BAY STATE-SPRAY & PROVINCETOWN STEAMSHIP, INC. vs. CATERPILLAR TRACTOR CO.

WILKINS, J. In 1972 the plaintiff (Steamship), which operates a passenger ferry service between Boston and Provincetown, ordered the ship "Provincetown" built by a shipyard. The shipyard installed engines that had been manufactured by the defendant (Caterpillar). The ship began commercial operation in 1973. On August 17, 1980, while the ship was en route to Provincetown, its main starboard engine malfunctioned. As a result, the ship's operating schedule during the next month was disrupted. Steamship commenced this action in May, 1982, to recover damages for the cost of repair and for lost profits caused by the engine's malfunction. Damages of this type are generally characterized as economic loss. See Marcil v. John Deere Indus. Equip. Co., 9 Mass. App. Ct. 625, 630 n.3 (1980); J.J. White & R.S. Summers, Uniform Commercial Code Section 11-4, at 405 (1980).

At trial Caterpillar contended, among other things, that Steamship's claim was either (a) a tort-based admiralty claim in which economic loss is not recoverable or (b) a contract-based State law warranty action barred by the statute of limitations stated in Section 2-725 of the Uniform Commercial Code (G. L. c. 106 [1986 ed.]). The judge denied Caterpillar's motion for a directed verdict and its motion for judgment notwithstanding the verdict, each of which was based in part on these theories. The jury returned a verdict for Steamship. We granted Caterpillar's application for direct appellate review.

After rejecting Caterpillar's argument that Steamship's claim is a tort claim in admiralty, we turn to the statute of limitations controversy. We must decide which of two statutes of limitation in the Uniform Commercial Code (either Section 2-318 or Section 2-725 of G. L. c. 106) applies in the circumstances. We conclude that the statute of limitations on which Caterpillar relies is the applicable one and that, therefore, Steamship's claim is barred. Our discussion will require an analysis of the unique Massachusetts treatment of G. L. c. 106, Section 2-318, a provision in the sales section of the Uniform Commercial Code, which the Legislature has used to eliminate requirements of privity and to express new principles of strict liability for personal injuries and property damage caused by a seller's breach of warranty in the sale of a product.

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1. Caterpillar argues that, to the extent that Steamship's claim is based in tort, it is governed by admiralty law, and that in admiralty economic loss, when it is the only loss, may not be recovered in a tort-based claim. Although Caterpillar is apparently correct in arguing that a plaintiff may not recover for economic loss in a tort-based products liability claim in admiralty (East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871 [1986]), Steamship's claim is not tort-based. It is a contract-based claim of breach of warranty and is outside admiralty jurisdiction. Id. at 872 n.7. [Note 1] Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F.2d 925, 929 (5th Cir. 1987), cert. denied, 485 U.S. 1007 (1988). That is Steamship's view of its own claim. It was also the trial judge's view, and we agree with it. Caterpillar itself does not argue that we must view Steamship's claim as tort-based but only that, if we were to do so, recovery could not be had in admiralty. The Uniform Commercial Code - Sales G. L. c. 106, Section 2-101 - Section 2-725 [1986 ed.]) governs this case. The principal issue before us is, therefore, which of two arguably applicable statutes of limitation in art. 2 of the Massachusetts Uniform Commercial Code applies to the claim in this case.

2. The conflict between the statutes of limitation can easily be described. Section 2-318, which is set forth in the margin, [Note 2]

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provides a three-year statute of limitations measured from the date the injury and damage occurs. The parties agree that the injury and damage occurred on August 17, 1980, when the allegedly defective engine malfunctioned. Steamship commenced this action in May, 1982. On the other hand, Section 2-725, which is set forth in relevant part in the margin, [Note 3] provides a four-year statute of limitations measured (as applicable in this case) from the tender of delivery of the goods, without regard to knowledge of the breach of warranty. Delivery occurred no later than 1973, approximately nine years before this action was commenced.

Each of the two statutes of limitation literally applies here. As to Section 2-318, this is an action against a manufacturer for breach of an implied warranty, brought by a subsequent purchaser who would have reasonably been expected to use the engine. It was commenced within three years after "the injury and damage occurred." Thus, as Steamship argues, the action was timely. As to Section 2-725, this is an action for breach of a contract of sale. The breach of warranty occurred no later than when the ship was delivered to Steamship, and the cause of action accrued when the breach occurred "regardless of the aggrieved party's lack of knowledge of the breach" (Section 2-725). Thus, as Caterpillar argues, the action was not commenced

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within "four years after the cause of action accrued," and it may not be maintained. [Note 4]

We resolve this conflict by analyzing the nature of Steamship's claim and determining what the Legislature intended to achieve by amendments to Section 2-318. In so doing, we give meaning to each of the seemingly conflicting statutes of limitation. We conclude that the statute of limitations of Section 2-318 applies to tort-based warranty claims and that the statute of limitations of Section 2-725 applies to contract-based warranty claims. As we shall explain, there are meaningful differences between the two kinds of claims, and the Legislature inserted the statute of limitations in Section 2-318 intending it to apply only to tort-based warranty claims.

