California's Quest For Harmony and The Advancement of Business Certainty and Uniformity Nationwide

Fortin Law Group

Published: April 16, 2018

This article examines Uniform Commercial Code ("UCC") section 2-725, "Statute of Limitations in Contracts for Sale," which has been adopted and enacted into law in California. The goal of this article is two-fold: (1) to determine whether California's courts have brought harmony between general statutes of limitations and the UCC's statute of limitations and (2) to examine California's impact on the advancement of business certainty and uniformity nationwide.

To achieve its goal, this article explores the conflicts and uncertainty that section 2725 brought about in California. More specifically, the scope of section 2725; whether all sales contracts are governed by section 2725; whether all claims for breach of warranty fall within the purview of section 2725; and the impact of indemnity actions flowing from a breach of warranty. For each of these issues the article examines the section's impact on California law and whether California's courts have resolved these issues. Further, it will analyze whether the California court decisions addressing these issues have advanced or diminished the main purpose of section 2725, which is nationwide uniformity.

It is also important to note that the reasons for or against deciding on the applicability of section 2725 to the issues raised in this article are deserving of a much more thorough discussion. However, again, that is not the goal of this article. The rationale of the decisions addressed in this article will be discussed only as necessary to (1) outline the rationale underlying the courts' holdings; (2) point out relevant issues the court conclusively determined; (3) raise relevant issues that the court failed to decide; and (4) discuss the impact, or lack thereof, of the court's decision in advancing business certainty and uniformity nationwide.

II. Purpose and Reason for Adoption of UCC ยง 2-725

The UCC, which is a joint project of the National Conference of Commissioners on Uniform State Laws and the American Law Institute, was created to eliminate jurisdictional variations and thus bring about uniformity in the law to all those "doing business on a nationwide scale." The UCC, of course, is not law until the legislature of each individual State adopts the provisions of the UCC and enacts them into law in their respective States.

In 1963, California adopted certain provisions of the UCC into law as the California Commercial Code (hereinafter "Code"). Section 2725 was deliberately omitted and not included in the Code at that time. The California State Bar Committee opined that section 2725 would conflict with the statutes of limitations in California for written contracts (four years) and oral contracts (two years) by establishing a four-year period for all actions for breach of a sales contract. Thus, although California desired to promote nationwide uniformity, it also wanted to avoid creating uncertainty in its own laws. Therefore, California initially resisted and did not adopt section 2725.

In 1967, section 2725 was added to the Code. The main purpose of this section, and its reason for adoption into the Code, is to promote "a uniform statute of limitations for sales contracts . . . [for those] doing business on a nationwide scale." The Code's comment further provides that this section "takes sales contracts out of the general [statutes of limitations] and selects a four year period as the most appropriate to modern business practice." Thus, despite an initial concern that section 2725 would create some conflict or uncertainty within California, this section was adopted because the desire for nationwide uniformity outweighed the local concerns. In enacting section 2725, California's courts were left with the task of grappling to bring about harmony between section 2725 and other California statutes.

From 1967, when section 2725 was added to the Code, until 1974 there were no reported judicial opinions citing 2725. At that time, in Hachten v. Stewart, the court stated that section 2725 was "one of the overlooked statutes" in California and it still might be.

III. Ambit of ยง 2725- Sales Contracts Only

For purposes of this article and to fully grasp the discussions concerning the applicability of section 2725 it is important to make clear that the applicability of section 2725 is limited to actions based only on "contracts for sale". Even more important is the need to define exactly what is within the ambit of "contracts for sale".

The first limitation to the applicability of section 2725 is the requirement that the action arise out of a contract. California's Commercial Code defines a "contract" as "the total legal obligation that results from the parties' agreement." Without a discussion of Contracts 101, section 2725 applies to actions based upon a fully enforceable contract. However, it will be discussed in the following section whether how the contract was formed, i.e., expressly or by implication, has any bearing on the applicability of section 2725.

The second limitation is the requirement that the contract be a "contract for sale." A contract for sale "includes both a present sale of goods and a contract to sell goods at a future time." Therefore, the dispute must pertain to goods that were actually purchased and sold.

This brings us to the last limitation, which requires that the product must qualify as "goods." "Goods" are defined as "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale . . . [including] the unborn young of animals and growing crops and other identified things attached to realty . . . ." By its definition "goods" excludes services, real property, and non-tangible things. Thus, for section 2725 to apply the action must have arisen from a contract for the present or future sale of goods, as defined by the UCC.

