Indiana Law Review


Vertical Privity and Damages For Breach of Implied
Warranty Under the U.C.C: It's Time for Indiana to

Abandon the Citadel

Harold Greenberg*

I. Introduction

A woman is injured when her daughter accidentally drops a container
of drain cleaner, the container breaks, and its contents splash and burn

the woman's legs, allegedly because the goods had not been adequately

packaged by the manufacturer.^ A couple purchases a mobile home from
a dealer, only to discover after they move in that it is riddled with
what are allegedly manufacturing defects and that the dealer has gone

out of business.^ A farmer purchases a planting machine from an au-
thorized dealer of the machine's well-known manufacturer. The machine

does not plant properly, allegedly because of manufacturing defects, and

the farmer loses much of the season's crop.- In each of these implied
warranty cases, the plaintiffs who suffered personal or economic injury,
allegedly caused by goods which were unmerchantable when they left
the hands of the manufacturer, were precluded from pursuing the man-

ufacturer because of the absence of privity of contract between the

respective plaintiffs and the particular manufacturer. Under present In-

diana law, this result is required no matter how meritorious the claim
may otherwise be.

It is the hypothesis of this article that in cases based on breach of

implied warranty under the Uniform Commercial Code, the concept

known as 'Vertical" privity, the absence of which prevents an injured
buyer from recovering from a remote manufacturer or other remote

seller, is an outmoded, artificial barrier which should, at long last, be

abandoned.^ EHmination of the vertical privity requirement does not

mean automatic victory for each of these or any other plaintiffs, nor
would it cause manufacturers to be insurers or prevent them from limiting

Associate Professor of Law, Indiana University School of Law-Indianapolis. A.B.,

Temple University, 1959; J.D., University of Pennsylvania, 1962.

'Lane v. Barringer, 407 N.E.2d 1173 (Ind. Ct. App. 1980).

^Candlelight Homes, Inc. v. Zornes, 414 N.E.2d 980 (Ind. Ct. App. 1981).

'Dutton V. International Harvester Co., 504 N.E.2d 313 (Ind. Q. App.), transfer
denied (1987).

''The obsolescence of requiring privity in warranty cases also calls for abandoning

the similar concept of '^horizontal" privity, but that action is not the main focus here.

See the discussion of horizontal privity infra note 30 and accompanying text.

23



24 INDIANA LAW REVIEW [Vol. 21:23

their exposure pursuant to the Uniform Commercial Code. It would,

however, allow injured plaintiffs to present their cases, to prove that

warranties were made and breached, and to recover any appropriate

damages caused by that breach from the party directly responsible for

and best able to prevent that breach: the manufacturer, while at the

same time promoting judicial efficiency.

II. Privity: An Overview

A. The Meaning of Privity

The term, "privity of contract," is a legal term which has been

much used, purportedly understood by everyone, but not often defined
clearly, if at all. By 1931, the requirement of privity between a plaintiff
and a defendant in an action based on an alleged breach of warranty

had became so firmly entrenched in the law that it earned the description

of being a "citadel."^ This citadel of privity has since been described

as being under assault,^ having fallen,'^ in hasty retreat,^ crippled,^ de-

caying, ^° "razed in many states,"^* "still standing, "'^ and possibly "only
a historic relic in the year 2000."^^

In Indiana, as elsewhere, some parts of the citadel have fallen

completely.'"^ With respect to actions for breach of implied warranty

^Ultramares Corp. v. Touche, 255 N.Y. 170, 180, 174 N.E. 441, 445 (1931). Justice

Cardozo is credited with coining this description in Ultramares (which involved the liability

of accountants to non-clients with whom the accountants had not dealt but who had
relied on financial documents negligently or fraudulently prepared by those accountants

for clients). See H. Pratter & R. Townsend, Indiana Uniform Commercial Code with
Comments 47 (1963); Prosser, The Assault upon the Citadel (Strict Liability to the
Consumer), 69 Yale L.J. 1099 (1960) [hereinafter The Assault].

^Ultramares, 255 N.Y. at 180, 174 N.E. at 445 ("The assauh upon the citadel of

privity is proceeding these days apace."); Prosser, The Assault, supra note 5.

'Prosser, The Fall of the Citadel (Strict Liability to the Consumer), 50 Minn. L.

Rev. 791 (1966) [hereinafter The Fall].

*J. White & J. Summers, Handbook of the Law under the Uniform Commercial
Code § 11-7 (2d ed. 1980) [hereinafter White & Summers].

'Special Project, Article Two Warranties in Commercial Transactions, 64 Cornell
L. Rev. 30, 255 (1978) [hereinafter Special Project].

'°3 A. Squillante & J. Fonseca, Williston on Sales § 22-5, at 169 (4th ed. Supp.
1987) [hereinafter Williston on Sales].

•'2 Am. L. Prod. Liab. 3d § 21:4 (1987).
'^/c/. § 21:5, See Edmeades, The Citadel Stands: The Recovery of Economic Loss

in American Products Liability, 27 Case W. Res. L. Rev. 647 (1977).
'^White & Summers, supra note 8,
^^See infra notes 39-44 and accompanying text.



1988] VERTICAL PRIVITY 25

under Article 2 of the Uniform Commercial Code,'^ however, the citadel

remains unaffected. Indiana courts continue to hold that a plaintiff

cannot recover from a defendant for breach of implied warranty under

Article 2 unless there is privity between them.'^

What, then, is privity, how did it develop, and what does it require?

Privity, in the law of contracts, is merely the name for a legal
relation arising from right and obligation. . . . [It] is but a

descriptive term, designating effect rather than cause. In short,

privity of contract is legal relationship to the contract or its

parties. To affirm one's right under a contract is therefore to
affirm his privity with the party hable to him.^^

Stated somewhat differently, "Privity of contract is the relation that

exists between two contracting parties, and in cases of defective products

this privity of contract is usually between buyer and seller."'^

Privity of contract is a court-created requirement which relates back

to a leading British case of the last century, Winterbottom v. Wright.^^

'The Uniform Commercial Code [hereinafter the Code or the U.C.C] appears in
the 1982 Indiana Code at sections 26-1-1-101 through 26-1-10-106. Article 2, Sales, appears

in the 1982 Indiana Code at sections 26-1-2-101 through 26-1-2-725. Unless the Indiana

text of the Code differs from the 1978 Official Text as promulgated by the Conference

of Commissioners on Uniform State Laws and the American Law Institute, further citations
to the Code will use the official, generic section citation form rather than the Indiana

citation form. In the event there is difference between the two texts, the Indiana Code

citation will be used to note the text applicable in Indiana.

'The most recent pronouncements are Dutton v. International Harvester Co., 504

N.E.2d 313 (Ind. Ct. App.), transfer denied (1987), and Prairie Prod., Inc., v. Agchem
Div.-Pennwalt Corp., 514 N.E.2d 1299 (Ind. Ct. App.), reh'g denied (1987). In Dutton,

the court of appeals affirmed summary judgment in favor of a manufacturer with whom
the buyer of a planting machine did not have privity for purposes of enforcing the implied

warranty of merchantability granted under U.C.C. § 2-314 (1978). In Prairie Production,

which involved a breach of express warranty, the court reiterated the rule stated in Dutton.

