UCC Anti-Privity Statute Doesn't Help Remote Buyer
 
March 1, 2000
 

As Justice Cardozo noted many years ago, "the assault upon the citadel of privity is proceeding in these days apace." Ultramares Corp. v. Touche, 255 N.Y. 170, 180, 174 N.E. 441, 445 (1931). Those comments seem curiously dated in the context of modern product liability claims, where injured consumers routinely file multimillion dollar suits for personal injuries against manufacturers many steps removed from the seller with whom they dealt. Typically, those product liability suits assert multiple theories of liability, including claims based on breach of the implied warranty of merchantability, especially in states, such as Virginia, which have not adopted "strict liability in tort." See, e.g., Wilkes v. F.L. Smithe Mach. Co., 704 F.Supp. 680 (W.D.Va. 1989).

In commercial product liability cases, by contrast, the concept of privity remains alive and well, even in states that have enacted a so-called "anti-privity" variation of UCC § 2-318.1 This point was underscored recently by the United States Fourth Circuit Court of Appeals which, after certifying the question to the Virginia Supreme Court, concluded that UCC § 2-715(2)(a), coupled with Virginia's "economic loss" rules, effectively trumps the Virginia anti-privity exception in the UCC. Not only did the court conclude that the absence of a contract between a manufacturer and a remote purchaser bars claims in negligence, but even in the case of the implied warranty of merchantability there can be no claim for consequential economic loss damages, absent privity of contract. Beard Plumbing & Heating, Inc. v. Thompson Plastics, Incorporated, 152 F.3d 313 (4th Cir. 1998).

The Beard case arose out of product defects associated with CPVC plumbing fittings installed in a condominium development. The fittings cracked when exposed to hot water and the general contractor required its plumbing subcontractor, Beard, which had installed the fittings, to replace them and to repair the resulting damage to the condominium units.

Beard, which had no contracts with any of the manufacturers of the allegedly defective fittings, filed suit against those manufacturers, seeking to collect the cost of repairs, losses due to the general contractor's refusal to pay either for the defective piping or the balance of its contract price, legal fees, and lost revenues due to damage to its business reputation. Beard's lawsuit asserted claims for negligence, breach of warranty of fitness for a particular purpose under § 2-315 of UCC, and breach of the implied warranty of merchantability under UCC § 2-314.

Under a well-settled line of cases, the Fourth Circuit Court of Appeals concluded that the negligence claims were barred by Virginia's "economic loss" rule. Under that rule, absent privity, a product's failure to meet a bargained-for level of quality, with resulting diminution in value of the product (as measured by the cost of repair), is purely an "economic loss" for which the law of contracts provides the sole remedy. Since all of Beard's damage claims - the cost of settlement, legal fees incurred in defending the action brought by the general contractor, loss of income due to early termination of its contract, and the cost of repairing leaks - represented contract damages (as opposed to damages for injuries to persons or property), Beard was limited solely to a contract remedy, if any.

While the court's rejection of the negligence count was not surprising, the claims for breach of warranty posed a more difficult challenge. Nevertheless, the Court of Appeals concluded that a claim for breach of warranty of fitness for a specific purpose requires, as a foundation, proof of active communications between the parties - a sort of "privity of communication," if not an express contract. Relying on Virginia precedents, the court noted that a claim for breach of this particular UCC warranty cannot exist unless three elements are met. First, the seller itself has to know of the particular purpose for which the buyer required the goods; second, the seller has to know that the buyer was relying on the seller's skill or judgment in furnishing the goods; and third, the buyer has to have relied on the seller's skill or judgment as a matter of fact. Medcom, Inc. v. C. Arthur Weaver Co., 348 S.E.2d 243, 246 (Va. 1986). Because the record was devoid of any communications between Beard and the remote manufacturers of CPVC pipe, there could be no claim for breach of implied warranty of fitness for a particular purpose.

The claim for breach of the implied warranty of merchantability presented a more difficult problem, since such a warranty normally arises by operation of law, regardless of any communications or express agreements. Beard argued that, under Virginia's broad anti-privity variation of UCC § 2-318, a manufacturer should be liable to a remote purchaser for consequential damages resulting from breach of warranty, despite the lack of a contract between the parties. In contrast, the remote manufacturers argued that the Virginia anti-privity statute, at least with respect to economic losses, is trumped by the UCC's damages provisions in §§ 2-714 and 2-715.

The Fourth Circuit Court of Appeals concluded that this issue was undecided under Virginia law, and found no case in any jurisdiction jointly construing UCC provisions § 2-318 and § 2-715 with regard to economic loss. The Court certified the following question to the Supreme Court of Virginia: "Is privity required to recover economic loss under Virginia Code § 8.2-715(2) due to the breach of the implied warranty of merchantability notwithstanding the language of Virginia Code § 8.2-318?"

The Virginia Supreme Court answered in the affirmative. The Court first noted that the language of § 2-715(2)(a), itself, contains a presumption that there is a contract between the parties because it expressly refers to losses reasonably foreseeable to the seller "at the time of contracting."2 In addition, the Virginia Supreme Court reasoned that § 2-318, the anti-privity provision, had to be construed in harmony with the more specific provision of § 2-715. The Court noted that the "general subject" of the anti-privity statute was to modify "the ability to raise the common law requirement of privity as a defense." Section 2-715, on the other hand, specifically "imposes a number of limitations and conditions on the recovery of damages in a breach of warranty claim." Applying the rule of statutory construction that, when two statutes addressing the same subject matter conflict, the more specific provision prevails, the Virginia Supreme Court concluded that "the limited contract requirement of § 8.2-715(a)(2) prevails over the general provisions relating to common law privity in § 8.2-318." As a result, a buyer must be in privity of contract with a manufacturer to recover consequential economic loss damages under a breach of warranty theory. In light of this conclusion, the Fourth Circuit rejected Beard's claim for consequential damages.

Beard Plumbing & Heating, Inc. underscores the need for vigilance in evaluating "property loss" and related commercial damage claims in "products liability" cases involving multiple levels of distribution and which do not involve any personal injury claims. Except for claims by direct, contract purchasers, most damage claims will face substantial privity defenses. Of course, even in cases of a direct contractual relationship, liability for consequential damages may be disclaimed as between commercial parties. Compare UCC § 2-316 with UCC § 2-719.