Court Opinion

ID: 3159452
Source: CourtListenerOpinion
Date Created: 2015-12-02 20:01:06.545366+00
Date Added: 2024-06-11T12:00:30.229484
License: Public Domain

PUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                             No. 15-1063

SEVERN PEANUT CO., INC.; MEHERRIN AGRICULTURE & CHEMICAL
CO.; TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA,

                Plaintiffs − Appellants,

           v.

INDUSTRIAL FUMIGANT CO.; ROLLINS INC.,

                Defendants - Appellees.

Appeal from the United States District Court for the Eastern
District of North Carolina, at Elizabeth City.   Terrence W.
Boyle, District Judge. (2:11-cv-00014-BO)

Argued:   October 27, 2015                Decided:   December 2, 2015

Before TRAXLER, Chief Judge, and WILKINSON and DUNCAN, Circuit
Judges.

Affirmed by published opinion.       Judge Wilkinson wrote the
opinion, in which Chief Judge Traxler and Judge Duncan joined.

ARGUED: James Luther Warren, III, CARROLL WARREN & PARKER PLLC,
Jackson, Mississippi, for Appellants. Steven B. Epstein, POYNER
SPRUILL LLP, Raleigh, North Carolina, for Appellees. ON BRIEF:
Alexandra Markov, D. Scott Murray, CARROLL WARREN & PARKER PLLC,
Jackson, Mississippi; Jay M. Goldstein, Hunter C. Quick, Howard
M. Widis, QUICK, WIDIS & NALIBOTSKY, PLLC, Charlotte, North
Carolina, for Appellants.   Andrew H. Erteschik, POYNER SPRUILL
LLP, Raleigh, North Carolina; William J. Conroy, CAMPBELL TRIAL
LAWYERS, Berwyn, Pennsylvania, for Appellees.
WILKINSON, Circuit Judge:

      Appellants Severn Peanut Co. and Severn’s insurer allege

breach     of    contract     and     negligence     claims     against     appellee

Industrial       Fumigant     Co.    (“IFC”).      According     to     Severn,    IFC

improperly       applied     a     dangerous      pesticide     while     fumigating

Severn’s peanut dome, resulting in fire, an explosion, loss of

approximately 20,000,000 pounds of peanuts, loss of business,

and various cleanup costs. The District Court for the Eastern

District    of    North     Carolina    awarded      summary    judgment    to    IFC.

Because    the    contract’s        consequential      damages    exclusion       bars

Severn’s breach of contract claim, and because North Carolina

does not allow Severn to veil that claim in tort law, we affirm

the judgment of the district court.

                                            I.

      On April 20, 2009, Severn and IFC entered into a Pesticide

Application Agreement (“PAA”) requiring IFC to use phosphine, a

pesticide, to fumigate a peanut storage dome owned by Severn and

located in Severn, North Carolina. The PAA required IFC to apply

the       pesticide          “in       a         manner        consistent         with

instructions . . . and precautions set forth in [its] labeling.”

J.A. 46.

      In return for IFC’s services, Severn promised to pay IFC

$8,604    plus    applicable        sales   taxes.    The   contract      specified,

however, that this charge was “based solely upon the value of

                                            2
the services provided” and was not “related to the value of

[Severn’s]     premises       or    the     contents       therein.”      J.A.    47.        The

contract also specified that this $8,604 sum was not “sufficient

to warrant IFC assuming any risk of incidental or consequential

damages” to Severn’s “property, product, equipment, downtime, or

loss of business.” Id.

      Phosphine is a pesticide often produced in either tablet or

pellet form. Upon reaction with moisture in the air, the tablets

or   pellets       produce    a    toxic     and      flammable      gas.   Phosphine        is

regulated by the Federal Insecticide, Fungicide, and Rodenticide

Act (“FIFRA”) and the North Carolina Pesticide Law of 1971. Both

laws require that it be administered only in a manner consistent

with its labeling. 7 U.S.C. § 136j(a)(2)(G); N.C. Gen. Stat.

§ 143-443(b)(3). The product label of the brand of phosphine

used by IFC, Fumitoxin, in turn requires that the user avoid

piling Fumitoxin tablets up on top of each other when applying

the pesticide.

