to place the plaintiff in the position he would have been in if the defendant had not broken the contract. Tort law has as its gravamen the restoring of the plaintiff to the position he had been in before the defendant's wrongful conduct injured him. The details and ramifications of the two sets of laws were developed in the light of the primary purpose of each.
See however, Ebers v General Chemical Co, 310 Mich 261, 275; 17 NW2d 176 (1945), where this Court allowed tort recovery to a plaintiff who pled breach of warranty. We said the real issue was "whether or not [the manufacturer] was negligent" in selling an inadequately tested insecticide which damaged the plaintiff's fruit trees. In Spence v Three Rivers Builders & Masonry Supply, Inc, 353 Mich 120; 90 NW2d 873 (1958), the plaintiff was awarded damages from the manufacturer of defective cinder blocks used in the construction of the plaintiff's resort cottages. Both cases were decided before adoption by this state of the ucc.
More recently, in Southgate Community School Dist v West Side Construction Co, 399 Mich 72; 247 NW2d 884 (1976), a decision that focused on privity, the plaintiff recovered in tort from a remote manufacturer for what appeared to be economic loss. To the extent that Southgate may read as rejecting the economic loss doctrine, it is today modified.
On appeal of Frey Dairy, the United States Court of Appeals for the Sixth Circuit certified the following question to this Court: "Under Michigan law, does the economic loss doctrine operate to bar tort claims sounding in negligence and gross negligence where the foundation of the parties' relationship is contractual and the only losses alleged are economic losses?" After we declined to address the question, 432 Mich 1240 (1989), the court decided the case on different grounds. 886 F2d 131.
See Spring Motors Distributors, Inc v Ford Motor Co, supra.
Moorman Mfg Co v Nat'l Tank Co, 91 Ill 2d 69, 78; 61 Ill Dec 746; 435 NE2d 443 (1982).
See Superwood Corp v Siempelkamp Corp, 311 NW2d 159, 162 (Minn, 1981), overruled on other grounds Hapka v Paquin Farms, 458 NW2d 683 (Minn, 1990).
Clark v Int'l Harvester Co, n 17 supra.
MCL 600.2945; MSA 27A.2945:
"[Products liability action" means an action based on any legal or equitable theory of liability brought for or on account of death or injury to person or property caused by or resulting from the manufacture, construction, design, formula, development of standards, preparation, processing, assembly, inspection, testing, listing, certifying, warning, instructing, marketing, advertising, packaging, or labeling of a product or a component of a product.
See Kershaw Co Bd of Ed v United States Gypsum Co, n 16 supra; Pisano v American Leasing, 146 Cal App 3d 194; 194 Cal Rptr 77 (1983).
See, e.g., Chicago Heights Venture v Dynamit Nobel of America, Inc, 782 F2d 723 (CA 7, 1986) (a leaking roof caused water damage to other parts of an apartment building).
The Minnesota Legislature has since modified the rule stated in Hapka, with passage of Minn Stat, § 604.10, which allows tort recovery for economic loss arising "from a sale of goods that is due to damage to tangible property other than the goods sold . . . but economic loss that arises from a sale of goods between parties who are each merchants in goods of the kind is not recoverable in tort." ZumBerge v Northern States Power Co, 481 NW2d 103, 107, n 2 (Minn App, 1992).
A motion for summary disposition premised upon the statute of limitations is governed by MCR 2.116(C)(7); in deciding such a motion, a court must consider the pleadings, affidavits, depositions, admissions, and other documentary evidence filed by the parties. MCR 2.116(G)(5).
See anno: Applicability of UCC Article 2 to mixed contracts for sale of goods and services, 5 ALR4th 501, 505.
On appeal in this Court, plaintiffs also attempt to avoid application of the ucc by arguing that there is no privity of contract between plaintiffs and defendants Universal and Alfa-Laval. We note that this issue was not raised in the trial court or in the Court of Appeals and thus is not properly before us. We also note in each case that plaintiffs allege that the defendant retailer was an "agent" of the manufacturer.