514 N.E.2d at 1301. See the discussion of Prairie Production infra in the text accompanying

notes 45-49 and 76-83.

'^La Mourea v. Rhude, 209 Minn. 53, 57, 295 N.W. 304, 307 (1940); see Black's
Law Dictionary 1362 (4th ed. 1951). Dean Murray has characterized this language as
"the best judicial statement relating to privity." Murray on Contracts § 278, n.25 (2d
rev. ed. 1974). The La Mourea court continued, "That simple truth removes the difficulty
arising from the complicated notions expressed by judges and text writers concerning

privity of contract." 209 Minn, at 57, 295 N.W. at 307. The case involved the technical
absence of privity between a third party beneficiary and a promisor from whom the
beneficiary sought to recover.

'»2 Am. L. Prod. Liab. 3d § 21:1 (1987).
"152 Eng. Rep. 402 (1842); see also Hiatt v. Brown, 422 N.E.2d 736, 739 (Ind.

Ct. App. 1981); 2 W. Hawkland, Uniform Commercial Code Series § 2-318:01 (1984)
[hereinafter 2 W. Hawkland]; Speidel, Warranty Theory, Economic Loss and the Privity
Requirement: Once More Into the Void, 67 B.U.L. Rev. 1, 24-25 n.54 (1987) [hereinafter
Warranty Theory],



26 INDIANA LAW REVIEW [Vol. 21:23

In that case, the defendant had contracted with the postmaster general

to furnish and maintain mail coaches. Plaintiff, a mail-coach driver who
was seriously injured when his coach overturned, brought a negligence

action against the defendant based on defendant's failure to keep the

coach in a fit and safe condition, as required by the contract. The court

held that the coachman could not recover and declared:

There is no privity of contract between these parties; and if the

plaintiff can sue, every passenger, or even any person passing

along the road, who was injured by the upsetting of the coach,
might bring a similar action. Unless we confine the operation
of such contracts as this to the parties who entered into them,
the most absurd and outrageous consequences, to which I can

see no limit would ensue.^°

The real issue in the case was: to whom did the defendant owe the
duty created by the contract? The response: only to the party with whom
the defendant had contracted. ^^ Thus, the citadel of privity was con-

structed as an almost impregnable defense in actions for breach of

contractual duties brought by anyone other than the immediate parties

to the contract which created those duties.

Privity became a part of warranty law in a society where the man-

ufacturer and the seller with whom the buyer dealt were most often one
and the same; there was no remote manufacturer in most cases. ^^ Xoday,

20152 Eng. Rep. at 405.

''Id.

''See Freeman v. Navarre, 47 Wash. 2d 760, 765, 289 P.2d 1015, 1018 (1955); 2

L. Frumer & M. Friedman, Products Liability § 3.02[3], at 3-145 to 3-146 [hereinafter
Frumer & Friedman]. As described in Freeman:

In the eighteenth century, [as the law of warranty first developed] . . . goods

and chattels were manufactured or made largely on a custom basis involving a
personal, over-the-counter relationship between the customer, on the one hand,

and the artisan, or mechanic, who made the goods or chattels, on the other.
Mass production, large scale or national promotion and distribution were un-

known. Actually, there was little need for a legal remedy for a consumer against

a manufacturer in a distant city who had sold products to a distributor, who,
in turn, had sold them to a jobber, who had sold to retailers, who had then
sold to consumers. At that time, in practically all lawsuits in the fields of

contracts and torts, the factor of personal relationship was quite apparent and

loomed quite large in the consciousness of the law courts. The idea of a lawsuit

by a consumer against a manufacturer, where no orthodox, over-the-counter,

personal relationship existed, was unusual and seemingly quite difficult for the

courts to contemplate. There is some similarity, T5erhaps, between the philosophy

or logic of the privity of contract doctrine and that inherent in the remnants

of the concept of caveat emptor, the latter, certainly, inherited from a time

when business morality was, perhaps, somewhat different from that prevailing
today.

47 Wash. 2d at 765, 289 P.2d at 1018.



1988] VERTICAL PRIVITY 27

we Speak of a chain of distribution in which **[t]he middleman is no

more than a conduit, a mere mechanical device, through which the thing

is to reach the ultimate user.'*23

In the context of a warranty of the quality or performance of goods,

the relationship between the parties for purposes of a discussion of

privity is best viewed as the sides of a right angle, as illustrated in the

figure which follows. ** Vertical*' privity describes the chain of distri-

bution, from the supplier of any component parts, through the man-

ufacturer of the finished goods, the wholesale and retail dealers, and

ultimately to the retail buyer of those goods. ** Horizontal'' privity

describes the persons to whom any warranty extends beyond the retail
buyer, such as members of the buyer's family, guests, neighbors, sub-

purchasers, etc., who may be affected by a breach of the warranty. ^^

It has also been suggested that there is a third type of privity, **diagonal"

privity, which completes a right triangle, and describes the relationship

between a party in the chain of distribution and a party in the horizontal

line. 25

Vertical
"

.

Parts supplier

Manufacturer ^"^^^^

Wholesaler
^^

-v^^ Diagonal

Retailer ^^-^.^^^

Buyer Spouse Child ^"^^uest Neighbor Sub-buyer

Horizontal

If a court requires privity between a plaintiff and a defendant, vertical

privity describes the person in the chain of distribution who is a proper
defendant in a suit by the particular plaintiff, i.e.y who is responsible
on the warranty which allegedly has been breached. Similarly, horizontal

privity describes who along the horizontal Hne from the retail buyer of
the goods to the person affected by the breach of warranty is a proper

plaintiff, i.e., who is a beneficiary of the warranty, or to whom does

"Prosser, The Fall, supra note 7, at 799; accord Santor v, A & M Karagheusian,
Inc., 44 N.J. 52, 60, 207 A.2d 305, 309 (1965); Kassab v. Central Soya, 432 Pa. 217,

226. 246 A.2d 848, 853 (1968).

^See, e.g.. Am. L. Prod. Liab. 3d § 21:4 (1987); 2 W. Hawkland, supra note 19,
§ 2-318:01; White & Summers, supra note 8, § 11-2; Williston on Sales, supra note
10, § 22-5.

2'Ezer, The Impact of the Uniform Commercial Code on the California Law of
Sales Warranties, 8 U.C.L.A. L. Rev. 281, 324-26 (1961) (in which the term originated);

see 2 W. Hawkland, supra note 19, § 2-318:01, n.4.



28 INDIANA LAW REVIEW [Vol. 21:23

the warranty extend. ^^ Diagonal privity links the two lines and describes

who at each end of the diagonal line is a proper plaintiff and is a
proper defendant in a particular situation.

