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Republic Steel Corp. v. Pennsylvania Engineering Corp.

February 28, 1986

REPUBLIC STEEL CORPORATION, PLAINTIFF-APPELLANT,
v.
PENNSYLVANIA ENGINEERING CORPORATION, DEFENDANT-APPELLEE



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.

I

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.

II

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 ...


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