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Knox v. North American Car Corp.

OPINION FILED JANUARY 9, 1980.

JOHNNIE B. KNOX, JR., ET AL., PLAINTIFFS-APPELLANTS,

v.

NORTH AMERICAN CAR CORPORATION, DEFENDANT-APPELLEE.



APPEAL from the Circuit Court of Cook County; the Hon. ALLEN HARTMAN, Judge, presiding.

MR. JUSTICE MCNAMARA DELIVERED THE OPINION OF THE COURT:

On February 2, 1977, plaintiffs, Johnnie B. Knox and Irene Peavy Knox, filed a two-count complaint against defendant, North American Car Corporation. Plaintiffs sought damages for personal injuries allegedly resulting from a breach of implied warranty under the Uniform Commercial Code (hereinafter U.C.C.) (Ill. Rev. Stat. 1977, ch. 26, par. 1-101 et seq.). In count I, Johnnie Knox sought damages for injuries sustained in an accident which occurred in New Orleans, Louisiana, on November 13, 1973. In count II, Irene Knox sought damages for loss of her husband's consortium. Defendant filed a motion to strike and dismiss plaintiff's complaint on the ground that it was barred by the statute of limitations. The trial court granted defendant's motion, and plaintiffs appeal. The pleadings reflect the following well-pleaded facts.

Defendant is a Delaware corporation having its principal place of business in Chicago, Illinois. It leases boxcars to various railroads and corporations engaged in shipping commodities by rail. On March 1, 1966, North American leased a boxcar to the Hershey Foods Corporation, a Delaware corporation, which lease was in effect at the time of plaintiff's injury. Hershey's duties under the lease consisted of informing defendant of the movement of the boxcar, the dates of loading, the type of commodities shipped, and the boxcar's final destination and routing. Hershey was required to provide defendant with all other information concerning the boxcar received from the various railroad companies or other sources. Defendant received a mileage charge from all railroad companies which used the boxcar. The lease provided that defendant would pay for the maintenance and repair of the boxcar. Hershey was allowed to make only running repairs unless it obtained defendant's written consent. Repairs to the floor of the boxcar would not fall under the category of running repairs.

On May 30, 1973, defendant was notified by Hershey that the floor of the boxcar was damaged and in need of repair. Reading Railroad Company delivered the boxcar to Hershey on October 30, 1973. At that time, there was still a hole in the floor of the boxcar. In its damaged condition, the boxcar was loaded by Hershey employees and consigned to the Great Atlantic & Pacific Tea Company in New Orleans, Louisiana. Plaintiff Johnnie Knox, a Louisiana resident and an A&P employee, was injured on November 13, 1973, when a wheel of the forklift truck he was driving into the boxcar fell into the hole in the floor. On November 19, 1973, the boxcar was repaired.

Plaintiff's suit was based on several provisions of the U.C.C. In requesting recovery under the U.C.C., plaintiffs sought the protection of the four-year statute of limitations applicable to breaches of an implied warranty. (Ill. Rev. Stat. 1977, ch. 26, par. 2-725(1).) Plaintiff sought to qualify as third-party beneficiary of an implied warranty under sections 2-315 and 2-318 of the U.C.C., which provide:

"§ 2-315. Implied Warranty: Fitness for Particular Purpose. Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified * * * an implied warranty that the goods shall be fit for such purpose."

"§ 2-318. Third Party Beneficiaries of Warranties Express or Implied.

A seller's warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this Section." Ill. Rev. Stat. 1977, ch. 26, pars. 2-315, 2-318.

Defendant's motion to dismiss plaintiffs' complaint alleged their cause of action was barred by the statute of limitations. Defendant maintained that Louisiana law controlled the present action, and the period of limitation for actions involving personal injuries in Louisiana is one year. (La. Civil Code, arts. 3536, 3537 (West 1973).) Defendant argued that, even if Illinois law controlled, the statute of limitations for personal injury actions in Illinois is two years. (Ill. Rev. Stat. 1977, ch. 83, par. 15.) It further maintained that the four-year limitations period provided for in the U.C.C. was inapplicable.