^'^

B. Privity and the U.C.C.

The Uniform Commercial Code deals with privity only in section
2-318. When Indiana enacted the Code in 1963,^^ that section provided:

A seller's warranty whether express or implied extends to
any natural person who is in the family or household of his
buyer or who is a guest in his home if it is reasonable to expect
that such person may use, consume or be affected by the goods
and who is injured in person by breach of the warranty. A
seller may not exclude or limit the operation of this section. ^^

This language is a limited legislative attack directed only to the wall

of horizontal privity and has reached only its lower levels. ^^ With respect

^'See, e.g., Williams v. West Penn Power Co., 502 Pa. 557, 467 A.2d 811 (1983);
H. Greenberg, Rights and Remedies under U.C.C. Article 2 § 14.30 (1987) [hereinafter
H. Greenberg].

^^See Ezer, supra note 25, at 324-26.

^4963 Ind. Acts 317.

^^IND. Code § 26-1-2-318 (1982).
In 1966, because there continued to be a lack of uniformity among the states with

respect to the privity requirement, the Permanent Editorial Board of the Code designated
the language quoted above as Alternative A to § 2-318 and approved two additional
alternatives as choices for states adopting the Code. See Permanent Editorial Board Note

in 1966 Amendment to § 2-318; 2 W. Hawkland, supra note 19, § 2-318, at 407;
Comment, Enforcing the Rights of Remote Sellers under the UCC: Warranty Disclaimers,
The Implied Warranty of Fitness for a Particular Purpose and the Notice Requirement

in the Nonprivity Context, 47 U. Pitt. L. Rev. 873, 884-85 (1986) [hereinafter Rights of

Remote Sellers].

Alternative B provides:
A seller's warranty whether express or implied extends to any natural person
who may reasonably be expected to use, consume or be affected by the goods
and who is injured in person by breach of the warranty. A seller may not
exclude or limit the operation of this section.

U.C.C. § 2-318.

Alternative C provides:
A seller's warranty whether express or implied extends to any person who may
be reasonably expected to use, consume or be affected by the goods and who
is injured by breach of the warranty. A seller may not exclude or limit the
operation of this section with respect to injury to the person of an individual

to whom the warranty extends.
Id.

^°See H. Pratter & R. Tovvnsend, supra note 5, at 47. Whether it restricts further
judicial assault on that wall, e.g., by extending warranty protection to employees, passers-



1988] VERTICAL PRIVITY 29

to vertical privity, the drafters themselves said that this provision 'Ms

neutral and is not intended to enlarge or restrict the developing case

law on whether the seller's warranties, given to his buyer who resells,
extend to other persons in the distributive chain. "^^ The attack on or

defense of the tower of vertical privity remains the assignment of the

courts for further development in the common law tradition. ^^

III. Privity: Indiana's Approach

A. The Assault on Privity in Indiana

In Indiana, as elsewhere, the doctrine of privity traces back to

Winterbottom v. Wright?^ In the ensuing years, cracks began to appear

in the privity barrier, and two leading cases caused the national collapse

of major sections of the citadel of privity: MacPherson v. Buick Motor
Co?'^ and Henningsen v. Bloomfield Motors, Inc.^^ MacPherson abolished

the need for vertical privity in negligence actions by a buyer against a

manufacturer if the goods involved (there, an automobile), if negligently

made, are inherently dangerous and cause personal injury. ^^ In Hen-

ningsen, the court imposed strict liability in tort, without regard to

negligence and despite the absence of vertical or horizontal privity, upon

both the manufacturer and the seller of a product (again, an automobile)

by, bailees, or subsequent buyers from the first retail buyer, remains a matter for further

development in many other jurisdictions, but not presently in Indiana where the provision
is interpreted restrictively. Compare Davidson v. John Deere & Co., 644 F. Supp, 707
(S.D. Ind. 1986); Lane v. Barringer, 407 N.E.2d 1173, 1176 (Ind. Ct. App. 1980) (Rathff,

J., concurring in part, dissenting in part) with Morrow v. New Moon Homes, Inc., 548
P.2d 279 (Alaska 1976); Milbank Mut. Ins. Co. v. Proksch, 309 Minn. 106, 244 N.W.2d
105 (1976); Salvador v. Atlantic Steel Boiler Co., 457 Pa. 24, 319 A.2d 903 (1974); JKT
Co. V. Hardwick, 274 S.C. 413, 265 S.E.2d 510 (1980). Some other jurisdictions also
read § 2-318 restrictively. See, e.g., Bailey v. ITT Grinnell Corp., 536 F. Supp. 84 (N.D.
Ohio 1982); Miller v. Sears, Roebuck & Co., 148 111. App. 3d 1022, 500 N.E.2d 557
(1986) (no expansion in either case).

^'U.C.C. § 2-318, Official Comment 3.
^^See, e.g., H. Pratter & R. Townsend, supra note 5, at 47; White & Summers,

supra note 8, § 11-3 at 403; Murray, Products Liability v. Warranty Claims: Untangling

the Web, 3 J.L. & Com. 269, 275-78 (1983).
"152 Eng. Rep. 402 (1842); see Hiatt v. Brown, 422 N.E.2d 736, 739 (Ind. Ct.

App. 1981). See the discussion of Winterbottom in the text accompanying notes 19-21,

supra.

'*2ll N.Y. 382, 111 N.E. 1050 (1916).
"32 N.J. 358, 161 A.2d 69 (1960).

^^See Prosser, The Assault, supra note 5, at 1100.



30 INDIANA LAW REVIEW [Vol. 21:23

which, because of an apparent defect, caused serious personal injury.
^'^

During the four decades between the two cases, in something of a

precursor to Henningsen, more courts nationally and in Indiana began

to impose a similar form of strict liability on the manufacturers of foods

or bottled goods sold for human consumption without requiring vertical
or horizontal privity. ^^

Indiana followed the lead of these two landmark cases. When the
first opportunity arose, the Indiana Supreme Court expressly appHed the

MacPherson rule and affirmed the recovery of damages from the negligent

manufacturer of a defective farm combine by an injured farmer who
had purchased the combine from another farmer and was not in either

vertical or horizontal privity with the manufacturer. ^^ The court thereby

abolished the requirement of either vertical or horizontal privity in

negligence cases involving inherently dangerous products with latent de-

fects. In doing so, the court stated:

As so often happens in the development of the common law,
eventually the exception becomes the rule, and that is what has

happened during the last sixty years to the principle under

consideration here. . . .

As stated by the leading authorities, pubHc policy has com-
pelled this gradual change in the common law because of the
industrial age where there is no longer the usual privity of contract

between the user and the maker of a manufactured machine.

On the other hand, there must be reasonable freedom and
protection for the manufacturer. He is not an insurer against
accident and is not obligated to produce only accident-proof

machines. The emphasis is on the duty to avoid hidden defects

or concealed dangers. . . ^^

Six years later, Indiana followed the lead of Henningsen when it
expressly adopted the principle of strict products liability, without re-

quiring proof of neghgence or privity, as enunciated in the Restatement

^^See Prosser, The Fall, supra note 7, at 791-97. The injured party in Henningsen
was the wife of the buyer of an automobile, thus raising the question of whether the

warranty from the dealer to the husband-buyer extended horizontally to his wife. The
issue of vertical privity was raised by the naming of the manufacturer of the automobile

as a defendant.

