Title: Professional Lens Plan, Inc. v. Polaris Leasing Corp.
Citation: 234 Kan. 742, 675 P.2d 887
Docket Number: 55,584
State: Kansas
Issuer: Kansas Supreme Court
Date: January 13, 1984

234 Kan. 742 (1984)
675 P.2d 887
PROFESSIONAL LENS PLAN, INC., Plaintiff/Appellee/Cross-Appellant, and DR. RONALD E. PRICE and ANN M. PRICE, Plaintiffs,
v.
POLARIS LEASING CORPORATION, Defendant/Appellee,
v.
IMPACT SYSTEMS, a Corporation and OHIO SCIENTIFIC, a Corporation, Third-Party Defendants, and OKIDATA CORPORATION, Third-Party Defendant/Appellant.
No. 55,584

Supreme Court of Kansas.
Opinion filed January 13, 1984.
*743 Frederick K. Starrett, of Ralston &amp; Frieden, of Topeka, argued the cause and was on the brief for appellant.
John C. Fay, of Manhattan, argued the cause and was on the briefs for plaintiff-appellee.
Sam Brownback, of Stites, Hill &amp; Wilson, of Manhattan, argued the cause and was on the brief for defendant-appellee.
Dorothy L. Thompson, of Everett, Seaton, Knopp &amp; Thompson, of Manhattan, argued the cause and was on the brief for third-party defendant Ohio Scientific.
The opinion of the court was delivered by
McFARLAND, J.:
This case involves two interlocutory appeals, pursuant to K.S.A. 60-2102(b) and Supreme Court Rule 4.01 (230 Kan. lii), concerning the propriety of some of the district court's rulings concerning implied warranty and allowing amendment of pleadings after the alleged expiration of the statute of limitations. The Court of Appeals permitted the appeals to be taken and the case was subsequently transferred to this court for determination.
Plaintiff Professional Lens Plan, Inc., is a corporation wholly owned by plaintiffs Dr. Ronald E. Price and Ann M. Price. Loren H. Shellabarger is the operator of Shellabarger Systems, a company which consults with, and assists businesses in selecting and programming computers. Sometime in 1979, Dr. Price and Mr. Shellabarger entered into an agreement whereby Shellabarger would recommend appropriate computer hardware for Professional Lens Plan, Inc. Five computer systems were presented to Dr. Price and he selected a computer manufactured by Ohio Scientific, a corporation.
Professional Lens Plan, Inc., reached an agreement with Impact Systems for acquisition of an Ohio Scientific computer on or about August 15, 1979. For purposes of tax benefits to the ultimate purchaser and other business considerations, Impact Systems purchased the computer from Ohio Scientific but sold the same to its wholly owned subsidiary, defendant Polaris Leasing Corporation. Polaris then executed an agreement with Professional Lens whereby it would lease the equipment to Professional Lens.
The computer was delivered in September, 1979, to Professional Lens by Impact (the computer having never been in the possession of Polaris). Problems in the operation of the computer commenced shortly after its delivery which were ultimately traced, at least in part, to an allegedly defective hard disc, a *744 computer component part, which had been purchased by Ohio Scientific from the disc's manufacturer, Okidata Corporation.
On June 12, 1980, plaintiff Professional Lens Plan, Inc., filed this action against defendant Polaris Leasing Corporation alleging the computer was defective and, as a result thereof, plaintiff corporation had suffered lost profits of $43,356.00 and incurred $11,911.31 for such expenses as computer forms, equipment, lease payments made, consultation and programming, insurance, additional office space, additional rent, telephone charges and labor. These figures were amended upward on the pretrial questionnaire filed herein by Professional Lens. On July 15, 1980, defendant Polaris Leasing filed a third-party complaint against Impact Systems and Ohio Scientific for indemnity of any judgment rendered against it in favor of plaintiff Professional Lens. On the same day, Professional Lens filed a motion to join Dr. and Mrs. Price as additional parties plaintiff (this motion was granted on February 26, 1981). Plaintiffs Price are in this litigation as guarantors of the lease (purchaser's) agreement. Third-party defendant Impact Systems, on August 21, 1980, filed a cross-petition against third-party defendant Ohio Scientific for indemnity for any judgment it might have to pay third-party plaintiff, Polaris Leasing. On March 5, 1981, third-party defendant Ohio Scientific filed a third-party petition against Okidata Corporation.
