Opinion ID: 2996111
Heading Depth: 2
Heading Rank: 1

Heading: Nabisco’s Tort Claims2

Text: The economic loss doctrine denies a tort remedy for product defects when the loss “is rooted in disappointed contractual or commercial expectations.” See Mutual Serv. Cas. Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 615 (7th Cir. 2001) (quoting Collins v. Reynard, 607 N.E.2d 1185, 1188 (Ill. 1992) (Miller, C.J., concurring)). Contract law provides the proper remedy for disappointed commercial expectations, such as when a product is unfit for its intended use. See Moorman Mfg. Co. v. Nat’l Tank Co., 435 2 The parties agree that Illinois law applies to their diversity claims. Nos. 01-1711 & 01-2310 7 N.E.2d 443, 450 (Ill. 1982). Recovery in tort for disappointed commercial expectations due to breach of implied duties and warranties between non-contracting parties is also barred by the economic loss doctrine. See Redarowicz v. Ohlendorf, 441 N.E.2d 324, 327 (Ill. 1982); Moorman, 435 N.E.2d at 450. To recover in tort under the economic loss doctrine, a party must show harm above and beyond a party’s contractual or commercial expectations. In re Chicago Flood Litigation, 680 N.E.2d 265, 276 (Ill. 1997). In Chicago Flood, a broken water main in Chicago flooded many downtown businesses. Id. at 268. The Illinois Supreme Court held that only plaintiffs who lost perishable inventory as a result of interrupted electrical service could recover in tort. Id. at 276. The court reasoned that these plaintiffs were not “seek[ing] damages for the loss of continuous electrical service, which is a disappointed commercial expectation.” Id. Instead, the plaintiffs sought damages for perished goods, which were recoverable because “[s]uch damages are above and beyond class plaintiffs’ disappointed commercial expectation” and thus, “fall outside the definition of economic loss and are recoverable in tort.” Id. In this case, Nabisco asserts that it lost $30 million in part due to AUL’s alleged negligence which made the warehouse and its products unfit for use. However, in contrast to the plaintiffs’ claims in Chicago Flood, Nabisco’s claims of recovery for contamination were not above and beyond their commercial expectations. In fact, Nabisco bargained for and received a contractual protection against contamination in the form of AUL’s promise to keep harmful chemicals in a separate part of the warehouse. This expectation was not met, and as a result Nabisco suffered a loss. Although Nabisco spent more to address the contamination than it was entitled to recover from AUL, Nabisco accepted this risk when it contracted to hold AUL responsible for a maximum of $1 million for 8 Nos. 01-1711 & 01-2310 breaching this term. Nabisco cannot circumvent this bargained-for limitation by suing in tort for those disappointed commercial expectations addressed in the contract. See Moorman, 435 N.E.2d at 450. Its negligence claim against AUL is therefore barred by the economic loss doctrine. Nabisco’s negligence claims against Central, Catellus, Krusinski, and the subcontractors are also barred by the economic loss doctrine. Nabisco alleges that Central, Catellus, Krusinski, and the subcontractors breached their warranties against latent defects. See Redarowicz, 441 N.E.2d at 327. However, the damages that Nabisco seeks are economic losses, which are addressed by contract law, not tort law.3 In Redarowicz, the second purchaser of a house discovered that there were latent defects that caused the chimney and adjoining brick wall to separate from the house. Id. at 326. The purchaser’s claims were for deterioration and loss of bargain resulting from inferior workmanship. Id. at 327. The court found that the losses from the latent defects were disappointed commercial expectations because the only losses the purchaser incurred were “additional expenses for living conditions that were less than what was bargained for.” Id. Like Redarowicz’s claims, Nabisco’s negligence claims against Central, Catellus, Krusinski, and the subcontractors are for the recovery of losses due to a construction defect. Nabisco claims that as a result of the defendants’ breach its products were contaminated, making them unfit to sell and causing Nabisco to lose the bargained-for use of the warehouse. These losses are for disappointed commercial expectations, which were contemplated by the 3 Although the law of torts developed out of the law of warranties, the law of warranties and contract law remain the appropriate manner in which to redress a purchaser’s disappointed commercial expectations. Moorman, 435 N.E.2d at 450. Nos. 01-1711 & 01-2310 9 contract. Therefore, unless Nabisco qualifies for an exception, its negligence claims against AUL, Central, Catellus, Krusinski, and the subcontractors are barred by the economic loss doctrine.
