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Defective Goods and the Economic Loss Doctrine

7th Circuit Court SealJMB Mfg., Inc vs Harrison Mfg LLC
7th Circuit Court of Appeals, 14-3315
Docket No.14-3306 Issued Aug 24, 2015

In this Opinion the 7th Circuit Court of Appeals ruled on the application of the “Economic Loss Doctrine” to the rejection of non-conforming goods and subsequent suit for damages.

Facts

Child Craft manufactured furniture. Mr. Bienias owns Summit, a supplier. The parties had a long-standing business relationship. Child Craft contracted with Summit to supply wood for a line of high-end baby furniture. Summit sourced the goods from Indonesian manufacturer Cita. At Bienias’s request Child Craft refrained from direct contact with Cita. In 2008-2009 Child Craft issued purchase orders to Summit worth $90,000. Each order included detailed specifications including maximum moisture content of 6-8%. Despite this fact the shipped wood never met those specifications. Child Craft rejected the goods as defective and refused to pay. Summit spent considerable time trying to re-work the products. As it turned out however, Child Craft was never able to sell its intended Line and ceased operations in 2009.

Procedural History

Summit sued for breach of contract and conversion. Child Craft counterclaimed against Summit and its owner, Bienias, for breach of contract and negligent misrepresentation seeking $5 million in compensatory damages and $5 million in punitive damages. Only Child Craft’s counterclaim for negligent misrepresentation against Bienias was tried. The Judge awarded $2.7 million in damages against Bienias and Summit.

Opinion

The 7th Circuit points out that under Indiana law a buyer who has received non-conforming goods cannot sue the seller for negligent misrepresentation to avoid the Economic Loss Doctrine, which limits it to contract remedies for purely economic losses. There is no basis for transforming a breach of contract claim into a tort claim to hold the seller’s president personally liable.

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