''See Coca Cola Bottling Works v. WiUiams, 111 Ind. App. 402, 413, 37 N.E.2d
702, 706 (1941); Prosser, The Fall, supra note 7, at 794-798.

^'J.I. Case Co. v. Sandefur, 245 Ind. 213, 197 N.E.2d 519 (1964); see Elliott v.

General Motors Corp., 296 F.2d 125 (7th Cir. 1961), cert, denied, 369 U.S. 860 (1961)

(in which the federal court had earlier concluded that the MacPherson rule did apply in
Indiana).

"^J.I. Case Co., 245 Ind. at 221-22, 197 N.E.2d at 522-23.



1988] VERTICAL PRIVITY 31

(Second) of Torts, § 402A/' which itself soHdified the Henningsen rule/^

The Indiana Legislature took a further step in this regard when it enacted

the state's first Product Liability Act/^

Despite the continuing assault on and collapse of the citadel else-

where,'*^ the assault in Indiana has proceeded extremely slowly, and a

major part of the structure remains unscarred. Until Prairie Production,

Inc. V. Agchem Div.-Pennwalt Corp.,"^^ the Indiana courts had not been
confronted squarely with the privity issue in cases based on breach of

an express warranty/^ In this case, the defendant-manufacturer allegedly

had made an express warranty that its product would control corn
earworms, but there was no privity between the plaintiff-farmer and the

defendant because the plaintiff had purchased the product as part of a

crop-spraying service. Plaintiff lost part of its crop due to earworm
infestation. The court of appeals relied on the leading case of Randy
Knitwear, Inc. v. American Cyanamid Co.f^ observing that '*the au-
thority in favor of discarding the privity requirement in express warranty

cases is overwhelming."'*^ In doing so, the court reversed summary
judgment in favor of the defendant, and ruled that if the representations

of the defendant-manufacturer amount to an express warranty, a question

of fact, the buyer may recover economic losses for breach despite the
absence of privity. However, the court restated the Indiana rule that in

the absence of privity, a buyer cannot recover economic damages from

a remote manufacturer if the claim is based on breach of implied

warranties.'*^

''See Cornette v. Searjeant Metal Prods., Inc., 147 Ind. App. 46, 258 N.E.2d 652

(1970).

*^See Prosser, The Fall, supra note 7. Dean Prosser is the author of § 402A. See

Edmeades, supra note 12, at 650, 663; Murray, supra note 32, at 275. But the concept

of strict products liability was apparently first espoused some 20 years earlier by Karl

Llewellyn, the principal drafter of the U.C.C, in a provision which was not included in
the final official text. See Murray, supra note 32, at 275.

^'1978 Ind. Acts, Pub. L. 141, § 28.

*^See, e.g.. Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976); Groppel
Co. V. United States Gypsum Co., 616 S.W.2d 49 (Mo. Ct. App. 1981); Spring Motors
Distrib., Inc. v. Ford Motor Co., 98 N.J. 555, 489 A.2d 660 (1985); Kassab v. Central

Soya, 432 Pa. 217, 246 A.2d 848 (1968); Comment, Rights of Remote Sellers, supra note

29, at 881.

^^514 N.E.2d 1299 (Ind. Ct. App.), reh'g denied (1987).

'^See id. at 1301. Language in earUer cases suggested that lack of privity would not

be a defense in express warranty cases. See Candlelight Homes, Inc. v. Zornes, 414 N.E.2d

980 (Ind. Ct. App. 1981); Richards v. Goerg Boat & Motors, Inc., 179 Ind. App. 102,
384 N.E.2d 1084, transfer denied (1979); Bepko, Commercial Law, Survey of Recent

Developments in Indiana Law, 15 Ind. L. Rev. 109, 118 (1982).
"^11 N.Y.2d 5, 181 N.E.2d 399 (1962).
^«514 N.E.2d at 1302.

*^Id. at 1301, citing Richards, Candlelight Homes, Dutton, and Ridge Co., Inc. v.

NCR Corp., 597 F. Supp. 1239 (N.D. Ind. 1984).



32 INDIANA LAW REVIEW [Vol. 21:23

Thus, in implied warranty cases under the U.C.C, the absence of
privity is a barrier behind which the defendant is totally protected

regardless of the cause or nature of the damage or the justice of the

plaintiff's claim. The two cases which furnish the strongest support for

the barrier are Lane v. Barringer^^ and Candlelight Homes, Inc. v.

Zornes.^^

Lane, which involved the woman whose legs were splashed with
caustic drain cleaner when the container broke," contained issues of
both vertical and horizontal privity, although the thrust of the court's

opinion addressed only the vertical. Plaintiff named as defendants in
her suit for breach of the implied warranty of merchantability" the

entire vertical chain of distribution: the supplier of the container, the

manufacturer of the drain cleaner, the distributor, the supermarket where

the injury occurred, and the market operators. In affirming summary
judgment in favor of all remaining defendants,^'* two members of the
court held that the absence of privity between the plaintiff and the

remaining defendants was an insurmountable barrier to her claim against

them:

Clearly, privity of contract is no longer required if a personal

injury action for a defective product sounds in tort; either on

a negligence theory or on the theory of strict liability in tort. . . .

However, the abrogation of the privity requirement in tort law

has not eliminated the privity requirement when the cause of
action sounds in contract for breach of warranty. ^^

'HOI N.E.2d 1173 (Ind. Ct. App. 1980).
^'414 N.E.2d 980 (Ind. Ct. App. 1981).

"See discussion in the opening paragraph of this article supra note 1.

"U.C.C. § 2-314(2)(c) and (e) require that for goods to be merchantable, they must,

inter alia, be fit for their ordinary purposes and be adequately packaged or contained.

The container slipped out of the hands of the plaintiff's married daughter as she took
it from a supermarket shelf to put in her shopping cart. The court assumed, for the

purposes of argument, that there had been a sale. For reasons unknown, the plaintiff

had allowed the statute of limitations for actions in negligence or strict liability—two
years—to pass, and those actions were barred. Her only possible claim was for breach
of warranty under the Code, the limitation on which is four years from the accrual of

the cause of action pursuant to U.C.C. § 2-725.

''•The market operators were dismissed by stipulation; the market itself, a corporation,

was never properly served with process and, although named, was never a party. 407

N.E.2d at 1175.

"M A later, federal case characterized this distinction as "archaic" and declared
that adoption of the U.C.C. had displaced common law actions for breach of implied
warranty. Corbin v. Coleco Indus., Inc., 748 F.2d 411 (7th Cir. 1984). The court held
that because the buyer of an above-ground swimming pool from his neighbor was not
in privity with the manufacturer, as required by Indiana law if the suit is for breach of



1988] VERTICAL PRIVITY 33

The third judge would have aboHshed the vertical privity requirement

in all cases involving personal injury but agreed with the result because

he found no horizontal privity under section 2-318 of the Code.^^

In Candlelight Homes, the plaintiff-buyers who had purchased a
defective mobile home from an authorized dealer of the defendant-
manufacturer brought an action for breach of implied warranty against

both the dealer and the manufacturer, but the dealer had gone out of

business. The court reversed a judgment for the plaintiffs against the

manufacturer and held that in a "suit for breach of implied warranty

for loss of bargain, privity must be shown, or facts must be present"

to prove an exception such as the seller's agency with the manufacturer

or the manufacturer's participation in the sale.^^ Neither had been shown.

