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Republic Steel Corp. v. Pennsylvania Engineering Corp.


February 28, 1986


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 82 C 5906--Frank J. McGarr, Judge.

Author: Eschbach

Before CUMMINGS, Chief Judge, ESCHBACH, Circuit Judge, and WRIGHT, Senior Circuit Judge.*fn*

ESCHBACH, Circuit Judge.

The primary questions presented in this appeal governed by Illinois law are (1) whether an agreement for the design, sale, and assembly of two steel furnaces is a contract for the sale of goods within the meaning of the Illinois Uniform Commercial Code ("U.C.C."), and thus subject to the limitations period of the U.C.C., and (2) whether a plaintiff may recover damages in tort for repair costs and loss of profits arising out of the negligent performance of engineering, design, and purchase agency services in connection with the sale and installation of the two furnaces. The district court entered judgment on the pleadings under Fed. R. Civ. P. 12(c) in favor of the defendant on the contract claims, and granted the defendant's motion under Fed. R. Civ. P. 12(b)(6) to dismiss the product-liability and negligence claims. For the reasons stated below, we will affirm.


On August 1, 1974, Republic Steel Corporation ("Republic"), a New Jersey corporation with its principal place of business of Ohio, entered into an agreement, entitled "Engineering Services Equipment Supply Agreement" ("Agreement"), with Pennsylvania Engineering Corporation ("PEC"), a Delaware corporation with its principal place of business in Pennsylvania, in connection with the design, manufacture, and installation of two steel furnaces for use in Republic's Chicago-district plant. Republic and PEC also executed a series of "placement recommendations" that authorized PEC to purchase or supply, as Republic's agent, some of the component parts necessary for the assembly and installation of the furnaces.

The Agreement contained numerous provisions defining PEC's responsibility in providing engineering, design, start-up, and training services. Articles 3 and 4 of the Agreement set forth the fees payable to PEC, making specific allocations as to the item or service for which remuneration was to be made. The Agreement also contained numerous warranty and liability provisions.*fn1

The facility installed at Republic's plant included the two furnaces. Propelled by four electric motors attached to mechanical drive assemblies, the furnaces could be tilted and rotated 360 degrees. Variable voltage panels, located apart from the mechanical drive units, controlled the furnace drive assemblies. When properly functioning, the variable voltage units decelerated the furnace drives at a uniform and controlled rate.

After acceptance by Republic's special certification team, Furnace No. 1 and Furnace No. 2 began operation on March 10, 1977, and on December 3, 1977, respectively. In September of 1980, the mechanical drive for Furnace No. 2 failed due to fatigue. The failure did not result in any personal injury. Republic's examination of the drive for Furnace No. 1 showed it to be in a state of imminent failure.

On September 27, 1982, Republic filed suit against PEC and others seeking $2.6 million in repair costs and loss of profits. Count I of Republic's complaint asserted a breach of contract claim against PEC. In Court II, Republic claimed that PEC had breached an implied warranty that the furnaces were "of a good and merchantible [sic] quality pursuant to the applicable provisions of the Uniform Commercial Code." In Counts III, IV, and V, Republic asserted products-liability and negligence claims against PEC. Republic alleged that the drive failures resulted from excessive stress to the furnace drive assemblies caused by a bypass of the deceleration mechanism. The deceleration bypass, Republic alleged, was due to a mis-wiring of the variable voltage control panels at the time of original manufacture. Republic alleged that PEC was responsible for preparing the necessary specifications and drawings for the control units, for requesting and analyzing quotations from suppliers, and for advising Republic on the ultimate purchase. Republic alleged further that, subsequent to the purchase of the drive control units, PEC was responsible for field supervision, check-out, start-up, and operator training.

On January 13, 1984, the district court granted PEC's motion under Fed. R. Civ. P. 12(b)(6), and dismissed Republic's tort claims. The district court held that, under the rule of Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 435, 61 Ill. Dec. 746, 435 N.E.2d 443 N.E.2d (1982), economic losses are not recoverable in tort for damages resulting from a qualitative defect in a product, and hence, that Republic must seek its relief in an action on the Agreement.