On September 3, 1981, Judge Innes overruled Okidata's motion to dismiss the third-party petition against it holding:
Thereafter a snowstorm of summary judgment motions was filed. The case was reassigned to Judge Mershon. On February 28, 1983, Judge Mershon issued his 48-page "Court Journal Entry and Memorandum of Decision on Motion for Reconsideration [of the September 3, 1981, decision] and on All Motions for Summary Judgment." Without attempting to summarize the entire tome, the key holdings for purposes of these interlocutory appeals are as follows:
Interlocutory appeals were duly perfected by Okidata Corporation and Professional Lens. We shall first discuss the issues raised by Okidata.
The first such issue concerns whether the district court erred in finding Professional Lens had a cause of action against Okidata. Stated more specifically, the question is whether Kansas permits a corporate ultimate purchaser, who has incurred only economic loss, as opposed to personal injury or property damage, to recover on theories of breach of implied warranty of fitness and merchantability, from a manufacturer with whom the ultimate purchaser was not in contractual privity.
Privity of contract is defined by Black's Law Dictionary 1362 (4th ed. rev. 1968) as follows:
In Booth v. Scheer, 105 Kan. 643, 185 Pac. 898 (1919), 8 A.L.R. 663, the general common law rule requiring privity in sales contracts was stated as follows:
See also Lumber Co. v. Mercantile Co., 114 Kan. 10, 216 Pac. 815, modified 114 Kan. 17 (1923), 35 A.L.R. 242.
*746 Problems arose with the strict application of the requirement of privity where manufacturers sold inherently dangerous products to dealers who, in turn, sold them to consumers. An exception to the rule requiring privity was frequently held to exist in situations where a manufactured human foodstuff caused personal injury by virtue of a defect. In Chandler v. Anchor Serum Co., 198 Kan. 571, 426 P.2d 82 (1967), this court was asked to impose an implied warranty, in the absence of contractual privity, for defectively manufactured animal vaccines which resulted in death and disease to plaintiff's cattle. The court, in Chandler, analyzed the law of implied warranty as follows:
The court then reviewed animal food and medicine cases from other jurisdictions and held:
Evangelist v. Bellern Research Corporation, 199 Kan. 638, 433 P.2d 380 (1967), involved a personal injury action wherein an attempt was made to extend implied warranty to a recapping device for soda pop, known as "Handy Dandy," to its manufacturer who was not in contractual privity with the plaintiff-consumer. The court reasoned:
The court then held as a matter of law plaintiff could not recover from defendant manufacturer on a theory of implied warranty.
*749 The incidents giving rise to the litigation in both Chandler v. Anchor Serum Co., 198 Kan. 571, and Evangelist v. Bellern Research Corporation, 199 Kan. 638, occurred before this state's adoption of the Uniform Commercial Code (K.S.A. 84-1-101 et seq.) effective in 1966.
K.S.A. 84-2-318 sets limits on persons who may assert breach of implied warranty actions under 84-2-314 (merchantability) and 84-2-315 (fitness for a particular purpose). K.S.A. 84-2-318 provides:
K.S.A. 84-2-318 is Alternative B of U.C.C. 2-318 (there are two other alternatives, A and C). Alternative B has been adopted by nine states and the Virgin Islands, some jurisdictions making a few modifications. White &amp; Summers, Uniform Commercial Code § 11-3, p. 404, n. 18 (2d ed. 1980); 3 Anderson, Uniform Commercial Code § 2-318:3 (3rd ed. 1983).
Alternative B (84-2-318) extends express or implied warranties to natural persons who may reasonably be expected to use the goods and who are injured in person. Alternative A, by comparison, is more restrictive, stating:
Alternative C broadens the scope of those who may seek recovery on warranty by stating:
As noted in the Official UCC Comment 2 following 84-2-318:
Professional Lens is the buyer of the computer and hence any question of extending the buyer's warranty to others (the whole purpose of 84-2-318) does not arise in regard to Professional Lens. Additionally, if same did apply in principle, Professional Lens is not a "natural person" who was personally injured. Determination of the issue before us is not a matter of statutory construction.
K.S.A. 84-2-318 has been characterized as relating wholly to "horizontal privity," that is, extending the class of plaintiff beyond that of the actual purchaser. The question of whether a plaintiff can extend the class of defendants beyond that of the seller is sometimes characterized as a matter of "vertical privity." See Rasor, Kansas Law of Sales Under the Uniform Commercial Code § 9-6 (1981). These terms are technically misnomers as imposition of implied warranties between persons who are in the buyer-seller relationship is an exception to the requirement of privity.
