Severn Peanut Co., Inc. v. Industrial Fumigant Co. , 807 F.3d 88 ( 2015 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-1063
SEVERN PEANUT CO., INC.; MEHERRIN AGRICULTURE & CHEMICAL
CO.; TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA,
Plaintiffs − Appellants,
v.
INDUSTRIAL FUMIGANT CO.; ROLLINS INC.,
Defendants - Appellees.
Appeal from the United States District Court for the Eastern
District of North Carolina, at Elizabeth City. Terrence W.
Boyle, District Judge. (2:11-cv-00014-BO)
Argued: October 27, 2015 Decided: December 2, 2015
Before TRAXLER, Chief Judge, and WILKINSON and DUNCAN, Circuit
Judges.
Affirmed by published opinion. Judge Wilkinson wrote the
opinion, in which Chief Judge Traxler and Judge Duncan joined.
ARGUED: James Luther Warren, III, CARROLL WARREN & PARKER PLLC,
Jackson, Mississippi, for Appellants. Steven B. Epstein, POYNER
SPRUILL LLP, Raleigh, North Carolina, for Appellees. ON BRIEF:
Alexandra Markov, D. Scott Murray, CARROLL WARREN & PARKER PLLC,
Jackson, Mississippi; Jay M. Goldstein, Hunter C. Quick, Howard
M. Widis, QUICK, WIDIS & NALIBOTSKY, PLLC, Charlotte, North
Carolina, for Appellants. Andrew H. Erteschik, POYNER SPRUILL
LLP, Raleigh, North Carolina; William J. Conroy, CAMPBELL TRIAL
LAWYERS, Berwyn, Pennsylvania, for Appellees.
WILKINSON, Circuit Judge:
Appellants Severn Peanut Co. and Severn’s insurer allege
breach of contract and negligence claims against appellee
Industrial Fumigant Co. (“IFC”). According to Severn, IFC
improperly applied a dangerous pesticide while fumigating
Severn’s peanut dome, resulting in fire, an explosion, loss of
approximately 20,000,000 pounds of peanuts, loss of business,
and various cleanup costs. The District Court for the Eastern
District of North Carolina awarded summary judgment to IFC.
Because the contract’s consequential damages exclusion bars
Severn’s breach of contract claim, and because North Carolina
does not allow Severn to veil that claim in tort law, we affirm
the judgment of the district court.
I.
On April 20, 2009, Severn and IFC entered into a Pesticide
Application Agreement (“PAA”) requiring IFC to use phosphine, a
pesticide, to fumigate a peanut storage dome owned by Severn and
located in Severn, North Carolina. The PAA required IFC to apply
the pesticide “in a manner consistent with
instructions . . . and precautions set forth in [its] labeling.”
J.A. 46.
In return for IFC’s services, Severn promised to pay IFC
$8,604 plus applicable sales taxes. The contract specified,
however, that this charge was “based solely upon the value of
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the services provided” and was not “related to the value of
[Severn’s] premises or the contents therein.” J.A. 47. The
contract also specified that this $8,604 sum was not “sufficient
to warrant IFC assuming any risk of incidental or consequential
damages” to Severn’s “property, product, equipment, downtime, or
loss of business.” Id.
Phosphine is a pesticide often produced in either tablet or
pellet form. Upon reaction with moisture in the air, the tablets
or pellets produce a toxic and flammable gas. Phosphine is
regulated by the Federal Insecticide, Fungicide, and Rodenticide
Act (“FIFRA”) and the North Carolina Pesticide Law of 1971. Both
laws require that it be administered only in a manner consistent
with its labeling. 7 U.S.C. § 136j(a)(2)(G); N.C. Gen. Stat.
§ 143-443(b)(3). The product label of the brand of phosphine
used by IFC, Fumitoxin, in turn requires that the user avoid
piling Fumitoxin tablets up on top of each other when applying
the pesticide.