There are three exceptions to the Moorman economic loss rule,4 though the parties agree that only one exception is at issue—whether Nabisco’s property damage was caused by a sudden, calamitous, or dangerous occurrence. See Chicago Flood, 680 N.E.2d at 275; Moorman, 435 N.E.2d at 449-50. In deciding whether the occurrence was sudden, dangerous, or calamitous, the court must determine the nature of the defect and the manner of occurrence. See Trans States Airlines v. Pratt & Whitney Canada, Inc., 682 N.E.2d 45, 49 (Ill. 1997); Moorman, 435 N.E.2d at 449. Even when the evidence is viewed in the light most favorable to Nabisco, we conclude that the nature and manner of the contamination of Nabisco’s bakery products does not fall under this exception. In contamination cases, Illinois courts have generally rejected the application of the sudden or calamitous occurrence exception, unless the defect makes the product hazardous or unreasonably dangerous. See Dixie-Portland Flour Mills, Inc. v. Nation Enters., Inc., 613 F. Supp. 985, 989 (N.D. Ill. 1985) (contamination of flour by sand did not fall under exception); NBD Bank v. Krueger Ringier, 4 The other two exceptions to the economic loss doctrine are: 1) “the plaintiff ’s damages are proximately caused by a defendant’s intentional, false representation,” or 2) “the plaintiff ’s damages are proximately caused by a negligent misrepresentation by a defendant in the business of supplying information for the guidance of others in their business transactions.” See Chicago Flood, 680 N.E.2d at 275. 10 Nos. 01-1711 & 01-2310 Inc., 686 N.E.2d 704, 708 (Ill. App. Ct. 1997) (contamination of land by petroleum did not fall under exception); Cloverhill Pastry-Vend Corp. v. Cont’l Carbonics Products, Inc., 574 N.E.2d 80, 82-83 (Ill. App. Ct. 1991) (contamination of bakery products by metal chips did not fall under exception); cf. Electronics Group, Inc. v. Central Roofing Co., 518 N.E.2d 369, 371 (Ill. App. Ct. 1987) (flooding due to faulty roof fell within exception); United Air Lines, Inc. v. CEI Indus. of Ill., Inc., 499 N.E.2d 558, 563 (Ill. App. Ct. 1986) (flooding and roof collapse due to faulty roof fell within exception). Loss from contamination is recoverable notwithstanding the economic loss rule if the product becomes inherently and unreasonably dangerous. In Board of Education v. A, C & S, Inc., 546 N.E.2d 580 (Ill. 1989), the court acknowledged that it was “artificial” to call asbestos contamination “sudden,” so the court held that recovery for contamination was not barred by the economic loss doctrine if the contamination was hazardous or unreasonably dangerous. Id. at 588-90; see also Blommer Chocolate Co. v. Bongards Creameries, Inc., 635 F. Supp. 911, 916-17 (N.D. Ill. 1985) (loss from contamination of chocolate by salmonella-infected whey is recoverable because it poses a health risk to consumers). Here, however, Nabisco alleges in its third amended complaint that the contamination did not pose a health risk. Given this allegation, Nabisco could not plead any facts that would support a finding that the contamination of its products meets the requirements for the application of this exception to Moorman. See Thomas v. Farley, 31 F.3d 557, 558-59 (7th Cir. 1994) (“[I]f a plaintiff . . . plead[s] particulars, and they show that he has no claim, then he is out of luck—he has pleaded himself out of court.”); R.J.R. Serv., Inc. v. Aetna Cas. & Sur. Co., 895 F.2d 279, 280 (7th Cir. 1988) (stating that a court is “not obliged to ignore any facts set forth in the Nos. 01-1711 & 01-2310 11 complaint that undermine the plaintiff’s claim”). Therefore, we agree with the district court that Nabisco’s negligence claims are barred by the economic loss doctrine and were properly dismissed. Nabisco sought leave to amend its complaint to add additional facts showing that its products were contaminated as soon as they entered the warehouse, but did not seek to withdraw its allegation that the contamination posed no health risk. Therefore, the proposed amendment would have been futile and the district court did not abuse its discretion in denying it.