      On August 4, 2009, IFC dumped approximately 49,000 tablets

of Fumitoxin into Severn’s peanut dome through a single access

hatch. This caused the tablets to pile up on one another. A fire

began   on    or     around    August       10,      and    it    continued      to    smolder

despite      the    parties’       firefighting           efforts.   On     August      29   an

explosion      occurred,      and     the       peanut     dome    sustained      extensive

structural         damage.    After       all       was    said    and    done,       Severn’s

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insurer, plaintiff Travelers Insurance Co., paid Severn over $19

million    to     cover    the       loss    of       nearly    20,000,000     pounds    of

peanuts, lost business income, the damage to the peanut dome,

and Severn’s remediation and fire suppression costs.

       On January 4, 2012, Severn, its insurer, and its parent

company filed an amended complaint against IFC and Rollins Inc.,

IFC’s parent company, in the Eastern District of North Carolina.

According    to    Severn,       IFC’s      improper      application     of     phosphine

tablets caused the fire and explosion and gave rise to claims

for negligence, negligence per se, and breach of contract. J.A.

41-43. On March 17, 2014, the district court granted partial

summary    judgment       to   IFC    and    Rollins,        holding    that   the     PAA’s

consequential damages exclusion barred Severn’s claim for breach

of contract. J.A. 1397. Several months later, as the parties

were    preparing     for      trial        on       Severn’s   remaining      negligence

claims, the district court sua sponte ordered briefing on the

issue of contributory negligence. J.A. 1606. After receipt of

the parties’ briefs, and on its own motion, the district court

found     Severn    contributorily               negligent      and    awarded    summary

judgment to IFC and Rollins on Severn’s remaining negligence

claims.    J.A.     1673-76.      This       appeal,       contesting     both    of    the

district court’s summary judgment orders, followed.

                                                 4
                                         II.

     Severn     argues       that      the       PAA’s       consequential      damages

exclusion does not bar its breach of contract claim for damage

to its dome and peanuts and its associated remediation and lost

business costs. For the reasons that follow, we disagree.

                                         A.

     Before     examining        the   parties’          particular     consequential

damages   exclusion,       it    is    worth      considering        the    utility   of

consequential damages limitations in general. In North Carolina,

     Consequential  or           special   damages  for  breach  of
     contract are those           claimed to result as a secondary
     consequence of the           defendant’s non-performance. They
     are distinguished           from general damages, which are
     based on the value          of the performance itself, not on
     the value of some            consequence that performance may
     produce.

Pleasant Valley Promenade v. Lechmere, Inc., 464 S.E.2d 47, 62

(N.C. Ct. App. 1995) (quoting 3 Dan B. Dobbs, Law of Damages,

§ 12.4(1)     (2d   ed.    1993)).      While         recovery   for       consequential

damages may already be limited by the venerable rule that the

victim of a breach of contract may be compensated only for those

damages that “may reasonably be supposed to have been in the

contemplation       of    both   parties         at    the    time   they     made    the

contract,” Williams v. W. Union Tel. Co., 48 S.E. 559, 560 (N.C.

1904) (quoting Hadley v. Baxendale, 9 Exch. 341, 354 (1854)),

enforcement    of    explicit     contractual          provisions      allocating     the

risk of consequential damages to one party or another further

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maximizes parties’ freedom of contract and allows them to better

achieve predictability in their business relations.

       North    Carolina           follows     a    “broad     policy”     which   generally

accords contracting parties “freedom to bind themselves as they

see fit.” Hall v. Sinclair Refining Co., 89 S.E.2d 396, 397-98

(N.C. 1955). Its courts recognize that “the right of private

contract is no small part of the liberty of the citizen,” and

the “usual and most important function of courts” is therefore

“to enforce and maintain contracts rather than enable parties to

escape their obligations.” Calhoun v. WHA Med. Clinic, PLLC, 632

S.E.2d 563, 573 (N.C. Ct. App. 2006) (quoting Tanglewood Land

Co. v. Wood, 252 S.E.2d 546, 552 (N.C. Ct. App. 1979)).

       Enforcement            of     contractual         liability       limitations       and

damages exclusions is one aspect of this freedom of contract.

For   this     reason,         “a    person        may   effectively       bargain   against

liability      for    harm         caused    by    his    ordinary    negligence      in   the

performance      of       a    legal        duty    arising     out   of    a   contractual

relation.” Hall, 89 S.E.2d at 397. And while cases examining

damages exclusions and liability limitations often necessarily

involve bargains that look like raw deals in hindsight, defense

of    the   liberty       of       contract        requires    that   courts       avoid   the

“indulgence          of        paternalism”              and    respect         individuals’

“entitle[ment] to contract on their own terms.” Gas House, Inc.