On August 4, 2009, IFC dumped approximately 49,000 tablets
of Fumitoxin into Severn’s peanut dome through a single access
hatch. This caused the tablets to pile up on one another. A fire
began on or around August 10, and it continued to smolder
despite the parties’ firefighting efforts. On August 29 an
explosion occurred, and the peanut dome sustained extensive
structural damage. After all was said and done, Severn’s
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insurer, plaintiff Travelers Insurance Co., paid Severn over $19
million to cover the loss of nearly 20,000,000 pounds of
peanuts, lost business income, the damage to the peanut dome,
and Severn’s remediation and fire suppression costs.
On January 4, 2012, Severn, its insurer, and its parent
company filed an amended complaint against IFC and Rollins Inc.,
IFC’s parent company, in the Eastern District of North Carolina.
According to Severn, IFC’s improper application of phosphine
tablets caused the fire and explosion and gave rise to claims
for negligence, negligence per se, and breach of contract. J.A.
41-43. On March 17, 2014, the district court granted partial
summary judgment to IFC and Rollins, holding that the PAA’s
consequential damages exclusion barred Severn’s claim for breach
of contract. J.A. 1397. Several months later, as the parties
were preparing for trial on Severn’s remaining negligence
claims, the district court sua sponte ordered briefing on the
issue of contributory negligence. J.A. 1606. After receipt of
the parties’ briefs, and on its own motion, the district court
found Severn contributorily negligent and awarded summary
judgment to IFC and Rollins on Severn’s remaining negligence
claims. J.A. 1673-76. This appeal, contesting both of the
district court’s summary judgment orders, followed.
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II.
Severn argues that the PAA’s consequential damages
exclusion does not bar its breach of contract claim for damage
to its dome and peanuts and its associated remediation and lost
business costs. For the reasons that follow, we disagree.
A.
Before examining the parties’ particular consequential
damages exclusion, it is worth considering the utility of
consequential damages limitations in general. In North Carolina,
Consequential or special damages for breach of
contract are those claimed to result as a secondary
consequence of the defendant’s non-performance. They
are distinguished from general damages, which are
based on the value of the performance itself, not on
the value of some consequence that performance may
produce.
Pleasant Valley Promenade v. Lechmere, Inc., 464 S.E.2d 47, 62
(N.C. Ct. App. 1995) (quoting 3 Dan B. Dobbs, Law of Damages,
§ 12.4(1) (2d ed. 1993)). While recovery for consequential
damages may already be limited by the venerable rule that the
victim of a breach of contract may be compensated only for those
damages that “may reasonably be supposed to have been in the
contemplation of both parties at the time they made the
contract,” Williams v. W. Union Tel. Co., 48 S.E. 559, 560 (N.C.
1904) (quoting Hadley v. Baxendale, 9 Exch. 341, 354 (1854)),
enforcement of explicit contractual provisions allocating the
risk of consequential damages to one party or another further
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maximizes parties’ freedom of contract and allows them to better
achieve predictability in their business relations.
North Carolina follows a “broad policy” which generally
accords contracting parties “freedom to bind themselves as they
see fit.” Hall v. Sinclair Refining Co., 89 S.E.2d 396, 397-98
(N.C. 1955). Its courts recognize that “the right of private
contract is no small part of the liberty of the citizen,” and
the “usual and most important function of courts” is therefore
“to enforce and maintain contracts rather than enable parties to
escape their obligations.” Calhoun v. WHA Med. Clinic, PLLC, 632
S.E.2d 563, 573 (N.C. Ct. App. 2006) (quoting Tanglewood Land
Co. v. Wood, 252 S.E.2d 546, 552 (N.C. Ct. App. 1979)).
Enforcement of contractual liability limitations and
damages exclusions is one aspect of this freedom of contract.
For this reason, “a person may effectively bargain against
liability for harm caused by his ordinary negligence in the
performance of a legal duty arising out of a contractual
relation.” Hall, 89 S.E.2d at 397. And while cases examining
damages exclusions and liability limitations often necessarily
involve bargains that look like raw deals in hindsight, defense
of the liberty of contract requires that courts avoid the
“indulgence of paternalism” and respect individuals’
“entitle[ment] to contract on their own terms.” Gas House, Inc.