The trial court held that Illinois had jurisdiction of the matter and its law governed since defendant had its principal place of business here. The court ruled, however, that the U.C.C. was inapplicable to the case because the lease transaction was not a sale within the provisions of section 2-315 and because plaintiff was not a proper beneficiary under section 2-318. The court found, therefore, that since the four-year period of limitations found in article 2 was inapplicable, plaintiffs' cause of action for personal injuries was barred by the statutory two-year period.

Plaintiffs initially contend that the trial court erred in finding that article 2 of the U.C.C. was inapplicable to the lease transaction here. Citing Walter E. Heller & Co. v. Convalescent Home (1977), 49 Ill. App.3d 213, 365 N.E.2d 1285, plaintiffs maintain that Illinois has joined a growing number of jurisdictions which apply the provisions of article 2 to lease transactions. In Heller, a matter involving an equipment lease of computers, the lessee defended against the lessor's action for rental payments on the ground that the lessor had breached the warranties of merchantability and fitness for a particular purpose imposed by article 2. This court held that article 2 should not be applied in toto to lease transactions. It ruled, however, that certain aspects of those sections dealing with warranties could be applied by analogy. The Heller court stated at page 219: "[W]e will analogize the provisions of article 2 to equipment leases only when the case involves the same considerations which gave rise to the Code's provisions and the analogy is not rebutted by the specific circumstances of the case." See also Sawyer v. Pioneer Leasing Corp. (1968), 244 Ark. 943, 428 S.W.2d 46; W.E. Johnson Equipment Co. v. United Airlines, Inc. (Fla. 1970), 238 So.2d 98; Glenn Dick Equipment Co. v. Galey Construction, Inc. (1975), 97 Idaho 216, 541 P.2d 1184; Hertz Commercial Leasing Corp. v. Transportation Credit Clearing House, Inc. (1969), 59 Misc.2d 226, 298 N.Y.S. 2d 392, rev'd on other grounds (1970), 64 Misc.2d 910, 316 N.Y.S.2d 585.

Some jurisdictions have held that since article 2 expressly refers to sales, it is never applicable to lease transactions. (DeKalb Agresearch, Inc. v. Abbott (N.D. Ala. 1974), 391 F. Supp. 152, aff'd (5th Cir. 1975), 511 F.2d 1162; Martin v. Ryder Truck Rental, Inc. (Del. 1976), 353 A.2d 581; Mays v. Citizens & Southern National Bank (1974), 132 Ga. App. 602, 208 S.E.2d 614; Bona v. Graefe (1972), 264 Md. 69, 285 A.2d 607.) Other jurisdictions have held that despite its language, article 2 is directly applicable in its entirety to leases. In re Vaillancourt (D. Me. 1970), 7 U.C.C. Rep. Serv. 748; Owens v. Patent Scaffolding Co. (N.Y. Sup. Ct. 1974), 77 Misc.2d 992, 354 N.Y.S.2d 778, rev'd on other grounds (1975), 50 App. Div.2d 866, 376 N.Y.S.2d 948.

• 1 We adhere to the principles enunciated in Heller, and we believe the application of selected provisions of article 2 to leases by analogy is the most well-reasoned approach. Although leases may be as prevalent as sales in the commercial world, they are a distinct type of transaction. Leases may differ significantly from sales in the area of risk of loss and the duties of maintenance and repair. A refusal to apply article 2 directly and in toto to leases avoids the situation in which language particularly applicable to sales must suffer a strained interpretation in order to cover a lease transaction. (See Ill. Rev. Stat. 1977, ch. 26, pars. 2-301, 3-312, 2-401.) We thus must examine the present lease transaction to determine whether defendant impliedly warranted that the boxcar would be fit for a particular purpose under section 2-315 and, if so, whether plaintiff, Johnnie Knox, falls within the class of the third-party beneficiaries of such warranty under section 2-318.