IV. Written, Oral, or Implied Contracts - All Four Years to File

It was appropriate for the first reported judicial opinion to address the one conflict that the Legislature anticipated and used as its reason for not adopting section 2725 into the Code in 1963.

In Hachten, defendants filed a summary judgment motion on grounds that the plaintiff's action was barred by the two-year statute of limitations relating to contracts not in writing. Plaintiff opposed the motion arguing that the action was brought timely within the four-year statute of limitations relating to contracts made in writing. The trial court granted defendants' summary judgment motion.

On appeal, the court was asked to determine whether the statute of limitations for breach of a contract for the sale of gasoline was either two years (oral contracts) or four years (written contracts). The court held that the statute of limitations was in fact four years. However, it also held that the applicable statute of limitations for such an action was section 2725 of the Code and not section 337 of the California Code of Civil Procedure.

Although the court did not explain how it concluded that the contract was a "sales contract," a close reading of Hachten reveals that the court held section 2725 to apply because it found it to be a "contract for sale." Therefore, the court held that in California any action based on "contracts for sale" can be filed within four years of accrual, whether the contract is written or oral. This holding furthers the legislative intent to take "sales contracts out of the general laws limiting the time for commencing contractual actions."

Five years later it was also determined that the four-year limitations period of section 2725 of the Code applied to contracts implied by the operation of law. While it may appear at first glance the decision reached was logical and simple, the decision did not come easy. The issue before the court in essence was whether an implied in law contract fell within the ambit of section 2725.

As discussed above, section 2725 applies only to "contracts for sale" as defined by the Code. The problem with an implied in law contract is that it is one that arises out of the operation of law and not one that "results from the parties' agreement." This would seem to take all implied in law contracts out of the purview of section 2725.

However, further clarity was found in the definition of the term "agreement" under the Code, since section 2725 required that the contract result from an "agreement" of the parties. The Code defines "agreement" as "the bargain of the parties in fact, as found in their language or inferred from other circumstances . . . ."

Focusing on that language, the court found that the "drafters contemplated agreements which could be implied other than in fact." Finding further support for its decision, the court noted that the Code is to be "liberally construed," that the literal use of the words "any contract for sale" includes those implied in law, and that "a broad reading of Hachten supports" the decision to apply section 2725 to implied in law contracts. Finally, the court believed that its holding "would promote business certainty and uniformity" to those who engaged in sales transactions.

Therefore, in California all actions for breach of "contracts for sale" fall within the purview of section 2725, whether the contracts are in writing, oral, or implied.

A. Uniformity Issues

As would be expected, there are no reported cases from any jurisdiction holding that actions based on sales contracts, whether made in writing or verbally, are not within the purview of section 2725. However, not all jurisdictions have agreed on, or even addressed, whether the limitations period set forth in section 2725 governs actions based on implied-in-law sales contracts.

In 1979, when the California court ruled that implied-in-law contracts fell within the purview of section 2725, only one other court had addressed this issue. In 1975, a Pennsylvania trial court was faced with a suit in quasi-contract. The court ruled that section 2725 did not apply to quasi-contract actions. The court supported its decision by finding that to fall within the purview of section 2725 the UCC required the contract upon which the suit was based to be the result of the parties' agreement. Quasi-contracts did not result from the parties' agreement, but rather from the operation of law, and thus fell outside of the ambit of section 2725.

With no other jurisdictions reporting a decision that addressed this very same issue, California created a split in authority. The coveted uniformity was nowhere in sight. In 1983, the split became more pronounced when another Pennsylvania court again held that "an action upon an implied-in-law contract is subject to" the general statute of limitations, and not section 2725.

Uniformity would soon follow. The California decision would prove to be the direction in which the majority of jurisdictions ultimately decided the issue before them. In 1980, the federal district court of New Jersey held that section 2725 applied to several counts stated in a complaint, including causes of action stated both in terms of contract and tort claims. In so holding, the district court reasoned that the allegations stated in the complaint "were not so distinct from actual contract for sale of goods as to render inapplicable the statute of limitations relating to actions for breach of contract." The court further stated that the allegations were inadequate to sustain separate tort claims, and causes of action based thereon were governed by section 2725.