6
v. S. Bell Tel. & Tel. Co., 221 S.E.2d 499, 504 (N.C. 1976)
(quoting 14 Williston on Contracts, 3d Ed., § 1632).
Contractual limitations on consequential damages also serve
to further predictability in business relations. By allowing
parties to bargain over the allocation of risk, freedom of
contract permits individuals and businesses to allocate risks
toward those most willing or able to bear them. Parties who
allocate risks away from themselves thereby cap their future
expected litigation and liability costs. Parties assuming risks
often receive benefits in the form of lower prices in exchange.
Without the ability of contracting parties to protect against
the imposition of consequential damages, some consumers might
not be able to access needed goods and services at all. Here,
for example, while Severn could have pursued a business strategy
of hiring its own certified phosphine applicators and doing its
pesticide services in-house, it is not clear that it could have
found other outside pesticide services companies willing to
perform phosphine applications without assent to consequential
damages exclusions like those required by IFC.
The benefits of consequential damages limitations for
consumers and producers may explain why they are both widespread
and widely enforced. In the context of sales of goods and
products liability, for instance, North Carolina and many other
states follow the Uniform Commercial Code and take the position
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that “[c]onsequential damages may be limited or excluded unless
the limitation or exclusion is unconscionable.” N.C. Gen. Stat.
§ 25-2-719. This policy of generally enforcing mutually-
assented-to limitations on liability extends beyond the goods
context. See, e.g., Hyatt v. Mini Storage on Green, 763 S.E.2d
166, 171 (N.C. Ct. App. 2014) (enforcing contractual exclusion
of liability for personal injury encountered on premises of
self-storage facility); Lexington Ins. Co. v. Tires Into
Recycled Energy & Supplies, Inc., 522 S.E.2d 798, 801 (N.C. Ct.
App. 1999) (enforcing lease provision limiting liability for
fire damages covered by insurance). Far from an outlandish
exculpation of responsibility, consequential damage limitations
like that in IFC and Severn’s PAA appear to be commonly-enforced
tools of doing business used throughout North Carolina and many
other states.
B.
Having reviewed North Carolina’s background law, we turn to
an examination of the particular consequential damages
limitation found in Severn and IFC’s contract. Severn argues
that despite North Carolina’s freedom of contract principles,
the PAA’s particular language is unenforceable on various
grounds. We find these contentions unpersuasive.
Severn and IFC are sophisticated commercial entities who
entered into an arm’s length transaction. Their contract
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specified that “[t]he amounts payable by [Severn] are not
sufficient to warrant IFC assuming any risk of incidental or
consequential damages,” including risks to several itemized
categories of damages: “property, product, equipment, downtime,
or loss of business.” J.A. 47. The loss of Severn’s peanut dome
and peanuts, the expenses Severn incurred while handling its
burning property, and Severn’s lost business unambiguously fall
within these itemized categories.
Companies faced with consequential damages limitations in
contracts have two ways to protect themselves. First, they may
purchase outside insurance to cover the consequential risks of a
contractual breach, and second, they may attempt to bargain for
greater protection against breach from their contractual
partner. Severn apparently did take the former precaution – it
has recovered over $19 million in insurance proceeds from a
company whose own business involves the contractual allocation
of risk. But it did not take the latter one, and there is no
inequity in our declining to rewrite its contractual bargain
now.
Severn maintains that the PAA’s consequential damages
exclusion is unconscionable and therefore unenforceable. But
North Carolina courts find contracts unconscionable only when
“no decent, fairminded person would view the [contract’s] result
without being possessed of a profound sense of injustice,” Gas
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House, Inc., 221 S.E.2d at 504 (quoting 14 Williston on
Contracts, 3d Ed., § 1632). And only “rarely” are “limitation
clauses in transactions between experienced businessmen
unconscionable.” Stan D. Bowles Distrib. Co. v. Pabst Brewing
Co., 317 S.E.2d 684, 690 (N.C. Ct. App. 1984). Here, both
parties are experienced businesses, and the contract specifies
that the price paid for IFC’s fumigation service is not high
enough to warrant exposure to consequential damages. A decent
fair-minded person may therefore enforce the parties’ bargain
with conscience intact.