Although these "exceptions," estabhshed in two earlier cases, ^^ do not

estabhsh true privity in the sense that the manufacturer is a party to

the sales contract with the buyer, they do establish a direct relationship

between the manufacturer and the buyer. ^^

Lane and Candlelight Homes have been relied on repeatedly in
subsequent cases to bar recovery by non-privity plaintiffs without regard

to whether vertical or horizontal privity was at issue.^ The most recent

an implied warranty connected with the sale of goods, the manufacturer was entitled to

summary judgment in its favor. 748 F.2d at 416.

In Thiele v. Faygo Beverage, Inc., 489 N.E.2d 562 (Ind. Ct. App.), transfer denied

(1986), the court concluded that actions for breach of warranty in tort and for strict

products liability, first introduced by approval of Restatement (Second) of Torts, §
402A, and subsequently codified in the Indiana Product Liability Act, Ind. Code §§ 33-
1-1.5-1 to -8 (1982), are indistinguishable. A complaint which states a count for strict
products liability and for breach of warranty in tort will be considered duplicitous. Thiele,

489 N.E.2d at 584. See Whittaker v. Federal Cartridge Corp., 466 N.E.2d 480, 481 n.2

(Ind. Ct. App. 1984).

5^07 N.E.2d at 1177-78 (Rathff, J., concurring in part, dissenting in part). See

supra notes 28-32 and accompanying text.

"414 N.E.2d 980, 982 (Ind. Ct. App. 1981). The court stated that the amended

complaint alleged breach of the implied warranty of fitness for particular purpose. As
discussed infra in the text accompanying notes 161-172, such a warranty rarely, if ever,

exists without privity or a direct relationship between the maker of the warranty and the

beneficiary thereof. The case could have been decided against the plaintiffs on the basis

that they failed to prove that such a warranty had been made by the manufacturer.
Instead, the court treated the case as involving "breach of implied warranty," which

should be taken to mean breach of the implied warranty of merchantability.
'^Richards v. Goerg Boat & Motors, Inc., 179 Ind. App. 102, 384 N.E.2d 1084,

transfer denied (1979) (participation in the sale); Thompson Farms, Inc. v. Corno Feed
Prods., 173 Ind. App. 682, 366 N.E.2d 3 (1977) (agency).

'^See Richards, 179 Ind. App. at 112, 384 N.E.2d at 1092.

""See, e.g., Corbin v. Coleco Indus., Inc., 748 F.2d 411, 414 (7th Cir. 1984) (suit

by sub-buyer against remote manufacturer); Davidson v. John Deere & Co., 644 F, Supp.
707, 713 (N.D. Ind. 1986) (suit by employee against manufacturer who sold directly to



34 INDIANA LAW REVIEW [Vol. 21:23

of these, Button v. International Harvester Co.,^^ cited Lane and stated,

"An essential element for the recovery of incidental and consequential
damages due to breach of warranty is privity of contract. "^^ Quoting

from an earlier case, the court declared that '*[t]he rule in Indiana is[,]

*[i]mplied warranties of merchantability and fitness for particular use,

as they relate to economic loss from the bargain, cannot ordinarily be

sustained between the buyer and a remote manufacturer.'"" Accordingly,

the Dutton court affirmed summary judgment in favor of the manu-
facturer of a defective planting machine and against the farmer-buyer

who had purchased the machine from an authorized distributor, claimed
breach of implied warranty, and sought damages for his economic loss

(there were no personal injuries).^

The rumblings of a further Indiana assault on the citadel had earlier

been heard in Barnes v. MacBrown & Co.,^^ which involved a warranty
parallel to those of the Code, the implied warranty of habitability. The

Indiana Supreme Court held that the second purchaser of a dwelling,

who had never dealt with the builder and was not in privity with him,
could recover for breach of the warranty even though the claim involved

only the economic loss of the cost of repairing a waterproof basement,

not personal injury. In doing so, the court quoted from /./. Case Co.

V. Sandefur,^ and stated:

The logic which compelled this change in the law of personal

property is equally persuasive in the area of real property. Our
society is an increasingly mobile one. Our technology is increas-
ingly complex. The traditional requirement of privity between

builder-vendor and a purchaser is an outmoded one.^^

employer); Ridge Co. v. NCR Corp., 597 F. Supp. 1239, 1242 (N.D. Ind. 1984) (suit by
buyer against component part supplier); Gonzales v. Kil Nam Chun, 465 N.E.2d 727, 731
(Ind. Ct. App. 1984) (suit by employee of borrower of scaffolding against owner).

^'504 N.E.2d 313 (Ind. Ct. App.), transfer denied (1987).

"•^Id. at 316.

"/c?. (quoting Richards v. Goerg Boat & Motors, Inc., 179 Ind. App. 102, 112, 384
N.E.2d 1084, 1092, transfer denied (1979)). The error in this statement with respect to
the implied warranty of fitness for particular purpose under U.C.C. § 2-315 is discussed

infra in the text accompanying notes 161-172.

"504 N.E.2d at 319. The statement of the court that after repair attempts by the

seller, the manufacturer "extended its warranty for an additional year," indicates that

the case also involved an express warranty. Id. at 315. However, the buyer-appellant

apparently did not raise the issue of express warranty in his appeal. Had he done so, he
might have avoided the privity issue. See infra text accompanying notes 45-49.

«264 Ind. 227, 342 N.E.2d 619 (1976).
**245 Ind. 213, 197 N.E.2d 519 (1964); see supra text accompanying notes 39-40.

"'Barnes, 264 Ind. at 229, 342 N.E.2d at 620.



1988] VERTICAL PRIVITY 35

Although cited with approval in later cases involving real property,^^

subsequent cases involving sales of goods have failed to take up this

lead either by ignoring the reasoning of Barnes altogether or by attempting

to distinguish it despite the clearly stated position of the court that

privity had already been eliminated as a requirement in cases involving

the law of personal property/^

The current status of privity in Indiana, therefore, is that it remains

a barrier against any lawsuit brought for breach of implied warranty

under the U.C.C.

B. The Battle Plan for the New Assault in Indiana

For the reasons developed in the remainder of this article, the assault

on vertical privity in Indiana should resume until the citadel is demolished.

There are two reasons why the assault should resume. First, permitting
the damaged buyer to proceed against the manufacturer will impose
Uability for defective goods on the party most able to prevent the defect

and to bear its cost, and who should, and probably will, ultimately bear
the liability in any event. Second, permitting a direct suit against the

manufacturer will result in judicial efficiency and will avoid substantial

unfairness to the buyer and other parties in the chain of distribution

between the buyer and the manufacturer. Because of the substantial

protections available under the U.C.C, allowing suit against a remote
manufacturer for breach of implied warranty will neither make him an
insurer nor will it impose upon him any liability beyond his reasonable
expectations.

