Illinois National Insurance Co. v. Ace Stamping and Machine Co. Inc.

          MEMORANDUM OPINION AND ORDER

          Virginia M. Kendall United States District Judge

         General Electric Transportation (“GET”) manufactures locomotive engines and uses various washers in those engines. In 2015–2016, GET retained Optimas OE Solutions, LLC (“Optimas”) to source the washers from outside vendors to use in its engines. When GET began manufacturing the engines, the washers cracked, and upon inspection, GET determined that the washers were not flat and were brittle. As a result, GET dissembled the locomotive engines and rebuilt them with different washers incurring approximately $1.7 million in losses. GET made a demand to Optimas, the supplier of the washers for the loss. Optimas was not the manufacturer of the washers; but rather, the supplier. Optimas had contracted with manufacturer Ace Stamping and Machine Co. Inc. (“Ace”) to provide the washers to Optimas’s customers. When GET complained about the defective washers supplied to them, Optimas settled with GET and the Plaintiff-Insurers reimbursed it for that settlement. Plaintiffs now move for summary judgment against Ace, the alleged manufacturer of the washers, alleging that Ace is required to indemnify them for the settlement cost pursuant to an agreement. While the purely legal issue of contract interpretation as to the indemnification clause is decided in favor of Plaintiffs, Plaintiffs’ Motion for Summary Judgment is otherwise denied due to remaining disputes of material facts.

         BACKGROUND

         Dating back to at least January 2015, GET retained Optimas^[1] to source two types of washers used in the manufacture of locomotive engines-washer types 41B537660P11 (“P11”) and 41B537660P16 (“P16”). (Dkt 43 ¶ 7). Optimas sourced the washers from outside manufacturers. Optimas had previously sourced the washers from manufacturer Andre Armor. (Dkt. 54 ¶). But due to financial difficulties Andre Armor was experiencing, Optimas began sourcing P11 and P16 washers from Ace. (Dkt 43 ¶ 10). From July 2015 through March 2016, Ace was Optimas’s sole supplier of P11 and P16 washers. (Id. ¶ 10; Dkt. 43-1 ¶ 15). Beginning in August 2015, Optimas sent the P11 and P16 washers it had received from Ace to GET and did so without any alteration to the washers. (Dkt 43 ¶ 12).

         Optimas included the following paragraphs in its Terms and Conditions of Purchase, which it included with the purchase orders it sent to Ace:

1. Any order placed or purchase order issued by Buyer (an “Order”) for products and/or services described therein (collectively, the “Products”) is subject to this Agreement, together with any additional or different terms mutually agreed to in writing by Buyer. Acceptance of an Order by Seller will occur upon the happening of any of the following: (i) receipt by Buyer from Seller of written acceptance of an Order or written notice that Seller will provide the Products. . . and (iii) any other conduct of Seller which recognizes the existence of a contract pertaining to the Products. . . .

9. Seller warrants that the Products will conform to the specifications, drawings, samples or other description furnished to Seller; will be of new manufacture and free from defects in material and workmanship; will be free and clear of all liens and encumbrances; and will comply with all other warranties implied in fact or by law. Such warranties shall run to Buyer and its customers and shall continue in full force and effect and Seller shall not be relieved of such warranties by Buyer’s inspection of or payment for the Products. . . .

10. Seller will defend, indemnify and hold harmless Buyer, its directors, affiliates, employees, and agents from and against any and all claims alleging. . . (ii) property damage, injuries or death to persons, or any other damage, loss cost or expense (including judgments paid and attorneys’ fees and expenses reasonably incurred) arising out of the purchase, use or operation of any Products. . . .

(Dkt. 43-2; Dkt. 43-3).

         Ace admits that it sent acknowledgments for these purchase orders and that it did not object to the inclusion of the indemnity clause in the terms and conditions. (Dkt. 43-4 at 14; Dkt. 49 ¶¶ 26–27, 31–32, 36–37, 41–42, 46–47, 51–52, 56–57). Ace argues, however, that with its shipments it included packing slips containing a remedy limitation which modified the agreement between the parties. (Dkt. 50 at 3). Those packing slips stated that “Liability of Seller for goods found to be defective or not in accordance with agreed specifications, shall be limited to replacement of goods or refund of the purchase price, as the Seller shall select.” (Dkt. 49-7).

         In November 2015 and March 2016, GET discovered that washers were cracking during the assembly of locomotive engines. (Dkt. 43 ¶ 58; Dkt. 54 ¶ 17). GET attributed the issues to Optimas, as Optimas was the supplier of washers at the relevant facility. (Dkt. 43-12 at 28:6–14). GET’s Senior Commodity Manager, Jonathan Merriott, testified that an analysis indicated that the washers supplied by Optimas had not been tempered properly and therefore had not adequately hardened. (Id. at 34:5–36:11). As a result, the washers “became more brittle and can crack when not flat.” (Id. at 36:8–11). The washers were also defective because they were not flat. (Id. at 48:19–22). GET determined that the defective washers were attributable to Optimas, rather than another supplier, Gexpro. (Id. at 109:15–23).

         GET could not use or sell locomotives with the defective components. (Id. at 31:5–17). As a result, on May 3, 2016, GET sent a demand letter to Optimas detailing the $1, 575, 485.70 in costs it had incurred due to the defective P11 and P16 washers Optimas supplied. (Dkt. 43 ¶ 68; Dkt. 43-16). On June 1, 2016, GET followed up with a letter from its Chief Financial Officer – Supply Chain confirming these costs. (Dkt. 43 ¶ 70).

         On May 11, 2016, Optimas sent a letter to Ace notifying it of GET’s claim, stating that it expected “that Ace will honor its agreement and warranty, and submit full payment of these amounts immediately.” Optimas went on to state that it was “in the process of gathering further information regarding the exact amount of these damages” and that it would forward additional information when it became available. (Dkt. 43-19).

         Ultimately, on June 24, 2016, Optimas paid a total of $1, 704, 003.84 to settle with GET, of which $1, 575, 485.70 was due to the defective P11 and P16 washers. (Dkt. 49 ¶ 74; Dkt. 53 at 11). Illinois National Insurance Company and Zurich American Insurance Company each ...