The fact that exculpatory clauses in North Carolina
contracts are “not favored” and must be “strictly construed,”
Fortson v. McClellan, 508 S.E.2d 549, 551-53 (N.C. Ct. App.
1998), does not change our analysis. The whole point of
consequential damages limitations is to lift risk from one
assenting party and transfer it to another. Were this bargain
unconscionable, what limitations on liability would not be?
There is no limiting principle to appellants’ argument. Parties
have no occasion to litigate over contractual provisions
limiting liability, after all, unless their ventures have in
some way gone awry. If courts are too quick to free harmed
parties from the results of their bargains, an erosion of the
law’s respect for consequential damages limitations would
shortly ensue.
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Severn’s argument that the PAA violates North Carolina
public policy is similarly problematic. The federal bench is
hardly the ideal pulpit from which to proclaim North Carolina
public policy. There is no sound basis to invalidate a North
Carolina contract on public policy grounds unless we have a
clear supporting signal from the North Carolina courts. “As the
term ‘public policy’ is vague, there must be found definite
indications in the law of the sovereignty to justify [a federal
court’s] invalidation of a contract as contrary to that policy.”
Muschany v. United States, 324 U.S. 49, 66 (1945). Without this
sense of caution, there would again be no limit to the contracts
we might find policy reasons to invalidate.
Here, it is anything but clear that North Carolina would
invalidate this contract on public policy grounds. True, both
FIFRA and North Carolina law require that phosphine be applied
in a manner consistent with its labeling. 7 U.S.C.
§ 136j(a)(2)(G); N.C. Gen. Stat. § 143-443(b)(3). But the PAA’s
consequential damages limitation is not an agreement which
“cannot be performed without a violation” of these statutes.
Cauble v. Trexler, 42 S.E.2d 77, 80 (N.C. 1947). It is merely a
release from private liability. And neither statute specifies
private liability as a primary means of enforcement. Instead,
federal law provides for a civil fine of up to $5,000 and
possible criminal liability for violations of FIFRA’s
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provisions. 7 U.S.C. § 136l. The North Carolina statute
similarly allows for criminal liability for violations of its
provisions, and also for a civil penalty of not more than $500
against pesticide application businesses when violations are
willful. N.C. Gen. Stat. § 143-469. North Carolina also
delegates regulatory power to a Pesticide Board, N.C. Gen. Stat.
§ 143-461(1), and requires all pesticide applicators to be
annually licensed with that Board. N.C. Gen. Stat. § 143-452.
North Carolina thus furthers pesticide safety by virtue of a
comprehensive statutory and regulatory scheme which does not
prohibit such pesticide application, but rather requires
companies engaging in it to be properly licensed, which IFC
concededly was. Adding restrictions to private contracts on top
of all this risks an unwarranted infringement on the North
Carolina legislature’s own public policy role.
Additionally, in North Carolina, the “consideration [of]
the comparable positions which the contracting parties occupy in
regard to their bargaining strength” is “closely related to the
public policy test.” Hall, 89 S.E.2d at 398. North Carolina
cases invalidating contracts on public policy grounds therefore
rarely involve sophisticated business entities – they instead
usually involve individual consumers or are grounded in
inequalities of bargaining power. See, e.g., Fortson, 508 S.E.2d
at 552 (involving “inexperienced member of the public seeking
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training in the safe use of a motorcycle”); Alston v. Monk, 373
S.E.2d 463, 465 (N.C. Ct. App. 1988) (involving individual
customer subjected to “negligent performance of hair styling and
coloring services” which “caused her to lose her hair”). We are
not presently considering the plight of a vulnerable member of
the public adrift among the variegated hazards of a complex
commercial world. Instead, we are considering a rather typical
agreement among two commercial entities, and we may hold them to
the contract’s terms.
III.