The propriety of allowing a non-privity ultimate purchaser who has suffered only direct or consequential economic loss to recover from a remote manufacturer of an allegedly defective product under an implied warranty theory has been a matter of considerable debate within the legal profession. See for example Rasor, The History of Warranties of Quality in the Sale of Goods: Contract or Tort?  A Case Study in Full Circles, 21 Washburn L.J. 175 (1982); Zammit, Manufacturers' Responsibility for Economic Loss Damages in Products Liability Cases: What Result in New York? 20 N.Y.L.F. 81 (1974); Comment, The Demise of Vertical Privity: Economic Loss Under the Uniform Commercial Code, 2 Hofstra L. Rev. 749 (1974); Speidel, Products Liability, Economic Loss and the UCC, 40 Tenn. L. Rev. 309 (1973); Comment, The Vexing Problem of the Purely Economic Loss in Products Liability: An Injury in Search of a Remedy, 4 Seton Hall L. Rev. 145 (1972); Comment, Implied Warranties and "Economic Loss", 24 Baylor L. Rev. 370 (1972); *751 Comment, Manufacturers' Liability to Remote Purchasers for "Economic Loss" Damages  Tort or Contract? 114 U. Pa. L. Rev. 539 (1966), Note, Economic Loss in Products Liability Jurisprudence, 66 Colum. L. Rev. 917 (1966). See generally White, Contract Law in Modern Commercial Transactions, An Artifact of Twentieth Century Business Life? 22 Washburn L.J. 1 (1982); and Murray, The Article 2 Prism: The Underlying Philosophy of Article 2 of the Uniform Commercial Code, 21 Washburn L.J. 1 (1981). See also Annot., Privity of Contract as Essential in Action Against Remote Manufacturer or Distributor for Defects in Goods Not Causing Injury to Person or to Other Property, 16 A.L.R.3d 683; Annot., Third-Party Beneficiaries of Warranties Under UCC § 2-318, 100 A.L.R.3d 743.
White &amp; Summers, Uniform Commercial Code (2d ed. 1980), has squarely addressed the issue of direct and consequential economic loss damages of a non-privity ultimate purchaser in implied warranty actions. Speaking of direct economic loss, Messrs. White and Summers have said:
Of consequential economic loss White and Summers have stated:
*752 In State ex rel Western Seed v. Campbell, 250 Or. 262, 442 P.2d 215 (1968), cert. denied 393 U.S. 1093 (1969), the Oregon Supreme Court commented:
White &amp; Summers has observed:
The economic loss claimed by Professional Lens appears to be consequential rather than direct under the following White &amp; Summers, Uniform Commercial Code (2d ed. 1980) definition:
However for purposes of this issue we need only utilize the general term, economic loss, as we see no valid reason for distinguishing between direct and consequential economic loss in the circumstances herein.
In Owens-Corning Fiberglas v. Sonic Dev. Corp., 546 F. Supp. 533 (D. Kan. 1982), Judge Saffels was called upon to decide whether Kansas law permitted a corporate buyer to maintain an action against a non-privity manufacturer for only economic loss based on breach of implied warranties of fitness and merchantability. In holding such action was not proper, Judge Saffels reasoned:
*754 In Hole v. General Motors Corp., 83 App. Div.2d 715, 442 N.Y.S.2d 638 (1981), the New York court reached a similar result in interpreting that state's version of Alternative B of U.C.C. § 2-318 (N.Y.U.C.C. § 2-318 [McKinney, 1983 Supp.]), the alternative enacted in Kansas (84-2-318). In Hole, the New York court declared:
Public policy reasons are the basis on which implied warranties have been extended to non-privity manufacturers whose inherently dangerous products cause physical injuries to buyers. However, imposing implied warranties on non-privity manufacturers for a buyer's economic loss is a major step, not to be taken lightly. If contractual privity is not necessary to maintain an action for breach of an implied warranty of fitness (84-2-315), how is it possible for a remote seller to have reason to know any particular purpose for which its goods are required by an unknown ultimate buyer? What is the time of contracting under 84-2-315 between a remote manufacturer and an ultimate purchaser? How does a buyer rely upon the skill or judgment of a seller it has never met or had any dealing with and maybe doesn't even know the existence of? The problems do not end with 84-2-315, they only begin. For example, how is a remote manufacturer to afford itself of the ability to exclude or modify warranties under 84-2-316, when the remote manufacturer does not know to whom it must exclude or modify its warranties? In *755 turn, how is an ultimate purchaser, pursuant to 84-2-607(3)(a), to give notice of defect to a remote manufacturer whom it does not know? Further, how is 84-2-719 authorizing contractual modification or limitation of remedy to operate between parties who have not dealt directly with each other? Specifically, how is a remote manufacturer to avail itself of 84-2-719(3) which permits limitation or exclusion of consequential damage liability? An across-the-board extension of implied warranties to non-privity manufacturers or sellers, without regard to the nature of either the involved product or the type of damage sought, would spawn numerous problems in the operation of Article 2 of the Uniform Commercial Code. See generally Murray, The Article 2 Prism: The Underlying Philosophy of Article 2 of the Uniform Commercial Code, 21 Washburn L.J. 1 (1981).
