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Travelers Indem. Co. v. Dammann & Co., Inc.

Court of Appeals for the Third Circuit
2010 U.S. App. LEXIS 2497, 594 F.3d 238, 72 U.C.C. Rep. Serv. 2d (West) 137 (2010)
ELI5:

Sections

Rule of Law:

Under New Jersey law, the economic loss doctrine prohibits a commercial buyer from recovering in tort for economic losses, including damage to 'other property,' if those losses were foreseeable and could have been allocated by contract; furthermore, standard indemnification clauses generally apply only to third-party liability, not first-party losses, unless explicitly stated.


Facts:

  • Dammann & Co. contracted to sell vanilla beans to International Flavors & Fragrances Inc. (IFF) under a written agreement containing indemnification clauses.
  • Dammann delivered the vanilla beans to IFF in January 2004.
  • IFF incorporated the beans into its own vanilla extract and mixed them with other flavoring products.
  • In February 2004, IFF discovered that the vanilla beans were contaminated with mercury.
  • IFF notified the FDA and subsequently scrapped the contaminated finished products, incurred cleaning costs, and lost profits.
  • IFF voluntarily issued credits and refunds to its customers who had purchased the contaminated extract.
  • IFF demanded compensation from Dammann for these losses, claiming more than five million dollars in damages.

Procedural Posture:

  • Travelers Indemnity Company filed a declaratory judgment action against Dammann and IFF in the U.S. District Court for the District of New Jersey.
  • IFF moved for leave to file crossclaims against Dammann for breach of warranty, product liability, and indemnification.
  • The Magistrate Judge denied IFF's motion, ruling the warranty claims time-barred and the tort claims barred by the economic loss doctrine.
  • IFF appealed the Magistrate Judge's ruling to the District Court.
  • The District Court denied IFF's appeal and rejected the request to file crossclaims on the grounds of futility.
  • IFF appealed the District Court's decision to the United States Court of Appeals for the Third Circuit.

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Issue:

Does the economic loss doctrine bar a commercial buyer from asserting product liability tort claims against a seller for damage to the buyer's finished products, and does a standard indemnification clause obligate a seller to cover the buyer's direct losses or voluntary payments to customers?


Opinions:

Majority - Fisher

Yes, the economic loss doctrine bars the tort claims, and the indemnification clause does not cover these specific losses. The court reasoned that New Jersey law seeks to keep tort and contract law separate, particularly between sophisticated commercial parties who can allocate risk through negotiation. The court predicted that the New Jersey Supreme Court would apply the economic loss doctrine to bar IFF's product liability claim because IFF's damages (lost profits, wasted materials) were purely economic and foreseeable risks that were, or could have been, covered by the contract. Regarding the indemnification claim, the court held that the contract terms 'defend, indemnify and hold harmless' plainly referred to liability incurred to third parties, not IFF's own first-party losses. Furthermore, IFF failed to allege that it was under a strict 'legal obligation' (such as a judgment) to pay its customers, rendering the implied indemnification claim invalid.



Analysis:

This decision reinforces the primacy of contract law over tort law in commercial disputes involving defective products. By expanding the application of the economic loss doctrine to include damage to 'other property' (in this case, the vanilla extract made from the beans), the Third Circuit signaled that federal courts will prevent sophisticated parties from using tort law to bypass the limitations (such as statutes of limitation) inherent in the Uniform Commercial Code (UCC). The ruling emphasizes that when businesses bargain on equal footing, they are expected to define their rights and remedies within their contract, and courts will not invent tort remedies to rescue a party from a bad bargain or a missed procedural deadline.

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