Nabisco’s claims against Specco and Hydrite for breach of their duties to warn are based on the same negli- gence claims discussed above. Specco and Hydrite’s alleged breach was a direct and proximate cause of Nabisco’s commercial loss. Nabisco is seeking recovery for its lost commercial expectations of storing its products in an uncontaminated warehouse and selling its products to consumers. Those who suffer loss of commercial expectations such as reduced value, repair and replacement, or lost profits are barred from tort recovery and are relegated to seeking recovery under contract law. Moorman, 435 N.E.2d at 450 (quoting Pa. Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1174-75 (3d Cir. 1981)). Nabisco does not meet any of the exceptions to the economic loss doctrine. Hence, the district court’s dismissal of Nabisco’s duty to warn claims was proper. B. Mandatory Arbitration of Central’s Breach of Warranty Claims The district court ruled that the mandatory arbitration provision in the tenant lease between Catellus and 12 Nos. 01-1711 & 01-2310 Central applies to all of Central’s claims, including those against Krusinski and the subcontractors, and that each of the parties Central brought a claim against must submit to arbitration.5 The court left open the question of whether there was a valid assignment to Central of Catellus’s rights. Although the Federal Arbitration Act favors resolution of disputes through arbitration, its provisions are not to be construed so broadly as to include claims that were never intended for arbitration. AGCO Corp. v. Anglin, 216 F.3d 589, 593 (7th Cir. 2000). To decide whether parties agreed to arbitrate their claims, this court must look at the intent of the parties at the time the contract was executed. Id. at 593-94. We review the district court’s ruling to compel arbitration de novo. Harter v. Iowa Grain Co., 220 F.3d 544, 549-50 (7th Cir. 2000). In this case, the intent of the parties is clear. The arbitration provision in the tenant lease between Central and Catellus applies only to the tenant lease. In the multitude of contracts in this action, there are no other contractual arbitration provisions. If Catellus had intended to require the contractor or the subcontractors to arbitrate their claims, then an arbitration provision would have been added to these contracts.6 Therefore, the contractor 5 We note on appeal that the subcontractors agree that the district court’s determination of their intent to arbitrate was in error, and therefore no parties here dispute that the subcontractors did not agree to arbitrate issues pertaining to the warehouse construction. Nevertheless, the issue of whether the contractor and the subcontractors are required to submit to arbitration is still before this court. 6 Furthermore, we note that Catellus entered into these construction contracts eight months before it executed the tenant lease. We find it difficult to imagine that at the time of these (continued...) Nos. 01-1711 & 01-2310 13 and the subcontractors cannot be required to arbitrate this dispute. The court further ruled that the arbitrator must decide whether there was a valid assignment of Catellus’s rights to Central. However, in the very next paragraph the court held that there was no evidence that Central was assigned the right to sue. It is unclear whether the issue of assignment was decided and, based on the limited record before the court, we cannot decide the matter. This is because the issue of assignment of warranty rights depends on unresolved questions of fact based on the parties’ intentions. See Bd. of Managers of Medinah on Lake Homeowners Ass’n v. Bank of Ravenswood, 692 N.E.2d 402, 405 (Ill. App. Ct. 1998) ( the parties’ intentions to create an assignment is a question of fact and “must be determined based upon the instruments executed as well as the surrounding circumstances”); Rivan Die Mold Corp. v. Stewart-Warner Corp., 325 N.E.2d 357, 361 (Ill. App. Ct. 1975). We cannot say as a matter of law that there was no assignment, so we remand the issue to the district court. If the court determines that there was an assignment, then the breach of warranty claims should not have been dismissed. The district court dismissed Central’s breach of warranty claim, concluding that Central could not enforce the warranties issued by the contractor and subcontractors. The parties agree that the subcontractors all issued warranties relating to the proper design and construction of the warehouse, though they disagree as to the intended recipients of these provisions. Central asserts that as a result of Catellus’s assignment of rights to Central under 6 (...continued) construction contracts, the parties intended to incorporate the arbitration provision of the later tenant lease. 