A claim like Steamship's of a breach of an implied warranty asserted to recover economic loss (the cost of repairs and lost profits) is contract-based, and, in this State when economic loss is the only damage claimed, recovery is not allowed in tort-based strict liability (see Restatement [Second] of Torts Section 402A [1965]) or in negligence. See New England Power Co. v. Riley Stoker Corp., 20 Mass. App. Ct. 25, 35 (1985); Marcil v. John Deere Indus. Equip. Co., 9 Mass. App. Ct. 625, 629-631 (1980). [Note 5] In this respect Massachusetts joins the majority view in this country which is also the view favored by commentators. See East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 868-869 (1986); Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555, 573-575, 581

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(1985); W.L. Prosser & W.P. Keeton, Torts Section 657, at 708 (1984). What makes the Massachusetts situation unique (and our commercial code not uniform in this respect) is the Legislature's imposition of the concept of strict liability in tort into Section 2-318 of the Uniform Commercial Code. Most jurisdictions have kept the two bases of liability separate, leaving for judicial determination the question of where a particular claim for damages falls -- in tort or under a Uniform Commercial Code warranty. See, e.g., Spring Motors Distribs., Inc. v. Ford Motor Co., supra at 577-582.

Tort concepts were introduced into G. L. c. 106, Section 2-318, through amendments adopted well after the enactment of the Uniform Commercial Code in 1957. [Note 6] In 1971 the Legislature greatly relaxed privity requirements in warranty actions and expressly referred to damages for "negligence" (as well as breach of warranty) in an amended Section 2-318. St. 1971, c. 670. [Note 7]

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In 1973 the Legislature inserted a statute of limitations in Section 2-318 requiring an action to be commenced within two years after "the date the ,i>injury occurs" (emphasis supplied). St. 1973, c. 750, Section 1. The act stated that the amendment applied "to injuries which occur" (emphasis supplied) after the effective date of the amendment. St. 1973, c. 750, Section 2. The two-year limitation generally paralleled the tort statutes of limitation then in effect. See G. L. c. 260, Section 2A, inserted by St. 1948, c. 274, Section 2; G. L. c. 260, Section 4, as amended through St. 1968, c. 94, Section 1. This amendment to Section 2-318 by its terms focused on tort-based claims for personal injuries. In 1974, the statute of limitations was extended to three years ("shall be commenced within three years next after the date the injury and damage occurs"). St. 1974, c. 750. Section 2-318 was thus again made to parallel the tort statutes of limitation. G. L. c. 260, Sections 2A and 4, as amended by St. 1973, c. 777, Sections 1 and 3. See Swartz v. General Motors Corp., 375 Mass. 628, 630 (1978). We observed in 1978 that these amendments, taken together, provided "a remedy as comprehensive as that [strict liability] provided by Section 402A of the Restatement" (Second) of Torts (1965). Id. See Back v. Wickes Corp., 375 Mass. 633, 639-640 (1978). Although we declined to recognize a common law tort basis of strict liability based on the principles of Section 402A (Swartz v. General Motors Corp., supra at 631), we recognized "that the duty which [a] plaintiff sues to enforce in a `warranty' action for personal injuries is one imposed by law as a matter of social policy," a tort concept. Back v. Wickes Corp., supra at 640.

The Supreme Court's opinion in the East River case, which has already provided the clear answer to the admiralty question in this case, sets forth strong reasons for recognizing a meaningful distinction between tort recovery for physical injuries and warranty recovery for economic loss. East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871-875 (1986). "When a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong." Id. at 871. The commercial user can protect himself by seeking express contractual assurances

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concerning the product (and thereby perhaps paying more for the product) or by obtaining insurance against losses. A person physically injured by a defective product generally had neither the bargaining power nor the opportunity to bargain with its manufacturer or seller and so could not reasonably provide himself with the same kind of protection that a purchaser of goods could. There is, therefore, a greater justification for placing responsibility on a manufacturer for physical injuries caused by a product not meeting standards imposed by the law than there is in placing broad liability on the manufacturer for economic loss to the product's owner resulting from a defect in the product.

The appropriate statute of limitations to apply to a breach of warranty claim under art. 2 of the Uniform Commercial Code is found by determining the nature of that particular breach of warranty claim. If, as is the case here, the claim asserts a contract-based theory of liability, Section 2-725 (not Section 2-318) furnishes the applicable statute of limitations. See Wilson v. Hammer Holdings, Inc., 850 F.2d 3, 7-8 (1st Cir. 1988) (stating correctly, as to Massachusetts law, "that section 2-318 is designed to cover breach of warranty actions that are in essence products liability actions, and is not designed as an alternative for contractually based warranty claims").

The idea that the substance of a warranty claim should be analyzed in order to determine the rights of parties is not new. See Fernandes v. Union Bookbinding Co., 400 Mass. 27, 39 (1987) (damage for loss of consortium recoverable in breach of implied warranty claim where husband-father sustained personal injury); Wolfe v. Ford Motor Co., 386 Mass. 95, 100 (1982) (defendant liable in negligence may obtain contribution from defendant liable for breach of warranty for same injuries). "[W]e find no magic in the label `warranty' but rather we look to the substantive quality of the claims against [the defendant]." Id.

Beyond the seeming logic of applying the contract-based warranty statute of limitations of Section 2-725 to this case, rather than the tort-based warranty statute of limitations of Section 2-318, is the practical consideration that a contrary approach produces

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an illogical result. If the tort-based rule of Section 2-318 were to apply to a claim such as Steamship's (three years from "the date the injury occurs"), a subsequent purchaser could recover for economic loss occurring years after the allegedly defective product left the manufacturer's control, while under Section 2-725 an original purchaser would be entitled to recovery only for economic loss caused by a defect uncovered during the four years after the sale. [Note 8]

To apply Section 2-725's statute of limitations provision to contract-based breach of warranty claims gives that provision its original meaning. To apply Section 2-318's statute of limitations to tort-based breach of warranty actions carries out the intention underlying the amendments to Section 2-318. Steamship's is a contract-based breach of warranty claim. It is barred by Section 2-725.

The judgment is reversed. The case is remanded for entry of judgment for the defendant Caterpillar Tractor Company.

So ordered.