Allmand Associates, Inc. v. Hercules Inc.

District Court, E.D. Michigan
1997 U.S. Dist. LEXIS 4930, 34 U.C.C. Rep. Serv. 2d (West) 353, 960 F. Supp. 1216 (1997)

ELI5:

Sections

Rule of Law:

The economic loss doctrine bars tort claims for fraud and misrepresentation in commercial transactions governed by the Uniform Commercial Code (UCC) where the alleged misrepresentations concern the quality or character of the goods sold, limiting the plaintiff to contractual remedies. Additionally, under the UCC, valid merger clauses and conspicuous disclaimers preclude claims based on prior oral express warranties or implied warranties.

Facts:

Hercules developed a liquid molding resin process called METTON® and solicited Allmand, a manufacturer of molded automotive parts, to use this technology.
During negotiations in 1989 and 1990, Hercules representatives made oral representations to Allmand that METTON® was compatible with zinc alloy tools, required no secondary finishing, and had short cycle times.
On October 11, 1990, the parties executed a General Molder License (GML) Agreement requiring Allmand to purchase its entire requirement of resin from Hercules, and a Codevelopment Agreement for prototypes.
During the relationship, Hercules sent Order/Acknowledgment Forms with each shipment containing a merger clause and a conspicuous disclaimer stating the seller's warranty of standard quality was in lieu of all other express or implied warranties.
Allmand experienced significant problems using METTON®, including damage to their zinc tools, air bubbles in parts, and noxious odors that resulted in environmental citations.
To address the odor issues, Allmand purchased a thermal oxidizer unit (RETOX 2000) from Hercules under a separate equipment agreement containing a specific performance guarantee regarding vapor destruction efficiency.
Facing customer complaints and lost business, Allmand decided to switch to a competitor's product (TELENE) and sent a termination letter to Hercules on September 23, 1993.
Allmand terminated the relationship without providing the contractually required 90-day notice and failed to pay outstanding balances for equipment and resin.
Allmand continued to use the Hercules-supplied equipment to process the competitor's resin.

Procedural Posture:

Allmand filed a complaint against Hercules in the U.S. District Court for the Eastern District of Michigan alleging breach of warranty, fraud, and breach of contract.
Hercules filed a countercomplaint alleging breach of the licensing agreement and failure to pay for equipment and materials.
Hercules filed a separate lawsuit regarding the RETOX 2000 equipment in the same district, which was transferred and consolidated with the original case.
Hercules filed three motions for summary judgment: one against all counts of Allmand's complaint, one for partial summary judgment on its own counterclaims, and one regarding the RETOX 2000 claim.

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Issue:

Does the economic loss doctrine bar a commercial buyer's fraud and misrepresentation claims against a seller when the alleged misrepresentations concern the quality and characteristics of the goods sold under a mixed goods-services contract?

Opinions:

Majority - Gadola

Yes, the economic loss doctrine bars fraud claims where the misrepresentations relate solely to the quality or character of the goods sold. The court first determined that the parties' relationship was governed by the UCC because the 'predominant purpose' of the contract was the sale of goods (resin), with technical services being merely incidental. Under the economic loss doctrine, tort recovery is barred for purely economic losses in commercial disputes. Although an exception exists for 'fraud in the inducement,' this exception only applies if the fraud is extraneous to the contract. Here, the alleged misrepresentations concerned the quality and characteristics of METTON®, which are matters of warranty, not independent torts. regarding the breach of warranty claims, the court found that the Order/Acknowledgment Forms constituted the final agreement. Consequently, the Parol Evidence Rule (UCC § 2-202) barred evidence of prior oral promises, and the written contract contained a valid, conspicuous disclaimer of implied warranties. Finally, the court granted summary judgment on Hercules' counterclaims because Allmand admitted to terminating without proper notice and owing money for goods delivered.

Analysis:

This decision reinforces the strength of the economic loss doctrine in commercial litigation, particularly in mixed goods-services contracts. By applying the 'predominant factor' test, the court expanded the reach of the UCC to complex industrial relationships where services (like technical support) accompany the sale of materials. The ruling clarifies that plaintiffs cannot artfully plead breach of warranty claims as fraud to avoid contractual liability limitations. If the 'fraud' is simply that the product didn't work as promised, it is a contract issue, not a tort. Furthermore, the case serves as a warning to commercial buyers regarding the power of 'battle of the forms' and merger clauses; standard terms in acknowledgment forms can effectively wipe out months of prior oral negotiations and promises regarding product performance.

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