On October 19, 1984, the district court held that Republic's contract claims were time-barred by the four-year limitations period in § 2-725(1) of the U.C.C., and entered judgment on the pleadings in favor of PEC. The district court reasoned that, because the services PEC rendered were incidental to the sale of the furnaces, the agreement between Republic and PEC must be treated as a contract for the sale of goods governed by the U.C.C. The court found that the complaint had been filed over four and one-half years after PEC had delivered and installed the furnaces. Republic appeals from the district court's orders of January 13 and October 19, 1984.


Republic advances two arguments on appeal: (1) the four-year limitations period contained in § 2-725 of the U.C.C. does not apply to its claim that PEC breached the Agreement, for that agreement is one for the rendition of services, not the sale of goods; and (2) the Illinois Supreme Court's decision in Moorman does not bar Republic's tort claims against PEC for the negligent performance of engineering and consulting services. We disagree with both arguments.

A. Statute of Limitations

Before discussing the substance of its contract claims, we address Republic's challenge to the scope of the record on appeal. The district court granted PEC's motion under Fed. R. Civ. P. 12(c) for judgment on the pleadings as to Republic's contract claims.*fn2 Under Rule 12(c), the record is confined to the pleadings. Flora v. Home Federal Savings and Loan Association, 685 F.2d 209, 211 (7th Cir. 1982). Republic contends that the district court improperly considered matters outside the pleadings in granting PEC's motion. In particular, Republic claims that the district court relied upon a series of contracts, executed separately from the Agreement, which Republic had entered into with PEC regarding the sale of the furnaces. Republic concludes that the only document properly before the court below, and of record on appeal, is the Agreement, which it characterizes as a contract for services and not for the sale of goods.

Before the district court, Republic also had argued that PEC's memoranda in support of its Rule 12(c) motion contained factual statements not part of the pleadings. Republic had requested that the district court, for that reason, treat PEC's motion as one for summary judgment. In fact, Republic had attached an affidavit to its final memorandum, averring to the nature of PEC's responsibilities under the Agreement, and concluded: "This court should deny [PEC's] Motion for Summary Judgment." Because both PEC and Republic had a reasonable opportunity to, and did in fact present materials pertinent to proceedings under Rule 56, it would have been entirely proper for the district court to have treated PEC's motion under Rule 12(c) as one for summary judgment. Fed. R. Civ. P. 12(c); Schy v. Susquehanna Corp., 419 F.2d 1112, 1116 (7th Cir.), cert. denied, 400 U.S. 826, 91 S. Ct. 51, 27 L. Ed. 2d 55 (1970); Sager Glove Corp. v. Aetna Insurance Co., 317 F.2d 439, 441 (7th Cir.), cert. denied, 375 U.S. 921, 84 S. Ct. 266 11 L. Ed. 2d 165 (1963). It is equally proper for us to do so now, and hence, we shall consider the record on appeal to include those undisputed statements of fact appearing in the affidavits submitted in support of or in opposition to PEC's motion. Roberts v. American Airlines, Inc., 526 F.2d 757, 762 (7th Cir. 1975), cert. denied, 425 U.S. 951, 96 S. Ct. 1726, 48 L. Ed. 2d 195 (1976); Sager Glove Corp., 419 F.2d at 1116.

Turning now to the substance of Republic's contract claims, we note that this is an action in diversity, and the parties agree that Illinois law applies. We see no reason to disturb that stipulation. Prudential Insurance Co. of America v. Sipula, 776 F.2d 157, 161 (7th Cir. 1985). Republic does not dispute that it filed suit outside the limitations period contained in the U.C.C.*fn3 Republic contends, however, that the sale of the furnaces was made pursuant to purchase orders separate from the Agreement. Republic concludes that the Agreement itself does not transfer title to any products or equipment, and, therefore, that it is not a contract for the sale of goods within the meaning of § 2-106 of the U.C.C.*fn4 Republic also contends that, because the sale of the furnaces was transacted between it and a division of PEC, PECOR, which was acting as an independent supplier, PEC was not a seller within the meaning of the U.C.C.*fn5 Republic concludes that the four-year limitations period under § 2-725 does not apply to its agreement with PEC. We disagree with Republic's analysis and conclusions.