In order to review the battle plan in a logical fashion, the points

of the attack should be examined. Privity's greatest strength in Indiana

is as a defense against claims of breach of the implied warranty of

merchantability. That strength lessens significantly when the defense is
raised against the Code's other implied warranty, fitness for a particular

purpose. Because these warranties differ in their creation and charac-

teristics, they must be dealt with separately. We attack first at the
citadel's strongest point.

^See, e.g., Zimmerman v. Moore, 441 N.E.2d 690, 694 (Ind. Ct. App. 1982); Wagner
Constr. Co. v. Noonan, 403 N.E.2d 1144, 1148 (Ind. Ct. App. 1980).

^^See, e.g., Corbin v. Coleco Indus., Inc., 748 F.2d 411, 415 (7th Cir. 1984) (comment

that Barnes is no authority for a U.C.C. case); Ridge Co. v. NCR Corp., 597 F. Supp.
1239, 1243 (N.D. Ind. 1984) (no evidence in Barnes that the court intended to go beyond

habitability). In stating that Indiana law requires privity in a warranty action based on

contract, the court in Neofes v. Robertshaw Controls Co., 409 F. Supp. 1376 (S.D. Ind.

1976), incorrectly forecast the possible future effect of Barnes on the privity requirement

with a citation, "but cf." 409 F. Supp. 1379.



36 INDIANA LAW REVIEW [Vol. 21:23

I. The Implied Warranty ofMerchantability

.

—The U.C.C. states,
*

'Unless excluded or modified (section 2-316), a warranty that the goods

shall be merchantable is implied in a contract for their sale if the seller

is a merchant with respect to goods of that kind.'*^° The basic definition

of "merchantability" requires that the goods be '*fit for the ordinary

purposes for which such goods are used.""^' Without some action by

the seller to exclude or modify,''^ this warranty arises automatically in

every sale in the chain of distribution. "^^ The Code simply does not state
to whom in the chain the warranty extends, nor does it limit the benefits
of the warranty to the seller's immediate buyer in the chain.^"^ However,

without some direct contact between the manufacturer and the retail

buyer, there is neither traditional privity of contract nor an exception

to it. Nevertheless, both the policy on which this warranty is based and

modern business circumstances and practices support the conclusion that

either (1) there really is a form of privity between the remote manufacturer

and the buyer, although not direct or face to face,"^^ or (2) the tower

of vertical privity should be abandoned and demolished.

The nature of the impHed warranty is that it arises . automatically

in every sale by a merchant unless it is specifically limited or disclaimed;

it is an obHgation imposed on the seller as a matter of law. Thus, it

involves two basic situations: sales in which the seller also gives an

express warranty and sales in which there is no express warranty whatever.

In sales involving an express warranty, in which privity is no longer

a barrier to a buyer's action against a remote manufacturer for breach

of that warranty,''^ there is no reason for the barrier to stand against

a similar suit for breach of the imphed warranty of merchantability. In

Prairie Production, Inc. v. Agchem Div.-Pennwalt Corp.,'^'^ the recent
case which abolished the privity requirement with respect to express

warranties only, the court first cited, described and relied on the two

Indiana cases in which the barrier of privity was broken in implied

warranty cases because of the manufacturer's contacts with the buyer:

™U.C.C. § 2-314(1).

^'U.C.C. § 2-314(2)(c).

''^See discussion of disclaimers of warranty and limitation of remedy under §§ 2-316

and 2-719 infra notes 176-181 and accompanying text.

''See U.C.C. § 2-314, Official Comment 2.
'"See Speidel, Warranty Theory, supra note 19, at 42-43.

"Prof. Speidel suggests that, based on a relational perspective of contract law, there

is indeed a connection between the remote manufacturer and the buyer which justifies

the ability of the buyer to recover from the manufacturer. See Speidel, Warranty Theory,

supra note 19.

'^See Prairie Prod., Inc. v. Agchem Div.-Pennwah Corp., 514 N.E.2d 1299 (Ind.
Ct. App.), reh'g denied (1987).

''Id.



1988] VERTICAL PRIVITY 37

Richards v. Goerg Boat & Motors, Inc.,^^ and Thompson Farms, Inc.
V. Corno Feed ProductsJ'^

In Richards, the buyer had talked with the manufacturer's personnel

at a boat show, had attended a demonstration at the manufacturer's

plant, and, when problems arose after the sale, dealt directly with the

manufacturer concerning problems with the boat. However, the buyer

made his purchase from the intermediate dealer. In Thompson Farms,
the court found that a special agency relationship existed between the

dealer and the manufacturer involving arrangements for financing, and

that the manufacturer had solicited the buyer directly as a customer for

the hog houses involved and had inspected them after construction for

conformity to blueprints.^^ In Prairie Production, however, the court

found that there was no direct participation in the sale by the manu-

facturer who gave an express warranty.
By distinguishing Richards and Thompson Farms in this way, the

court seems to be asserting that unless the contact between the manu-

facturer and the buyer is oral and face to face, the contact is insufficient

to break through the barrier of privity; that advertising literature, no

matter how descriptive or laudatory, does not even crack the barrier if
it does not rise to the level of an express warranty. In describing Randy
Knitwear, Inc. v. American Cyanamid Co.,^^ which the Indiana court
found to exemplify the overwhelming weight of authority and virtually

indistinguishable from the case before it,^^ the court of appeals stated:

It justified discarding the privity requirement under the circum-

stances of that case by observing that manufacturers commonly
extoll the merits and quality of their products in newspapers,

periodicals and other media directed to each purchaser in the

chain of distribution. These affirmations, which may or may
not constitute an express warranty, may effectively induce the
purchase, and are even intended to have that effect.^^

What, then, of the case in which the manufacturer engages in an

extensive advertising campaign to induce sales but carefully avoids making

any express warranties? Surely, the written contact through Time mag-

azine or The Wall Street Journal is as effective as ten or fifteen minutes

at a trade show to establish a form of direct contact between the

manufacturer and the buyer to satisfy the privity requirement.

^8179 Ind. App. 102, 384 N.E.2d 1084, transfer denied (1979).
^'173 Ind. App. 682, 366 N.E.2d 3 (1977).

«°See Prairie Prod,, 514 N.E.2d at 1301.

«'ll N.Y.2d 5, 226 N.Y.S.2d 363, 181 N.E.2d 399 (1962).

''^Prairie Prod., 514 N.E.2d at 1302.

"/^. at 1302-03 (emphasis added).



38 INDIANA LAW REVIEW [Vol. 21:23

Moreover, the making of the express warranty itself should be

sufficient to establish the required contact. The nature and quality of

the express warranty itself may be the inducement, as in the automotive
industry where the manufacturers are presently giving warranties of

different coverages and durations. And in the Richards case, the court
declared: '*An express warranty is a contract between the buyer and the

seller. . . ."^^ This being so, if a sale includes a manufacturer's express

warranty, the existence of a contract between the manufacturer and the

buyer establishes privity between them. This should be sufficient to

support an action against the manufacturer for breach of the express

warranty or the implied warranty of merchantability or both,^^ unless

the manufacturer has taken affirmative steps to modify or disclaim

warranties. ^^ Furthermore, the privity requirement should be abolished

in all cases involving the implied warranty of merchantability, whether

or not the remote manufacturer has given an express warranty.