14 Nos. 01-1711 & 01-2310 the tenant lease, it can sue the subcontractors for breach of warranty. In response, the subcontractors argue that the warranties in their contract extend only to Krusinski, not Catellus, and Central does not have standing to sue them for breach of warranty claims. Contrary to the subcontractors’ argument, their warranties do extend to Catellus. In Section 9.8 of the subcontractors’ agreement, the subcontractors warrant their work against defects and agree to satisfy the warranty obligations without cost to the “Owner or Contractor.” The first page of the subcontractors’ agreement lists Catellus as the “Owner.” Therefore, the plain language of the subcontractors’ agreement reflects that Catellus has the right to enforce the subcontractors’ warranties. So, if the district court determines that there was a valid assignment of Catellus’s rights under the subcontractors’ agreement to Central, Central has a right to maintain breach of warranty claims against all of the subcontractors. Thus, the district court’s ruling requiring mandatory arbitration for Catellus’s breach of warranty claims is reversed and the issue of whether there was a valid assignment of Central’s rights to Catellus is remanded for further proceedings. C. AUL’s Third-Party Beneficiary Claims A direct third-party beneficiary is a person who, although not a party to the contract, the contracting parties intended to benefit from the contract. See A.E.I. Music Network, Inc. v. Bus. Computers, Inc., 290 F.3d 952, 955 (7th Cir. 2002); XL Disposal Corp. v. John Sexton Contractors Co., 659 N.E.2d 1312, 1316 (Ill. 1995). By contrast, an incidental third-party beneficiary is a person who, not a party to the contract, receives a benefit from the contract unintended by the contracting parties. See, e.g., A.E.I. Music Network, 290 F.3d at 955; Altevogt v. Brinkoetter, 421 N.E.2d 182, 187-88 (Ill. 1981). Only a direct Nos. 01-1711 & 01-2310 15 third-party beneficiary may enforce the contract because the contracting parties intended for the beneficiary to receive the benefits of the contract. See A.E.I. Music Network, 290 F.3d at 955; Altevogt, 421 N.E.2d at 187. To decide whether a party is a direct or an incidental thirdparty beneficiary, we must determine the intent of the parties based on the contract as a whole as well as the understandings between the parties at the time of the contract’s execution. See A.J. Maggio Co. v. Willis, 738 N.E.2d 592, 599 (Ill. App. Ct. 2000); Ball Corp. v. Bohlin Bldg. Corp., 543 N.E.2d 106, 107 (Ill. App. Ct. 1989).7 AUL argues that it was a direct third-party beneficiary of the tenant lease between Central and Catellus because Catellus acknowledged that Central would operate the warehouse using AUL’s name. Specifically, the tenant lease states in Paragraph 15 that Central will conduct its operations under its name and under the name of its affiliate AUL, and these operations will not constitute subletting. In addition, AUL argues that Catellus knew all along that Central and AUL were virtually identical corporations under the common control and ownership of Concepcion because initially Concepcion approached Catellus about the warehouse space on AUL’s behalf.8 In response, Catellus argues, and the district court ruled, that Section 17.1.8 of the tenant lease defeats AUL’s 7 Catellus argues that under Illinois law it is presumed that the parties to a contract intend that the contract’s provisions apply only to them—not to third parties. See Ball Corp., 543 N.E.2d at 107. However, this is not a full reading of Ball Corp., which also states that the intent to create a direct thirdparty beneficiary is determined by the contract’s language and the surrounding circumstances at the time of the contract’s execution. Id. 8 These negotiations were managed by Frolian Concepcion, who wholly owns AUL and Central. 16 Nos. 01-1711 & 01-2310 claim that it was a direct third-party beneficiary since it clearly states that “nothing herein is intended to create any third party benefit.” However, Paragraph 15 makes Section 17.1.8 ambiguous because Paragraph 15 clearly confers an intended benefit on AUL: the authority to operate the warehouse. Catellus also asserts that no direct third-party beneficiary was created by the contract because Central’s name, not AUL, is on the contract. Nevertheless, AUL’s name remained in the contract as the operator of the warehouse space, an intended benefit. The acknowledgment of AUL in the contract and the alleged discussions during contract negotiations are enough to show that Central and Catellus intended AUL to receive a benefit from the contract. Therefore, AUL has stated a valid third-party beneficiary claim under Illinois law.9