Severn argues that despite its assent to a contractual
consequential damages exclusion, its negligence claims should
still be allowed to proceed. The district court granted summary
judgment to IFC on Severn’s negligence claims on the grounds
that Severn was contributorily negligent in its efforts to fight
the fire after it started. Severn contends that this ruling
ignored material issues of fact, making summary judgment on the
basis of contributory negligence inappropriate. We agree.
We may, however, “affirm the district court’s grant of
summary judgment on any ground in the record.” Jehovah v.
Clarke, 798 F.3d 169, 178 (4th Cir. 2015). Here, we are doubtful
that Severn’s negligence claims survive its contractual assent
to the limitation of its consequential damages. This doubt is
reinforced by the principles inherent in North Carolina’s
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economic loss doctrine, which serves as a barrier to certain
tort claims arising out of facts best considered through the
lens of contract law. We hold that Severn’s negligence claims do
not survive summary judgment.
North Carolina’s economic loss doctrine provides that a
breach of contract does not ordinarily “give rise to a tort
action by the promisee against the promisor.” Ellis v. La.-Pac.
Corp., 699 F.3d 778, 783 (4th Cir. 2012) (quoting N.C. State
Ports Auth. v. Lloyd A. Fry Roofing Co., 240 S.E.2d 345, 350
(N.C. 1978)). More specifically, it “prohibits recovery for
purely economic loss in tort when a contract, a warranty, or the
UCC operates to allocate risk.” Kelly v. Ga.-Pac. LLC, 671 F.
Supp. 2d 785, 791 (E.D.N.C. 2009). In cases arising out of the
sale of failed goods, the economic loss doctrine thus bars
“recovery for purely economic loss in tort, as such claims are
instead governed by contract law.” Lord v. Customized Consulting
Specialty, Inc., 643 S.E.2d 28, 30 (N.C. Ct. App. 2007).
While it originated out of the law of products liability,
North Carolina’s economic loss doctrine is based upon broad
principles. The rationale for the rule is that “parties are free
to include, or exclude, provisions as to the parties’ respective
rights and remedies, should the product prove to be defective”
and that “[t]o give a party a remedy in tort, where the defect
in the product damages the actual product, would permit the
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party to ignore and avoid the rights and remedies granted or
imposed by the parties’ contract.” Moore v. Coachmen Indus.,
Inc., 499 S.E.2d 772, 780 (N.C. Ct. App. 1998). The economic
loss doctrine thus “encourages contracting parties to allocate
risks for economic loss themselves, because the promisee has the
best opportunity to bargain for coverage of that risk or of
faulty workmanship by the promisor.” Lord, 643 S.E.2d at 30.
The principles behind North Carolina’s economic loss
doctrine are applicable to this case, and we are not free to
ignore them. Here Severn claims a remedy in tort for IFC’s
breach of its duty to apply Fumitoxin in accordance with its
label – the very same duty as that underlying Severn’s breach of
contract claim. But Severn chose to bargain away protection for
the consequential damages caused by breach of that duty. Its
negligence claims therefore attempt to undo that bargain through
the vehicle of tort law.
Contrary to Severn’s assertions, moreover, its peanuts and
storage dome were not “other property” outside of the contract
and therefore not subject to the principles of the economic loss
doctrine. The contract was for the treatment of “commodities
and/or space,” and it specified that this included Severn’s
“1,976,503 [c]ubic [f]eet” of peanuts and its Severn, North
Carolina peanut dome. J.A. 46. Severn’s complaint in turn
acknowledges that the Fumitoxin tablets were placed within the
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dome and among the peanuts. The pesticide which allegedly caused
the fire and the peanuts and dome which that fire allegedly
destroyed were therefore at the relevant times both
contractually and practically bound up together.
Like a buyer of goods, Severn had the “best opportunity to
bargain for coverage of [] risk,” Lord, 643 S.E.2d at 30. Yet
Severn in fact made just the opposite bargain, and the economic
loss doctrine counsels that the contract’s allocation of risk in
the event of economic and commercial adversity should be
respected. Because North Carolina’s economic loss principles
prevent Severn from transforming its breach of contract claim
into tort, we affirm the judgment of the district court.
AFFIRMED
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