Plaintiffs rely primarily upon Berry v. G.D. Searle & Co. (1974), 56 Ill.2d 548, 309 N.E.2d 550, for the propositions that the transaction in the present case carried with it an implied warranty under section 2-315 and that Johnnie Knox qualifies as a beneficiary of the warranty under section 2-318. In Berry, plaintiff sought damages for injuries sustained as a result of ingesting an oral contraceptive manufactured by defendant. Our supreme court held that the sale of the contraceptive carried with it an implied warranty under section 2-315. It was further held that even though there was no privity of contract between plaintiff and defendant, a remote manufacturer, plaintiff nevertheless qualified as a beneficiary of the warranty since section 2-318 was neutral on the question of the necessity of privity between parties in the distributive chain and the requirement of privity, in the context of tort liability, had been abolished. Berry is distinguishable, first, because the transaction there was a sale of goods governed directly by article 2. In contrast, we have held that since the present case involves a lease, the provisions of article 2 are applicable, where appropriate, only by analogy. Secondly, plaintiff in Berry was a purchaser of the product and was thus in vertical privity with the manufacturer. Conversely, Johnnie Knox is not a party in the distributive chain, but stands in horizontal privity to defendant. As we shall discuss more fully, section 2-318 sets a definite limit on a seller's liability to one who stands in horizontal privity, a limitation with which the court in Berry was not concerned. We do not believe Berry controls the disposition of this matter.

• 2 In our view, the well-pleaded facts contained in count I of the complaint support the conclusion that defendant impliedly warranted that the boxcar would be fit for shipping the products of Hershey, its lessee. The lease arrangement placed the duties of maintenance and repair upon defendant. Hershey was permitted to make only "running repairs." Thus it is evident that Hershey, even more so than in a sale situation, relied upon defendant's undertaking to provide a boxcar which was safe and suitable for the purpose contemplated by the parties to the lease. Such an undertaking on the part of the defendant lessor gives rise to a contractual implied warranty of fitness analogous to that applicable to sales under section 2-315. See Walter E. Heller & Co. v. Convalescent Home.

Having so decided, we must address the issue whether Johnnie Knox can qualify, under section 2-318, as a third-party beneficiary of defendant's implied warranty. Plaintiffs concede that Johnnie Knox does not fall within the literal language of section 2-318 which includes as beneficiaries "any natural person who is in the family or household of his buyer or who is a guest in his home * * *." Plaintiffs, however, point to subsection 3 of the Uniform Commercial Code Comment to section 2-318 which states:

"This section expressly includes as beneficiaries within its provisions the family, household, and guests of the purchaser. Beyond this, the section is neutral and is not intended to enlarge or restrict the developing case law on whether the seller's warranties, given to his buyer who resells, extend to other persons in the distributive chain." (Ill. Ann. Stat., ch. 26, par. 2-318, Uniform Commercial Code Comment, at 265 (Smith-Hurd 1963).)

Plaintiffs maintain that this language manifests an intent on the part of the draftees to enable a court to extend the protection of section 2-318 beyond the classes of persons specifically enumerated therein. Plaintiffs further argue that a similar result should be reached under section 2-318 notwithstanding its language because any requirement of privity in non-Code cases has been abolished in Illinois. (Buehler v. Whalen (1977), 70 Ill.2d 51, 374 N.E.2d 460; Genaust v. Illinois Power Co. (1974), 23 Ill. App.3d 1023, 320 N.E.2d 412, aff'd (1976) 62 Ill.2d 456, 343 N.E.2d 465; Suvada v. White Motor Co. (1965), 32 Ill.2d 612, 210 N.E.2d 182.) We do not agree.