Republic's argument ignores the language of both its complaint and the Agreement. In Court II of its complaint, Republic alleged that PEC "did impliedly warrant that the [furnace] facility provided by it was of a good and merchantible [sic] quality pursuant to the applicable provisions of the Uniform Commercial Code. " Complaint P 16 (emphasis added). Moreover, in its first memorandum in opposition to PEC's motion, Republic states "it bears repetition that [PEC] had an exclusive license . . . within the territory of North America to design, engineer, sell and install complete steel making facilities and equipment." Plaintiff's Response to Motion for Judgment on Pleadings, Republic Steel Corp. v. Pennsylvania Engineering Corp., No. 82 C 5906, at 2 (N.D. Ill. filed July 20, 1984) (emphasis added). Republic also concedes that it "entered into more than one agreement with [PEC], including a separate and distinct agreement through its PECOR Division for the design and supply of the [furnaces]." Id. at 4.

The terms of the Agreement belie Republic's efforts to segregate the service component of its transaction with PEC. Section 2.09, entitled Certain Purchase Orders Incorporated in this Agreement, recites that:

The following [Republic] Purchase Orders were issued to PEC for services by PEC, intended to be utilized in connection with the Q-BOP Facility:

?. . . .

(e) No. 600-493400-332 dated 8/30/74

(f) No. 600-493400-332 Rev. 1 dated 10/2/74

The work performed under these Purchase Orders shall be deemed to have been performed under the terms of this Agreement, except that compensation paid or payable to PEC under such Purchase Orders shall be handled as provided in Section 4.06 of this Agreement.

The purchase orders referred to above are those for the two furnaces and drive assemblies at issue here. In addition, under section 2.10, "all of the documents incorporated in this Agreement by Annex shall be referred to as the 'Contract Documents.'"

The Scope of Supply and Responsibility Schedule ("Schedule"), Annex A to the Agreement, detailed the items and materials necessary for the assembly and the installation of the furnace facility, and assigned engineering, purchase, and installation responsibility as between Republic and PEC for each item. Under specification number 026 of the Schedule, the acquisition of the "two (2) 225 Ton Q-BOP Furnace [sic] Complete with Drive and Six (6) Removable Bottoms" was PEC's responsibility.*fn6 The initial purchase price of the furnaces was $3.7 million. The final price, after adjustments, was over $5 million.*fn7 Because of the specific and detailed reference in the Agreement to the purchase of the furnaces, we find unconvincing Republic's argument that the Agreement memorializes a transaction unrelated to the sale of the furnaces. Even were we to assume that section 2.09 of the Agreement did not incorporate the purchase order for the furnaces, Illinois law requires us to construe together contracts which are executed by the same parties in the course of a single transaction. See, e.g., Tepfer v. Deerfield Savings & Loan Association, 118 Ill. App. 3d 77, 454 N.E.2d 676, 73 Ill. Dec. 579 (1st Dist. 1983).*fn8

We are also not persuaded by Republic's argument that, because section 2.05 of the Agreement required PEC to treat PECOR, one of its divisions, as an "independent supplier" when placing an order with it, PEC was not a "seller," and hence, the Agreement between Republic and PEC was not a contract for sale within the meaning of the U.C.C. Section 2.05 of the Agreement does no more than define the scope of PEC's authority to act as a purchasing agent for Republic, and set forth PEC's duty to comply with Republic's standard purchasing procedure when supplying equipment and parts to Republic under the Agreement. Section 2.05 contains the following proviso:

To the extent suppliers, contractors, or vendors will not agree to the entire provisions of the Purchasing Procedure, Annex B hereto, PEC will inform [Republic], who must authorize PEC's then course of action with said supplier, contractor or vendor. PEC shall not be responsible, if after its best efforts, said suppliers, contractors or vendors refuse to comply. When dealing with its divisions, subsidiaries and affiliates in connection with the subject matter of this Agreement (other than the Engineering Construction Division) PEC shall treat such divisions, subsidiaries and affiliates as independent Contractors, suppliers or vendors, as the case may be.

Agreement § 2.05 (emphasis added).

Read in context, section 2.05 merely prohibits PEC from circumventing certain purchase procedures when dealing with its divisions such as PECOR. A similar provision is found in section 2.07 with regard to construction services that the Agreement obligated PEC to arrange and to oversee.*fn9 Section 2.05, meant as it was to facilitate compliance with Republic's internal purchase procedures, cannot reasonably be read to redesignate one of PEC's divisions for the purpose of foreclosing the application of the U.C.C. to the transaction between Republic and PEC.*fn10 This is especially true in light of the language in Count II of Republic's complaint, discussed above, that indicates Republic's tacit understanding that the U.C.C. governed the legal consequences of a breach of the Agreement. Such language is entirely incongruous with the claim that the Agreement concerned solely the provision of services by PEC.