More than ten years later the Court of Appeals of Oklahoma, reviewing the applicability of section 2725 to an action in assumpsit, "a contract implied in law," stated: "We find Russell Taylor . . . and Food Town . . . persuasive and adopt their reasoning. In addition, this result serves to promote the purpose of clarifying and making uniform the rules for settling disputes between those who came together as the result of commercial transactions."

Finally, in 2003, a New York trial court first faced the issue of whether implied-in-law contracts fell within the purview of section 2725. The court, ruling on a motion for summary judgment, held that section 2725 applied to all actions arising from a sales transaction and that plaintiffs would not be allowed to circumvent section 2725 by pleading common counts rather than a breach of contract claim. The New York court, in support of its holding, cited cases in several jurisdictions that had previously held section 2725 to govern similar actions. The court further reasoned that its holding advanced the purpose of the UCC which was to bring about uniformity of law for those engaging in sales transactions.

Thirty years later, California's holding in H. Russell Taylor and its belief that the holding would promote certainty and uniformity in business sales transactions would prove to be correct. The court masterfully brought about harmony between competing statutes of limitations within California. Ultimately, it was able to promote the purpose of the UCC uniformity nationwide.

V. Breach of Warranty - Contract or Tort Action

Determining whether an action for breach of warranty is a contract or tort action has proven to be pivotal in determining the length of time a plaintiff has to file its lawsuit. California was no exception. California's decision in Becker v. Volkswagen of America appears to have drawn this line, but it failed to clearly define it. In Becker, plaintiff filed an action for breach of warranty, seeking to recover for the personal injuries he sustained resulting from a defective vehicle manufactured by defendant. The court held that personal injury actions based upon breach of warranty were not governed by the statute of limitations set forth in section 2725 of the Code. Instead, the court held that the two-year statute of limitations for personal injury actions applies to these types of actions. In so holding, it became apparent that section 2725 would not be the applicable statute of limitations on all actions based on a breach of warranty.

So when does section 2725 apply? Unfortunately, the Becker opinion only conclusively determined that personal injury actions were not governed by section 2725. However, the opinion seems to suggest that the applicability of section 2725 depends on whether the action is one in contract or tort. Presumably, the section's four-year limitations period applies to all contract actions for breach of warranty and all tort actions for breach of warranty are governed by other California statutes. Logically, the next inquiry is what qualifies as an action in contract or tort for breach of warranty. With the exception of personal injury actions, California courts have not addressed this issue head on.

Fortunately, the court in Becker did provide some guidance and insight as to how future courts may resolve this issue. In Becker, citing Dean Prosser, the court stated that the UCC contemplates only two breach of warranty claims; those "based on economic loss or loss-of-the-bargain." However, such opinion ignores the fact that UCC section 2-715, which has been adopted in California, explicitly provides that recovery may be had for "[i]njury to person or property proximately resulting from any breach of warranty."

Relying on a decision from the Supreme Court of New Jersey, the court in Becker dismissed Code section 2715, subdivision (2)(b), stating that "when the gravamen is a defect in the article and consequential personal injury and property damages are sought, they will be [governed by the statute of limitations for tort actions], no matter how [the claim is] expressed." Therefore, Becker and Carrier Corp. pose the proposition that breach of warranty actions seeking purely economic and/or loss-of-the-bargain damages are based in contract and governed by section 2725. On the other hand, breach of warranty actions seeking personal injury and/or property damages are based in tort and outside of the ambit of section 2725. Unfortunately, the California Supreme Court has not addressed this issue.

Even if the proposition stated in Becker and Carrier Corp. is to be taken as a conclusive determination of California's law relating to the applicability of section 2725, it raises yet another issue. How does one distinguish between a tort property damage claim and a claim where the property damage is nothing more than economic loss or loss of the bargain? As stated before, the issues relating to tort versus contract or property damages versus economic loss have not been clearly defined by California courts. Thus, this may prove to be an area left open for nifty lawyers.

A. Uniformity Issues

In 1975, when California's decision to deny the applicability of section 2725 to breach of warranty actions seeking damages for personal injuries was made, several other jurisdictions had already decided this issue. Between those jurisdictions there was a split in authority. Alaska, Illinois, Oregon, Pennsylvania, Tennessee and the 6th Circuit all have held that the UCC's four-year statute of limitations controlled all actions for breach of warranty. Ohio, the District Court of Virginia, Connecticut, New Jersey, and now California all have held that the UCC's four-year statute of limitations did not govern breach of warranty actions seeking damages for personal injuries.