The computer and its component part, the hard disc, are clearly not products which are inherently dangerous. Here damages are sought only for economic loss, no personal injuries or property damage being involved. We find no public policy dictates extending implied warranties of fitness and merchantability to the non-privity manufacturers herein.
We conclude implied warranties of fitness and merchantability are not extended to a remote seller or manufacturer of an allegedly defective product, which is not inherently dangerous, for only economic loss suffered by a buyer who is not in contractual privity with the remote seller or manufacturer. Accordingly the district court erred in holding that Professional Lens had a cause of action against Okidata Corporation for economic loss based on breach of implied warranty.
The second issue may be stated as follows: In the event this court concludes Professional Lens has a cause of action against Okidata based on breach of implied warranties, are warranty and damage limitations contained in Okidata's sale of the hard disc to Ohio Scientific binding upon Professional Lens, the ultimate purchaser? Such issue, then, relates to certain defenses Okidata might utilize in defending against Professional Lens' action against Okidata. We have concluded in the foregoing issue that Professional Lens has no cause of action against Okidata. Therefore, this issue is moot.
The third issue is whether the district court erred in permitting Professional Lens to amend its pleadings after the expiration of *756 the applicable statute of limitations and bring an action directly against third-party defendants Okidata Corporation and Ohio Scientific for breach of implied warranties.
The basic issue is whether the applicable statute of limitations is three years (K.S.A. 60-512) or four years (K.S.A. 84-2-725). If the applicable statute is four years, then it is conceded the amendments were timely. If three years is the proper statute of limitations, then the amendments came after the expiration of the statute of limitations, and consideration is sought of complex arguments relative to the relation back of amendments and a form of estoppel arising from the district court's ruling of September 3, 1981 (later rescinded).
Here again, this court's previous determination Professional Lens has no cause of action against Okidata renders this issue as it relates to Okidata moot. However, it would be inappropriate to move to the next issue without reference to the procedural problems that exist in this case. Only Okidata sought an interlocutory appeal on the first three issues raised in this case and the district court granted the right to Okidata alone to take this appeal on these issues. Ohio Scientific is an appellee herein and is not an opposing party to any position of appellant Okidata in this appeal. Notwithstanding these facts, Ohio Scientific wears the same shoes as does Okidata as to issues number one (implied warranty) and three (statute of limitations). Ohio Scientific has filed a brief herein which essentially is a "me too" to Okidata's brief. Despite the procedural problems in the way the matter comes before us, we conclude judicial economy and the best interests of the litigants would be better served by simply declaring the lack of privity between Professional Lens and Ohio Scientific defeats Professional Lens' claims against Ohio Scientific for breach of implied warranties on the rationale set forth in issue number one herein. Therefore, the statute of limitations issue is also moot as to Ohio Scientific.
This concludes the discussion of all issues raised by Okidata in its interlocutory appeal.
The final issue is the only issue raised by Professional Lens Plan, Inc., in its interlocutory appeal and is stated as follows: In light of the trial court's ruling sustaining Impact Systems' motion for summary judgment against Polaris Leasing in this case, does privity of contract exist between plaintiff and Impact Systems?
*757 Interlocutory appeals are governed by K.S.A. 60-2102(b) as follows:
See Supreme Court Rule 4.01 (230 Kan. lii) which sets forth the procedure to be followed.
As will be recalled, Polaris Leasing brought Impact Systems into this litigation as a third-party defendant. Impact Systems was granted summary judgment on the third-party petition on the basis Polaris Leasing was not, in fact, the purchaser of the computer from Impact Systems but was only the financing agent. Hence the court reasoned there could be no implied warranties between Impact Systems and Polaris Leasing. In this interlocutory appeal no one is challenging the propriety of this determination. Rather, Professional Lens, who was not a party to the summary judgment, is asking this court to extend the district court's rationale and find, as a matter of law, Professional Lens and Impact Systems are in a buyer-seller relationship and hence there is privity between them. This is a matter which was not determined by the district court.
We conclude this issue is not the proper subject of an interlocutory appeal and, accordingly, we have no jurisdiction to determine it. The interlocutory appeal of Professional Lens must be dismissed.
In the interlocutory appeal of Okidata Corporation, the order permitting Professional Lens Plan, Inc., to bring a breach of implied warranty action against Okidata Corporation and Ohio Scientific is vacated. The interlocutory appeal of Professional Lens Plan, Inc., is dismissed.