Viewing, as we must under Illinois law, the Agreement in conjunction with the placement recommendations and related documents, we reject Republic's contention that it contracted with PEC only for the provision of professional engineering services and not also for the sale of the furnaces. The agreement between Republic and PEC was, rather, "mixed," i.e., one both for the sale of goods and for the provision of services.

The question remaining for us to consider is whether, under Illinois law, the mixed sales/service agreement between Republic and PEC comes within the scope of the U.C.C. To resolve the issue we must determine whether the transaction between Republic and PEC was predominately one for the sale of goods with services incidentally involved, or was one for the rendition of services with the sale of goods incidentally involved. Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co., 532 F.2d 572, 580 n.6 (7th Cir. 1976).*fn11 The Illinois Appellate Court recently has applied the predominant-character test to determine whether mixed contracts come within the scope of the U.C.C. Yorke v. B.F. Goodrich Co., 130 Ill. App. 3d 220, 474 N.E.2d 20, 85 Ill. Dec. 606 (2d Dist. 1985) (transaction involving sale of vinyl pellets for the production of vinyl siding was contract for sale of goods despite seller's agreement to provide technical assistance); Meeker v. Hamilton Grain Elevator Co., 110 Ill. App. 3d 668, 442 N.E.2d 921, 66 Ill. Dec. 360 (4th Dist. 1982) (a contract for the sale and erection of two grain bins was a contract for the sale of goods, and suit on it was barred by the limitations period of U.C.C. § 2-725(1)).

In assessing the character of the transaction between Republic and PEC, we may not be unmindful of Illinois law underscoring the broad coverage of the U.C.C. and emphasizing the need for uniformity in commercial transactions. See, e.g., Meeker, 110 Ill. App. 3d at 669, 442 N.E.2d at 922. We agree with the district court that "the rendition of the engineering services led directly to the construction of the furnaces which [was] the heart of the [Agreement]." The cost of the furnaces and drive assembly components was approximately $5 million. We do not doubt that the design, engineering, and purchase-agency services rendered by PEC in furtherance of the Agreement were substantial. That alone, though, is not sufficient to determine the predominant character of a contract for the purposes of the U.C.C. Bonebrake v. Cox, 499 F.2d 951, 958 (8th Cir. 1974) (a contract for the sale and installation of bowling equipment concerned predominantly the sale of goods, even though the amount of services rendered was substantial), cited with approval in Pittsburgh-Des Moines Steel, 532 F.2d at 580 n.6. We hold that the Agreement between PEC and Republic was predominantly a contract for the sale of the two furnaces, with the rendition of engineering, design, installation, and purchase-agency services incidental thereto. Thus, the limitations period under § 2-725(1) of the U.C.C. applies to the Agreement and bars Republic's contract claims.

B. Tort Claims

The district court granted PEC's motion under Fed. R. Civ. P. 12(b)(6), and dismissed Counts III, IV, and V of Republic's complaint, which alleged products-liability and negligence claims. The court relied on the Illinois Supreme Court's decision in Moorman, which held that a plaintiff may not recover in tort for economic loss resulting from a qualitative defect in a product.*fn12 As it did before the district court, Republic contends that PEC's primary responsibility with regard to the tilt-drive control panels was to act as Republic's purchasing agent and to provide design and engineering services. Republic concludes that the Agreement between it and PEC constitutes a contract for the rendition of professional services, and hence, falls within an exception to the rule in Moorman precluding recovery in tort for economic losses.*fn13

Though PEC designated its motion as one for dismissal under Rule 12(b)(6), and the district court so treated it, the motion was not filed until after PEC had filed an answer to Republic's complaint. Thus, as a matter of motions practice, we must consider PEC's motion as as request for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c). Fed. R. Civ. P. 12(h)(2); Schy, 419 F.2d at 1115. Although PEC's motion performs the same function as a Rule 12(c) motion, we apply, nonetheless, the standard for a Rule 12(b)(6) motion in reviewing the district court's dismissal. Slotnick v. Garfinkle, 632 F.2d 163, 165 (1st Cir. 1980); Amersbach v. City of Cleveland, 598 F.2d 1033, 1038 (6th Cir. 1979).