As the court in Becker noted, the jurisdictions which adopted the UCC as controlling in all breach of warranty claims almost uniformly reasoned that the UCC "changed the law and rendered the Code's four-year statute of limitations controlling." These courts also viewed the language of the section as "clear and unequivocal" in that it was intended to apply to all "actions for breach of any contract for sale." Therefore, these courts concluded that the legislative intent must have been to make section 2725 the statute governing all "actions based upon a breach of warranty."

Conversely, the court in Becker noted that the reasoning of the authorities opposing the application of section 2725 to breach of warranty actions for personal injuries were not at all uniform. For example, in Ohio the court decided that section 2725 does not apply where privity is lacking. Virginia, relying on its earlier decision in a non-UCC case, "held that the statute of limitations applicable to personal injury actions . . . governed all personal injury actions regardless of whether they were based upon tort or contract." The California court did not find either of these opinions persuasive, although it ultimately agreed that the UCC did not apply to personal injury actions even if based on a breach of warranty.

California adopted the approach taken by the courts in Connecticut and New Jersey. California agreed that an action for personal injuries based upon breach of warranty "is essentially a tort action." Thus, all three cases concluded that if a defective product causes injury to another, the action is to be governed by the tort laws pertaining to strict liability and not by the UCC.

Today, there continues to be a split in authority. However, the more serious problem is that this is not a case where two fundamental opposite views collide. Rather, there are at least three categories into which all jurisdictions can be divided based on their holdings in deciding whether or not the UCC applies to all breach of warranty claims:

(1) those holding that 2-725 applies to all breach-of-warranty actions regardless of whether personal injury damages are sought . . .; (2) those holding such actions should be subject to non-U.C.C. limitations . . .; (3) and those that apply the U.C.C. limitation only if privity exists between the plaintiff and the defendant . . . .

Unlike the court in H. Russell Taylor, the Becker court was not successful in resolving the conflict within California while promoting uniformity nationwide. Of course, it is unfair to blame Becker for the lack of uniformity since the split in authority existed prior to its decision. However, Becker failed to explain how its decision would advance certainty and uniformity nationwide. Additionally, as previously discussed, Becker left several other questions within California unresolved.

VI. Seeking Indemnity for Breach of Warranty - Does ยง 2725 Apply?

A related inquiry that the court in Carrier Corp. resolved is whether an action for "indemnification" for breach of warranty also falls within the ambit of section 2725. The court held that "in a case involving indemnification for damages under express or implied warranty based on a sales contract, the traditional time limitations for commencement of actions will prevail over . . . section 2725." There are traditional statutes of limitations for actions seeking indemnification of damages arising from an express or implied contract.

The decision in Carrier Corp. is significant because under section 2725 the limitations period begins to run from the date of delivery of the product, whereas under general statutes of limitations the limitations period does not begin to run at least until the problem has been discovered or should have been discovered. The result is that the buyer of the product will likely have a much longer period of time in which to seek remedy for a wrong by pleading an action for indemnity, if the facts permit, as opposed to a simple breach of warranty action, as was the case in Carrier Corp.

The decision in Carrier Corp. appears to allow buyers "to 'plead around' section 2725 . . . by [simply] asking for indemnification." It also appears to defeat "the legislative intent" to take "sales contracts out of the general laws limiting the time for commencing" actions. However, the court supported its decision by finding claims for indemnity to be "separate substantive cause[s] of action, independent of the underlying wrong." The court further reasoned that the mere fact that indemnity actions stem from a breach of warranty, under a sales contract, "does not alter the general Statute of Limitations rules." Therefore, in California, actions seeking indemnity for breach of warranty do not fall within the ambit of section 2725 and are governed by other general statutes of limitations.

A. Uniformity Issues

As noted above, deciding whether section 2725's four-year statute of limitations applies to an action for indemnity is very significant. If section 2725 applies, the action will be barred if it was filed more than four years after the product was delivered to the plaintiff. If section 2725 does not apply, an action filed more than four years after the date of delivery might be timely depending on when the action for indemnity accrues in the jurisdiction where the action was filed. Not surprisingly, by the time this issue was brought before the courts in California in 1993, there was a split in authority among other jurisdictions.