• 3 Initially, we believe plaintiffs have misinterpreted the thrust of the above-quoted comment to section 2-318. Section 2-318 defines the classes of persons entitled to benefit from implied warranties who stand in "horizontal" privity (as opposed to "vertical" privity) to the last purchaser, or in the present case, the lessee, in the distributive chain. "Horizontal" privity in its broadest sense, includes any person who uses the product. "Vertical" privity includes all parties up the distributive chain from the immediate seller (Omaha Pollution Control Corp. v. Carver-Greenfield (D. Neb. 1976), 413 F. Supp. 1069.) Since section 2-318 does not address itself to vertical privity, liability of a seller under that section to those who stand in vertical privity may be co-extensive with the liability imposed in non-U.C.C. cases. In other words, section 2-318 was meant to act as a limitation only upon a seller's liability for breach of warranty to those who stand in horizontal privity, but not to those who stand in vertical privity. (Omaha Pollution Control Corp. v. Carver-Greenfield.) We cannot disregard or enlarge the express limitations of section 2-318.

• 4 Moreover, at the time section 2-318 was enacted, the legislature considered alternative language. The alternatives considered and rejected read as follows:

"Alternative B. A seller's warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section."

"Alternative C. A seller's warranty whether express or implied extends to any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends."

It is apparent that the classes of third-party beneficiaries of warranties under the rejected alternatives are much broader than they are under the language adopted in Illinois. By electing to enact what was then Alternative A for section 2-318 in Illinois, we believe the legislature consciously chose to limit a seller's liability for breach of warranty to the specific classes enumerated therein. Thus, since section 2-318 is applicable to the present case by analogy, plaintiffs must demonstrate that Johnnie Knox occupies a position in relation to Hershey analogous to that of a family member or guest of a purchaser.

• 5, 6 An employee of the last purchaser of goods may qualify as a third-party beneficiary under section 2-318. (McNally v. Nicholson Manufacturing Co. (Me. 1973), 313 A.2d 913.) The theory underlying this principle is that the employee stands in such relationship to his employer, the last purchaser, that he is the functional equivalent of a guest or family member. Were we here concerned with an employee of Hershey, the foregoing case would be persuasive authority for the result urged by plaintiffs. Johnnie Knox, however, is not an employee of the lessee; he is an employee of A & P. Consequently, he is twice-removed from the last party in the distributive chain. His position relative to Hershey is the equivalent, in terms of the classes of persons enumerated in section 2-318, of a guest or family member in the household of a borrower of the product from the last purchaser. In a sale situation, we do not believe section 2-318 would give a person who stands in this relationship to the last purchaser the status of a third-party beneficiary in Illinois. Likewise, by analogy, we do not believe Johnnie Knox may take advantage of section 2-318's provision to become such a beneficiary. See Dickey v. Lockport Prestress, Inc. (1976), 52 App. Div.2d 1075, 384 N.Y.S.2d 609.

In view of our holding that section 2-318 is inapplicable to the present case since Johnnie Knox does not qualify as a third-party beneficiary of defendant's implied warranty, it follows that the four-year statute of limitations for actions for breach of warranty found in the U.C.C. is also inapplicable. Johnnie Knox's cause of action, therefore, is subject to the two-year statute of limitations applicable to actions for personal injuries. (Ill. Rev. Stat. 1977, ch. 83, par. 15.) Since the suit was filed more than two years after the cause of action arose, it is barred, and the trial court properly dismissed count I of the complaint.

Because our holding is dispositive of the propriety of the dismissal of count I, it is unnecessary to consider the contention of defendant that, under the "most significant relationship" test, Louisiana should be deemed the State in which the cause of action arose.

Plaintiffs finally contend that even if Johnnie Knox's suit for personal injuries is barred by the statute of limitations, plaintiff, Irene Knox, is nevertheless entitled to maintain her action for loss of consortium. At the time the cause of action arose, the Illinois limitation period for such actions was five years. (Ill. Rev. Stat. 1977, ch. 83, par. 16.) Since the ...


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