The concept of impHed warranty is not and never has been purely

contractual, but is in reality a blend of the principles underlying both

contracts and torts. ®^ As described by the court of appeals, in Indiana
implied warranties

*

'arise out of the status relationship between a buyer

making a purchase from a seller; that is, they arise because the seller

happens to be a merchant or has knowledge about the buyer's purpose

and rehance."^* A basic difference between warranty and negligence is

«M79 Ind. App. at 118, 384 N.E.2d at 1095.

''See Szajna v. General Motors Corp., 115 I11.2d 294, 503 N.E.2d 760, reh'g denied

(1986), in which the court stated that if the manufacturer gives a written warranty pursuant

to the Magnuson-Moss Federal Warranty Act (15 U.S.C. §§ 2301-2310 (1976)), as most

manufacturers will, the manufacturer "establishes privity between the warrantor [manu-

facturer] and the consumer which, though limited in nature, is sufficient to support an

imphed warranty under sections 2-314 and 2-315 of the UCC." Id. at 305, 503 N.E.2d
at 769. The Illinois Supreme Court therefore reversed the holding of the intermediate

appellate court that although there was privity for purposes of the express warranty, there

was no privity for purposes of the implied warranty of merchantability.

But see Walsh v. Ford Motor Co., 588 F. Supp. 1513 (D.D.C. 1984). In Walsh,

the court ruled that although an action under the Magnuson-Moss Act may include a
claim for breach of imphed warranties which arise under the U.C.C, the issue of privity
is governed by state law without reference to the Magnuson-Moss Act. Id. at 1526-1527.

''See infra text accompanying notes 176-181.

'''See, e.g., Frumer & Friedman, supra note 22, § 3.02[3], at 3-143 to 3-144; Prosser,
The Assault, supra note 5, at 1126-34; Rabin & Grossman, Defective Products or Realty
Causing Economic Loss: Toward a Unified Theory of Recovery, 12 Sv^^. U.L. Rev. 4,
49-50 (1981) [hereinafter Rabin & Grossman]. Dean Prosser called warranty "a freak
hybrid born of the illicit intercourse of tort and contract." The Assault, supra note 5,

at 1126.

»«Richards v. Goerg Boat & Motors, Inc., 179 Ind. App. 102, 110, 384 N.E.2d 1084,
1091, transfer denied (1979) (emphasis added). See discussion of Speidel, Warranty Theory,

supra note 75.



1988] VERTICAL PRIVITY 39

that warranty is not based on fault but focuses on the condition of the

product by imposing a form of strict Hability on the seller. ^^

One major purpose of warranty law was to change the rule from

caveat emptor to a rule which gives the buyer what he had reason to

expect: goods fit for their ordinary uses.^° In his article on the fall of

the citadel, prompted by the explosion caused by Henningsen v. Bloom-

field Motors,^^ Dean Prosser reflected that had another decade passed
before a decision like Henningsen was announced, the law of warranties

might itself have been changed to ehminate privity as a defense between

remote manufacturers and injured consumers.^^ Since Henningsen, that

change has occurred in most jurisdictions, at least with respect to personal

injury and property damage,^^ but not in Indiana.

The Indiana courts speak of privity being required to protect the

bargained for expectations of the parties. ^"^ This position is based on

the false premise that the parties must deal with each other face to face

in order to know those expectations, a premise which harks back to the
19th Century business climate and philosophy expressed in Winterhottom

''See Gregory v. White Truck & Equip. Co., 163 Ind. App. 240, 255-56, 323 N.E.2d
280, 289 (1975); Frumer & pRffiDMAN, supra note 22, § 3.01 [1], at 3-5; Prosser, The
Assault, supra note 5, at 1126-34.

^See Prosser, The Assault, supra note 5, at 1145. It has been suggested that had

Restatement (Second) of Torts, § 402A, been approved by the American Law Institute
at the time Karl Llewellyn was chief reporter for the Code and the chief drafter of Article

2, he would not have included any provisions on warranty at all. Murray, supra note

32, at 276. This suggestion may go a bit too far. As strict liability in tort has developed,
the general rule has been that recovery can only be for personal injury and property

damage but not for economic loss. See, e.g., Sanco v. Ford Motor Co., 771 F.2d 1081

(7th Cir. 1985); Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555, 489 A.2d

660 (1985); Prosser, The Assault, supra note 5, at 1120-23 (whose position in this regard

is discussed infra in note 131). This, too, may change, but the change will Hkely be long
in coming.

^"32 N.J. 358, 161 A.2d 69 (1960); see supra discussion in text accompanying notes

35-37.

'^Prosser, The Fall, supra note 7, at 801-02. Another scholar has commented that

Karl Llewellyn, the principal drafter of Article 2, was hostile to privity as a defense. 2

W. Hawkland, supra note 19, at § 2-318:01. See also supra note 90.
'^See Frumer «fe Friedman, supra note 22, § 3.02[7][a] at 3-216 to 3-217; 2 R.

HuRSH & H. Bailey, American Lavv^ of Products Liability § 10.66 at 344 (2d ed. 1974)
[hereinafter R. Hursh & H. Bailey]; G. Wallach, The Law of Sales under the Uniform
Commercial Code f 11.15[l][a] (1981) [hereinafter G. Wallach].

^See Richards v. Goerg Boat & Motors, Inc., 179 Ind. App. 102, 112, 384 N.E.2d
1084, 1092, transfer denied (1979). ("Generally privity extends to the parties to the contract

of sale. It relates to the bargained for expectations of the buyer and seller.") Accord

Ridge Co. v. NCR Corp., 597 F. Supp. 1239, 1242 (N.D. Ind. 1984); see Bepko, Contracts,
Commercial Law & Consumer Law, 1979 Survey of Recent Developments in Indiana Law,
13 Ind. L. Rev. 107, 109 (1980).



40 INDIANA LAW REVIEW [Vol. 21:23

V. Wright. ^^ A more realistic appraisal of the contemporary marketplace
reveals that the expectations of all of the parties in the chain of dis-

tribution are that the manufacturer will produce merchantable goods

and will ultimately be liable if the goods in the hands of the retail buyer

prove to be unmerchantable.

When the manufacturer produces his goods and puts them into the
chain of distribution, his expectation is that they will ultimately reach

a user, not gather dust on the shelves of a distributor or retailer. Unless

the manufacturer is acting fraudulently, he further expects that the goods

are fit for the ordinary uses to which such goods are put by buyers.^^

Many manufacturers engage in massive and very expensive advertising
campaigns aimed directly at the retail buyer with the specific intention

of creating a demand for their products.^^ Although, as already noted,
the advertising may be crafted carefully so as not to constitute an express
warranty, ^^ no manufacturer would spend money on advertising if he
did not fully expect the buyer to react to it and buy the product. The

manufacturer's expectation and intention with respect to the parties who
are between him and the buyer is to encourage the interest of those

parties so that they, too, will promote sales of his product. In the vast

majority of transactions today, the intermediate parties do nothing more

than facihtate the flow of the goods from the manufacturer to the

buyer. ^^ The fact that the manufacturer does not deal directly and

individually with each buyer is irrelevant to these expectations. ^°^ At the

'H52 Eng. Rep. 402 (1842). See supra discussion of this case and the business chmate

in which it arose, at notes 19-22 and accompanying text.