                                                   6
v. S. Bell Tel. & Tel. Co., 221 S.E.2d 499, 504 (N.C. 1976)

(quoting 14 Williston on Contracts, 3d Ed., § 1632).

       Contractual limitations on consequential damages also serve

to    further     predictability       in    business       relations.     By   allowing

parties      to   bargain    over     the    allocation       of   risk,    freedom   of

contract permits individuals and businesses to allocate risks

toward those most willing or able to bear them. Parties who

allocate risks away from themselves thereby cap their future

expected litigation and liability costs. Parties assuming risks

often receive benefits in the form of lower prices in exchange.

Without the ability of contracting parties to protect against

the imposition of consequential damages, some consumers might

not be able to access needed goods and services at all. Here,

for example, while Severn could have pursued a business strategy

of hiring its own certified phosphine applicators and doing its

pesticide services in-house, it is not clear that it could have

found    other     outside       pesticide       services    companies      willing    to

perform phosphine applications without assent to consequential

damages exclusions like those required by IFC.

       The    benefits      of    consequential        damages      limitations       for

consumers and producers may explain why they are both widespread

and    widely     enforced.      In   the    context    of     sales   of    goods    and

products liability, for instance, North Carolina and many other

states follow the Uniform Commercial Code and take the position

                                             7
that “[c]onsequential damages may be limited or excluded unless

the limitation or exclusion is unconscionable.” N.C. Gen. Stat.

§ 25-2-719.       This    policy     of     generally         enforcing          mutually-

assented-to limitations on liability extends beyond the goods

context. See, e.g., Hyatt v. Mini Storage on Green, 763 S.E.2d

166, 171 (N.C. Ct. App. 2014) (enforcing contractual exclusion

of    liability   for    personal     injury        encountered       on    premises   of

self-storage      facility);        Lexington        Ins.    Co.      v.    Tires    Into

Recycled Energy & Supplies, Inc., 522 S.E.2d 798, 801 (N.C. Ct.

App.   1999)   (enforcing     lease       provision     limiting       liability       for

fire    damages    covered    by    insurance).        Far     from    an     outlandish

exculpation of responsibility, consequential damage limitations

like that in IFC and Severn’s PAA appear to be commonly-enforced

tools of doing business used throughout North Carolina and many

other states.

                                          B.

       Having reviewed North Carolina’s background law, we turn to

an     examination       of   the     particular            consequential         damages

limitation found in Severn and IFC’s contract. Severn argues

that despite North Carolina’s freedom of contract principles,

the    PAA’s   particular      language        is    unenforceable          on     various

grounds. We find these contentions unpersuasive.

       Severn and IFC are sophisticated commercial entities who

entered    into     an    arm’s     length     transaction.           Their      contract

                                           8
specified       that    “[t]he      amounts       payable      by    [Severn]     are   not

sufficient to warrant IFC assuming any risk of incidental or

consequential       damages,”        including         risks    to    several     itemized

categories of damages: “property, product, equipment, downtime,

or loss of business.” J.A. 47. The loss of Severn’s peanut dome

and peanuts, the expenses Severn incurred while handling its

burning property, and Severn’s lost business unambiguously fall

within these itemized categories.

       Companies faced with consequential damages limitations in

contracts have two ways to protect themselves. First, they may

purchase outside insurance to cover the consequential risks of a

contractual breach, and second, they may attempt to bargain for

greater     protection         against      breach        from       their   contractual

partner. Severn apparently did take the former precaution – it

has    recovered       over   $19    million      in    insurance      proceeds    from   a

company whose own business involves the contractual allocation

of risk. But it did not take the latter one, and there is no

inequity in our declining to rewrite its contractual bargain

now.

       Severn     maintains         that   the     PAA’s       consequential       damages

exclusion    is    unconscionable          and     therefore         unenforceable.     But

North Carolina courts find contracts unconscionable only when

“no decent, fairminded person would view the [contract’s] result

without being possessed of a profound sense of injustice,” Gas

                                              9
House,       Inc.,    221     S.E.2d       at    504        (quoting      14    Williston        on

Contracts, 3d Ed., § 1632). And only “rarely” are “limitation

clauses        in     transactions          between           experienced         businessmen

unconscionable.” Stan D. Bowles Distrib. Co. v. Pabst Brewing

Co.,    317    S.E.2d       684,    690    (N.C.       Ct.    App.     1984).     Here,        both

parties are experienced businesses, and the contract specifies

that the price paid for IFC’s fumigation service is not high

enough to warrant exposure to consequential damages. A decent

fair-minded person may therefore enforce the parties’ bargain

with conscience intact.