In considering the propriety of the district court's dismissal of Republic's tort claims, therefore, we must accept the well-pleaded factual allegations of Republic's complaint as true. Hishon v. King & Spalding, 467 U.S. 69, 81 L. Ed. 2d 59, 104 S. Ct. 2229, , 467 U.S. 69, 104 S. Ct. 2229, 2233, 81 L. Ed. 2d 59 (1984); Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1104 (7th Cir. 1984), cert. denied, 470 U.S. 1054, 105 S. Ct. 1758, 84 L. Ed. 2d 821 (1985). We are of course not bound by the legal characterizations Republic gives those facts. Prudential, 776 F.2d at 159.

The Agreement contains numerous warranty and liability clauses. Section 8.03, entitled Cost of Defective Work, provides:

Any engineering work which is in fact defective or does not meet the standards prescribed in this Agreement, shall be redone at no cost to [Republic] . . . . Any PEC purchasing services required in connection with materials or equipment used for such rework shall be at no cost to [Republic], but the cost of material, equipment, construction labor, and other costs as well as costs relating to changes in existing structures by reason of any such rework shall be borne by [Republic].

Under section 8.05, entitled Flow-through of Supplier Warranties :

PEC shall cause [Republic] to be entitled to the benefit of all warranties, indemnifications, licenses and other rights negotiated by PEC with third parties pursuant hereto . . . . PEC will use its best efforts to obtain warranties on all items of equipment extending until one year after startup of the Q-BOP Facility.

The Agreement specifically addresses the nature and extent of PEC's liability in Article 14. Section 14.01, entitled Direct but no Consequential Liabilities, provides:

PEC shall be liable for all direct damages suffered by [Republic] as a result of PEC's acts or omissions or acts or omissions of those for whom it is responsi- ble in law, which shall exclude all vendors and con- tractors where PEC acts only as agent for [Republic]. It is also understood that in no event shall PEC be responsible for any indirect, special or consequential damages suffered by [Republic], including but without limitation of the foregoing, loss of profits, loss of production, business interruption, damages in the nature of penalties or fines which may be asserted by [Republic] . . . .

Article 15, entitled Responsibility of PEC, provides that PEC shall not be responsible for:

any omission by [Republic], its employees, agents, and contractors . . . . PROVIDED that to the extent PEC, in carrying out its obligations of supervision of the installation and/or construction, Check-out and Start- Up of the facility, observes or otherwise becomes aware of the defective work being performed or defective materials being supplied by other contractors of [Republic] . . . PEC shall . . . use its reasonable best efforts to inform [Republic's] Representative of the same so that [Republic] can take such remedial action as [Republic] desires . . . .

We express no opinion as to whether the liability and warranty clauses recited above would bar recovery of the damages Republic seeks for replacement or repair costs and loss of profits arising out of the defective control panels had Republic brought a timely suit on the Agreement. We mention these provisions in order to demonstrate that Republic and PEC entered into detailed and exhaustive covenants concerning the subject matter of Republic's tort claims.

We agree with the district court's characterization of the failure of the drive assemblies as a "qualitative defect[] relating to the purchaser's expectation in terms of the product's fitness to perform its intended function."*fn14 To allow Republic to proceed on tort theories in light of the exhaustive contract provisions noted above would cause the very mischief of which the Illinois Supreme Court disapproved in Moorman.*fn15 This is so irrespective of whether Republic's contract claims are barred by the U.C.C.'s limitations period.

In holding that Republic's contract claims were barred by the § 2-725(1) limitations period, we concluded that the predominant character of the Agreement between it and PEC was that of a contract for the sale of goods, not for the rendition of services. In effect, Republic is asking us not to segregate the service component from the Agreement in order to provide it with a remedy in tort because its contract claims are time-barred. For the reasons stated above, we decline to do so. Thus, Counts III, IV, and V of Republic's complaint fail to state claims upon which relief can be granted.


We have treated the district court's entry of judgment on the pleadings in favor of PEC on Counts I and II as a Rule 56 summary judgment, and the district court's dismissal of Counts III, IV, and V under Rule 12(b)(6) as the entry of judgment on the pleadings in favor of PEC. For the reasons stated above, and as so modified,*fn16 the orders of the district court are AFFIRMED.

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