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ARGO WELDED PRODS. v. J. T. RYERSON STEEL & SONS

December 16, 1981

ARGO WELDED PRODUCTS, INC.
v.
J. T. RYERSON STEEL & SONS, INC.; ARGO WELDED PRODUCTS, INC. v. BRANDYWINE MACHINE COMPANY, INC.



The opinion of the court was delivered by: LUONGO

The facts of this case are relatively simple. In early May 1979, after informal telephone discussions, Argo agreed to buy and Ryerson agreed to sell eight 304L stainless steel rings for a specified price. Ryerson was not aware of it, but Argo intended to use this material to satisfy an order it had recently received from its most significant customer, Ingersoll-Rand Company (Ingersoll-Rand). On May 15, 1979, Argo mailed a purchase order to Ryerson confirming the basic transaction. The Argo purchase order apparently did little more than restate the nature and quantity of the materials sought, the price, and a requirement that Argo be furnished with test certificates from the mill which produced the steel. *fn2"

 At the time it received Argo's order, Ryerson did not have in stock the necessary raw materials. It purchased the desired steel from Bramco, another steel warehouse. Bramco delivered the steel to Ryerson with the corresponding mill test reports, and Ryerson, in turn, shipped the steel from its warehouse in Pennsylvania to Argo in New Jersey on June 26, 1979. Shortly after receiving the steel, and apparently without having made an inspection, Argo fabricated the material to Ingersoll-Rand's specifications.

 In early July, Argo delivered the fabricated steel and mill test certificates to the Turbo Products Division of Ingersoll-Rand in New Jersey. Ingersoll-Rand tested the material a few weeks after delivery and determined that it was not 304L stainless steel. Argo was notified and, in September 1979, Argo and Ingersoll-Rand agreed to have the material tested by two independent outside laboratories. The test results confirmed that the material was not 304L stainless. The Turbo Products Division of Ingersoll-Rand then cancelled its order and refused to do business with Argo for approximately one year. Argo alleges that as a result, it not only lost $ 12,591 on the order, but also lost $ 300,000 worth of potential business from the Turbo Products Division. *fn3" To recover these losses, Argo instituted the present action against Ryerson and, upon learning that Bramco had supplied the steel to Ryerson, commenced a separate action against Bramco. On January 23, 1981, I ordered that the actions be consolidated for all purposes. Each of Argo's complaints states two causes of action, one in assumpsit for breach of contract and the other in trespass for negligently supplying it with nonconforming goods. *fn4" Exemplary damages are sought under the second cause of action.

 ARGO'S NEGLIGENCE CAUSE OF ACTION

 There is no dispute, for purposes of this motion, to the facts as stated thus far. The defendants argue in their joint motion that, on these facts, they are entitled to summary judgment in their favor on Argo's cause of action in negligence and claim for exemplary damages. Defendants' argument rests upon their assertion that Pennsylvania law does not permit recovery in negligence for purely economic loss. They contend that Argo's remedies are governed by article 2 of the Pennsylvania Uniform Commercial Code, 13 Pa.Cons.Stat. §§ 2101, et seq. *fn5" Argo does not dispute defendants' interpretation of Pennsylvania law, but argues that, under Pennsylvania choice of law principles, a Pennsylvania court would apply New Jersey law with respect to all legal issues in this lawsuit.

 The parties agree that Pennsylvania's choice of law rules apply in this diversity action. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). Application of the correct choice of law rule, however, very often implicates the problem of characterizing correctly the nature of the choice of law question involved. Fortunately, that problem is not present here because Pennsylvania applies the same flexible choice of law methodology to conflicts questions involving tort, contract or sales. *fn6" This approach "takes into account both the grouping of contacts with the various concerned jurisdictions and the interests and policies that may be validly asserted by each jurisdiction." Melville v. American Home Assurance Co., 584 F.2d 1306, 1311 (3d Cir. 1978).

 Before undertaking application of this flexible approach, it is essential to examine the applicable law of Pennsylvania and New Jersey to determine whether Argo would be allowed to pursue its negligence cause of action in either jurisdiction. Applying the same reasoning as in my opinion in Iron Mountain Security Storage Corp. v. American Specialty Foods, Inc., 457 F. Supp. 1158 (E.D.Pa.1978), it is evident to me that Pennsylvania would not permit any tort recovery in this case. If any duties to Argo have been breached, they were, under Pennsylvania law, purely contractual. Tort recovery is allowed, if at all, solely to recompense breaches of social obligations. See Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1169 (3d Cir. 1981); Iron Mountain Security Storage Corp., supra, at 1165. It can be readily determined from even the most cursory examination of Argo's complaints that the duties defendants are alleged to have breached extended to no one other than Argo. I conclude, therefore, that if Pennsylvania law is applied, Argo cannot recover in negligence. Moreover, Pennsylvania does not permit recovery of punitive damages in an action for breach of contract. Hoy v. Gronoble, 34 Pa. 9 (1859); Narrowsburg Lumber Co. v. Hopkins, 287 Pa. Super. 70, 429 A.2d 724 (1981).