       The     fact     that       exculpatory         clauses       in    North        Carolina

contracts are “not favored” and must be “strictly construed,”

Fortson       v.    McClellan,      508    S.E.2d      549,     551-53     (N.C.       Ct.     App.

1998),       does    not    change        our    analysis.         The    whole        point    of

consequential         damages       limitations         is    to   lift        risk    from     one

assenting party and transfer it to another. Were this bargain

unconscionable,         what       limitations         on    liability         would    not    be?

There is no limiting principle to appellants’ argument. Parties

have     no    occasion        to    litigate        over       contractual           provisions

limiting liability, after all, unless their ventures have in

some way gone awry. If courts are too quick to free harmed

parties from the results of their bargains, an erosion of the

law’s     respect       for     consequential           damages        limitations           would

shortly ensue.

                                                10
       Severn’s     argument    that      the    PAA    violates         North         Carolina

public policy is similarly problematic. The federal bench is

hardly the ideal pulpit from which to proclaim North Carolina

public policy. There is no sound basis to invalidate a North

Carolina   contract     on     public     policy       grounds      unless     we       have   a

clear supporting signal from the North Carolina courts. “As the

term   ‘public    policy’      is    vague,     there       must   be    found         definite

indications in the law of the sovereignty to justify [a federal

court’s] invalidation of a contract as contrary to that policy.”

Muschany v. United States, 324 U.S. 49, 66 (1945). Without this

sense of caution, there would again be no limit to the contracts

we might find policy reasons to invalidate.

       Here, it is anything but clear that North Carolina would

invalidate this contract on public policy grounds. True, both

FIFRA and North Carolina law require that phosphine be applied

in     a   manner     consistent          with        its     labeling.            7    U.S.C.

§ 136j(a)(2)(G); N.C. Gen. Stat. § 143-443(b)(3). But the PAA’s

consequential       damages     limitation        is    not    an       agreement        which

“cannot be performed without a violation” of these statutes.

Cauble v. Trexler, 42 S.E.2d 77, 80 (N.C. 1947). It is merely a

release from private liability. And neither statute specifies

private liability as a primary means of enforcement. Instead,

federal    law    provides     for    a   civil       fine    of   up    to    $5,000       and

possible     criminal         liability         for     violations            of        FIFRA’s

                                           11
provisions.       7     U.S.C.       § 136l.         The     North      Carolina        statute

similarly allows for criminal liability for violations of its

provisions, and also for a civil penalty of not more than $500

against     pesticide       application          businesses        when       violations       are

willful.     N.C.      Gen.      Stat.     §     143-469.          North      Carolina        also

delegates regulatory power to a Pesticide Board, N.C. Gen. Stat.

§ 143-461(1),         and    requires         all    pesticide       applicators          to    be

annually licensed with that Board. N.C. Gen. Stat. § 143-452.

North Carolina thus furthers pesticide safety by virtue of a

comprehensive         statutory      and       regulatory     scheme       which      does     not

prohibit     such       pesticide          application,           but     rather       requires

companies     engaging        in    it   to     be   properly      licensed,          which    IFC

concededly was. Adding restrictions to private contracts on top

of   all   this     risks     an    unwarranted         infringement           on   the    North

Carolina legislature’s own public policy role.

      Additionally,         in     North      Carolina,      the     “consideration           [of]

the comparable positions which the contracting parties occupy in

regard to their bargaining strength” is “closely related to the

public     policy     test.”       Hall,    89      S.E.2d   at    398.       North    Carolina

cases invalidating contracts on public policy grounds therefore

rarely involve sophisticated business entities – they instead

usually     involve         individual          consumers      or       are     grounded        in

inequalities of bargaining power. See, e.g., Fortson, 508 S.E.2d

at 552 (involving “inexperienced member of the public seeking

                                                12
training in the safe use of a motorcycle”); Alston v. Monk, 373

S.E.2d     463,     465    (N.C.       Ct.    App.    1988)       (involving     individual

customer subjected to “negligent performance of hair styling and

coloring services” which “caused her to lose her hair”). We are

not presently considering the plight of a vulnerable member of

the   public      adrift       among    the    variegated         hazards   of    a    complex

commercial world. Instead, we are considering a rather typical

agreement among two commercial entities, and we may hold them to

the contract’s terms.

                                              III.