Georgia, Utah, Idaho, and South Dakota held that section 2725 governed indemnity actions based on breach of warranty. All of these jurisdictions commonly held that section 2725 "will bar indemnity claims based on breach of warranty if those claims were brought more than four years after delivery."

Georgia, without much discussion, made clear that an action for indemnity based on an alleged breach of warranty was a "contract claim." Therefore, section 2725 was the governing statute of limitations which barred the claim because it was filed more than four years after the date of delivery.

On the other hand, Utah and Idaho recognized that generally indemnity actions do not accrue until actual damage has been suffered. However, both of these jurisdictions approached the problem by way of traditional statutory construction. In doing so, both Utah and Idaho found that section 2725 was a statute meant to be of "ultimate repose." Thus, Utah's court stated that "by its terms, [section 2725] appears to override the general rule regarding indemnity actions." Similarly, the Idaho court stated that

Application of the general indemnity rule (statute of limitations does not begin to run until liability attaches to indemnitee) would contradict the legislature's specific directive, in cases involving the sale of goods, by extending beyond four years the time in which an action may be brought.

South Dakota joined these jurisdictions in applying section 2725 to such actions for indemnity. However, South Dakota's court did leave open the possibility that a party who seeks indemnity for liability, resulting from a breach of warranty might be able to file its action, even if otherwise barred by section 2725, whenever "equity so mandates."

Conversely, New York, North Carolina, Maine, Missouri, New Hampshire, Maryland, and Nebraska all held that actions for indemnity based on breach of warranty were outside of the ambit of section 2725. The rationale of these jurisdictions is uniform, with only a disagreement as to when an action for indemnity accrues. The leading case is McDermott v. City of New York.

In McDermott, the court stated that the roots of an action for indemnity are found in the principles of equity. Therefore, to do justice, indemnity requires that liability be placed on the party who first owed a duty to the person that ultimately discharged the duty to another. Based on these principles the court found that an "indemnity claim is a separate substantive cause of action, independent of the underlying wrong." Finally, it appears that all of these courts, which have followed McDermott, agree that "in applying the equitable principles of indemnification," indemnity must be permitted in all instances where there is a breach of duty, regardless of the underlying wrong. On this reasoning, these courts have concluded that an action for indemnity is governed by other general statutes of limitations.

Sixteen years later, the split in authority is as pronounced as ever. It has left the business world as uncertain and divergent as ever before. Here, again, the jurisdictions can be placed in one of three main categories: (1) those jurisdictions holding that section 2725 is a statute of "ultimate repose" that takes indemnity actions based upon sale contracts out of the general statutes of limitations; (2) jurisdictions holding that section 2725 applies, except where the principles of equity requires otherwise; and (3) jurisdictions holding that actions for indemnity are separate substantive causes of action and not within the purview of section 2725.

The third and final category may be broken down into two sub-categories, i.e., those holding that the indemnity accrues only when liability has been imposed for the underlying wrong versus those holding that it accrues when the potential for liability is, or should have been, discovered. In short, the savvy use of indemnity has left a gap as wide as the Pacific Ocean in the quest to achieve business certainty and uniformity nationwide.

VII. Conclusion

While California's courts have made large strides toward achieving complete harmony between the UCC's four-year statute of limitations and its other general statutes of limitations, the quest has not yet ended. For example, the court must still clearly define which actions for breach of warranty will be treated as those based in tort or contract law. Moreover, the California Supreme Court has yet to weigh in on any of these issues. Lacking a Supreme Court decision leaves the door open for crafty lawyers to change the landscape of California's law. Conceivably, a California Supreme Court decision, if well reasoned, can be influential in bringing uniformity nationwide.

While California has not been the first to render a ruling on the issues addressed in this article, its rulings have been influential in one way or another. California's decision in H. Russell Taylor was key in advancing the main purpose of the UCC, which is to bring business certainty and uniformity nationwide. The decisions in Becker and Carrier Corp. have only made the split of authority among the jurisdictions more pronounced and muddled.

This article was provided by Fortin Law Group, Costa Mesa, California. This article is intended to provide the reader with general information regarding current legal issues. It is not construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters.

Tags: 2018, Business, Contracts, General Liability

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