 Although Argo contends that New Jersey law applies, it cites no authority for the proposition that an action in negligence may be maintained to recover damages for economic loss alone. I am aware that New Jersey is within a small minority of jurisdictions which, in very limited circumstances, permits a party to recover in tort for loss of bargain. *fn7" See Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965); Monsanto Co. v. Alden Leeds, Inc., 130 N.J.Super. 245, 326 A.2d 90 (Law Div.1974). See also Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F.2d 280, 285-87 & n.13 (3d Cir. 1980). However, I am not aware of any New Jersey precedent either permitting or prohibiting a party from proceeding in negligence to compensate for a commercial injury. *fn8" New Jersey law is clear with respect to one element of Argo's negligence cause of action; it would not permit Argo to recover punitive damages in this case under any theory. See Sandler v. Lawn-A-Mat Chemical & Equipment Corp., 141 N.J.Super. 437, 358 A.2d 805 (App.Div.1976). In Sandler, the court held that "(w)here the essence of a cause of action is limited to a breach of a (commercial) contract, punitive damages are not appropriate regardless of the nature of the conduct constituting the breach." Id. at 449, 358 A.2d 805. No detailed analysis is needed to conclude that the "essence" of Argo's negligence claims is founded on a breach of contract. Moreover, it is of no help to Argo's position that it alleges that the defendants' actions constituted wanton and willful misconduct. For as the Sandler court observed:

 
The additions of such stylized labels as "malice" and "maliciously" in the pleadings and pretrial order do not transform the essence of the action into a tortious wrong. Regardless of these labels, plaintiffs' grievance is founded upon the breach of contract between the parties-a contract which creates no special relationship or duty beyond that arising out of any commercial transaction. As such, punitive damages are not recoverable against the breaching party.

 Id. at 451, 358 A.2d 805. There is, therefore, no conflict between Pennsylvania and New Jersey law with respect to Argo's claim for exemplary damages. Neither permits recovery.

 On the basis of the broad language in Sandler, supra, I would predict, were it necessary for me to do so, that New Jersey would not permit Argo to pursue its negligence cause of action to recover even compensatory damages. Because I believe that an application of Pennsylvania's choice of law rules leads to the conclusion that Pennsylvania would apply its own law to this issue, I need not make such a forecast. Examining the jurisdictional contracts, Ryerson and Bramco are both Pennsylvania corporations. All aspects of the agreement between them were concluded and performed in Pennsylvania. On the other hand, Argo, a New Jersey corporation, initiated the dealings with Ryerson by telephoning its order to Ryerson in Pennsylvania. Ryerson concluded these dealings by shipping the alleged nonconforming goods to Argo in New Jersey. Argo urges me to count the contacts and find that the contacts with New Jersey are more numerous, *fn9" but application of modern choice of law principles involves more than the mere counting of contacts. Indeed, counting contacts in this case resolves little, if anything. The proper approach is to weigh these contacts in light of the interests which New Jersey and Pennsylvania have in ensuring that their own law is applied.

 Assuming, arguendo, that New Jersey recognizes a cause of action in negligence to recover for economic loss, New Jersey obviously has an interest in compensating Argo, a New Jersey corporation, for any injury it may have suffered as a result of defendants' breach of duty. Likewise, Pennsylvania has an interest in protecting commercial transactions negotiated within its borders by ensuring that damages for breach are limited by the scope of the parties' agreement. See Iron Mountain Security Storage Corp., supra, at 1165. Balancing these interests, Pennsylvania's interest in preserving freedom of contract is paramount. Pennsylvania's interest would be completely defeated if New Jersey law were applied. Application of Pennsylvania law, on the other hand, would not defeat New Jersey's compensatory interest. Moreover, since New Jersey would not allow Argo to recover punitive damages in this case, I conclude that New Jersey's compensatory interest is weak in relation to Pennsylvania's interest.

 There is an additional reason for rejecting Argo's contention that New Jersey law applies to its negligence cause of action. For the purpose of analysis, I have assumed that New Jersey would recognize Argo's negligence claim. Because New Jersey's law on the subject is, in fact, unknown or unclear, that arguendo assumption must give way to Pennsylvania's choice of law presumption that New Jersey and Pennsylvania law are in accord. Melville v. American Home Assurance Co., supra, at 1308; In re Trust of Pennington, 421 Pa. 334, 340, 219 A.2d 353, 356 (1966). Accordingly, summary judgment must be granted in favor of defendants on Argo's causes of action in negligence and claims for punitive damages.

 ARGO'S ASSUMPSIT CAUSE OF ACTION

 On its breach of contract claims, Argo seeks to recover consequential damages in the amount of (1) $ 12,591 for loss of revenue from cancellation of the Ingersoll-Rand purchase order; (2) $ 300,000 for the loss of the Turbo Products Division as a customer for approximately one year; and (3) $ 1,200 for expenses incurred in restoring customer goodwill. Defendants have moved for partial summary judgment, contending that (1) as a matter of Pennsylvania law, damages for loss of customer goodwill are not recoverable in an action for breach of contract or ...


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