      Severn      argues       that     despite      its    assent     to   a    contractual

consequential          damages    exclusion,         its    negligence      claims     should

still be allowed to proceed. The district court granted summary

judgment to IFC on Severn’s negligence claims on the grounds

that Severn was contributorily negligent in its efforts to fight

the   fire    after       it   started.       Severn       contends    that     this   ruling

ignored material issues of fact, making summary judgment on the

basis of contributory negligence inappropriate. We agree.

      We     may,      however,    “affirm      the       district     court’s     grant   of

summary      judgment      on     any    ground      in     the    record.”      Jehovah   v.

Clarke, 798 F.3d 169, 178 (4th Cir. 2015). Here, we are doubtful

that Severn’s negligence claims survive its contractual assent

to the limitation of its consequential damages. This doubt is

reinforced        by    the     principles          inherent      in   North      Carolina’s

                                               13
economic loss doctrine, which serves as a barrier to certain

tort claims arising out of facts best considered through the

lens of contract law. We hold that Severn’s negligence claims do

not survive summary judgment.

       North    Carolina’s       economic      loss     doctrine     provides      that   a

breach of contract does not ordinarily “give rise to a tort

action by the promisee against the promisor.” Ellis v. La.-Pac.

Corp., 699 F.3d 778, 783 (4th Cir. 2012) (quoting N.C. State

Ports Auth. v. Lloyd A. Fry Roofing Co., 240 S.E.2d 345, 350

(N.C.      1978)).     More   specifically,        it    “prohibits     recovery      for

purely economic loss in tort when a contract, a warranty, or the

UCC operates to allocate risk.” Kelly v. Ga.-Pac. LLC, 671 F.

Supp. 2d 785, 791 (E.D.N.C. 2009). In cases arising out of the

sale    of    failed    goods,    the    economic       loss    doctrine    thus     bars

“recovery for purely economic loss in tort, as such claims are

instead governed by contract law.” Lord v. Customized Consulting

Specialty, Inc., 643 S.E.2d 28, 30 (N.C. Ct. App. 2007).

       While it originated out of the law of products liability,

North      Carolina’s    economic       loss     doctrine      is   based   upon    broad

principles. The rationale for the rule is that “parties are free

to include, or exclude, provisions as to the parties’ respective

rights and remedies, should the product prove to be defective”

and that “[t]o give a party a remedy in tort, where the defect

in   the     product    damages    the    actual      product,      would   permit    the

                                            14
party to ignore and avoid the rights and remedies granted or

imposed by the parties’ contract.” Moore v. Coachmen Indus.,

Inc., 499 S.E.2d 772, 780 (N.C. Ct. App. 1998). The economic

loss doctrine thus “encourages contracting parties to allocate

risks for economic loss themselves, because the promisee has the

best opportunity to bargain for coverage of that risk or of

faulty workmanship by the promisor.” Lord, 643 S.E.2d at 30.

     The     principles       behind      North        Carolina’s       economic    loss

doctrine are applicable to this case, and we are not free to

ignore   them.   Here       Severn    claims       a   remedy    in    tort   for   IFC’s

breach of its duty to apply Fumitoxin in accordance with its

label – the very same duty as that underlying Severn’s breach of

contract claim. But Severn chose to bargain away protection for

the consequential damages caused by breach of that duty. Its

negligence claims therefore attempt to undo that bargain through

the vehicle of tort law.

     Contrary to Severn’s assertions, moreover, its peanuts and

storage dome were not “other property” outside of the contract

and therefore not subject to the principles of the economic loss

doctrine. The contract was for the treatment of “commodities

and/or   space,”      and    it   specified        that   this    included     Severn’s

“1,976,503    [c]ubic       [f]eet”      of    peanuts    and    its    Severn,     North

Carolina     peanut    dome.      J.A.    46.      Severn’s      complaint     in   turn

acknowledges that the Fumitoxin tablets were placed within the

                                              15
dome and among the peanuts. The pesticide which allegedly caused

the fire and the peanuts and dome which that fire allegedly

destroyed     were      therefore      at   the     relevant      times      both

contractually and practically bound up together.

      Like a buyer of goods, Severn had the “best opportunity to

bargain for coverage of [] risk,” Lord, 643 S.E.2d at 30. Yet

Severn in fact made just the opposite bargain, and the economic

loss doctrine counsels that the contract’s allocation of risk in

the   event   of     economic    and   commercial     adversity     should    be

respected.    Because    North    Carolina’s      economic   loss   principles

prevent Severn from transforming its breach of contract claim

into tort, we affirm the judgment of the district court.

                                                                      AFFIRMED

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