^See Speidel, Warranty Theory, supra note 19, at 44-47.

''See Lang v. General Motors Corp., 136 N.W.2d 805, 809-10 (N.D. 1965); R.
Nordstrom, Handbook of the Law of Sales § 91 (1970).

'^See U.C.C. § 2-313(2): "[A]n affirmation merely of the value of the goods or a

statement purporting to be merely the seller's opinion or commendation of the goods does

not create a warranty."

^See supra notes 22-23 and accompanying text. In the few situations where the retail

dealer is to perform some service on the goods, such as prepare an automobile for delivery

or prepare and install industrial or consumer equipment, the manufacturer will have the

opportunity to show that the damage was caused by improper service, rather than by a

defect in the goods themselves. In most situations, however, the failure of goods to be

merchantable, including those goods which require some preparatory service, occurs at

the manufacturing level.

'°°5ee Speidel, Warranty Theory, supra note 19, in which Prof. Speidel states that

the relationship between all of the parties in the chain of distribution is sufficient under

modern contract theory to support the buyer's action against the remote manufacturer

despite the absence of traditional privity. Cf. Carlill v. Carbolic Smoke Ball Co., [1893]
1 Q.B. 256, the famous case in which a manufacturer was held liable on a promise in

newspaper advertising to pay 100 pounds to anyone who contracted a cold or influenza
after using the carbolic smoke ball. The offer was made to the general public and did
not require notice of acceptance to the offeror.



1988] VERTICAL PRIVITY 41

same time, the wholesale distributor and the retailer expect that the

manufacturer has sold them merchantable goods, and that no one will

have cause to complain.

The buyer's expectations are that the goods will be fit for their

ordinary purposes and that if they are not, the manufacturer whose

advertising was seen or whose brand is on the goods will stand behind

them. There is nothing inconsistent with the expectations of any of the

parties if the responsibility for unmerchantable goods is placed precisely

where it belongs, on the manufacturer. Moreover, the basic expectations

of the parties are precisely the same in the absence of advertising or

knowledge of the identity of the manufacturer at the time of the sale.

All parties in the chain expect that the goods will be suitable for their

ordinary purposes.

The policy which supports elimination of a privity requirement in

implied warranty actions is quite straightforward. The party who can
best assure that the goods are merchantable is the manufacturer, par-

ticularly when the distributor and retail dealer who stand between the
manufacturer and the buyer in the chain of distribution do nothing more

than pass the goods on to the buyer unchanged, frequently in a sealed

package. If the goods are unmerchantable, the manufacturer is not only

the party ordinarily responsible for the problem but is also the party

most able to prevent or correct it.

Furthermore, under Code procedures, if the implied warranty of
merchantability has been breached and the buyer sues her immediate

seller, the HkeHhood is that responsibility will ultimately fall on the

manufacturer, a fact also within its expectation. If the buyer sues the

retail dealer for breach of warranty, the dealer may move up the vertical
chain of distribution by using local third-party practice or by "vouching

in" his immediate seller (the distributor) pursuant to the U.C.C., and

so on up the Hne, until the manufacturer is vouched in.^^^ Should vouched-

in parties not come in and defend, and the court finds that the goods,
as manufactured, were unmerchantable, that finding of fact will be

binding in later litigation with the vouched-in parties who refused to
appear. ^°2 Third-party practice or vouching-in, however, is "expensive.

'"•See U.C.C. § 2-607(5):

Where the buyer [here, the retailer] is sued for breach of a warranty or other

obligation for which his seller is answerable over

(a) he may give his seller [here, the distributor or manufacturer] written
notice of the litigation. If the notice states that the seller may come in and
defend and that if the seller does not do so he will be bound in any action

against him by his buyer by any determination of fact common to the two
litigations, then unless the seller after seasonable receipt of the notice does

come in and defend he is so bound.



42 INDIANA LAW REVIEW [Vol. 21:23

time consuming, and wasteful. "'^^ It promotes multiplicity of actions

and wastes valuable judicial resources. '^

It may be argued that the availability of this vouching-in procedure
prevents the privity requirement from causing any real harm to buyers
who can always sue their immediate sellers, except in the few cases
where the seller is judgment-proof or out of business. *°^ Unfortunately

for the buyers in Candlelight Homes, ^^^ theirs was one of the cases in
which the dealer was out of business so they recovered nothing. The
unavailability of the immediate seller is not all that rare.^^^

The result of barring a direct suit against the manufacturer is that

the manufacturer of unmerchantable goods who is fortunate enough to
have his goods sold by an economically shaky, irresponsible or judgment-

proof entity somewhere in the chain of distribution between him and

the retail buyer will enjoy the windfall of no liability if he hides behind

the wall of privity. ^^^ A clearer case of unjust enrichment is difficult to
imagine. '°^ Also, if the manufacturer is not a party to the suit and

cannot be joined involuntarily or vouched in because of the absence of

'°^Prosser, The Assault, supra note 5, at 1131-33.

"»See, e.g.. Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976); R.
Nordstrom, supra note 97, § 91.

'"'See Szajna v. General Motors Corp., 115 111. 2d 294, 301, 503 N.E.2d 760, 765

(1986) (in which the court observed that an automobile dealer is usually a responsible

commercial entity and that the unavailability of the dealer occurs "infrequently"); R.

Nordstrom, supra note 97, § 91.

'M14 N.E.2d 980 (Ind. Ct. App. 1981). See supra notes 2, 57-59 and accompanying
text.

'°'See, e.g.. Ford Motor Credit Co. v. Harper, 671 F.2d 1117 (8th Cir. 1982) (tractor

seller out of business); Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976)
(mobile home seller out of business); Durfee v. Rod Baxter Imports, Inc., 262 N.W.2d
349 (Minn. 1977) (auto dealer out of business). In 1984 and 1985, respectively, 13,787

and 13,418 (preliminary figure) retail businesses failed; 4,882 and 4,813 (preliminary figure)

wholesale businesses failed. U.S. Bureau of the Census, Statistical Abstract of the United

States: 1987, Table No. 866, p.510 (1986).

During the preparation of this article, one of the author's students came to him with

the following problem which she was requested to research by the Indianapolis law firm

for which she was working: the buyer of a truck seat was seriously injured in an accident,

partly, he claimed, because the seat was defective. Because the statute of limitations for

strict products liability or negligence had expired, he sued the retailer (represented by the

student's law firm employer) for breach of implied warranty of merchantability. Unfor-

tunately for the retailer, with whom the injured buyer was in privity, the wholesaler from
whom the retailer purchased the seat is out of business. Under current Indiana law,
because there is no privity between either the buyer or the retailer and the manufacturer,

the retailer may be required to bear the personal injury damages which should be the
responsibility of the manufacturer if the seat in fact was defective.

'"'See Industrial Graphics, Inc. v. Asahi Corp., 485 F. Supp. 793 (D. Minn. 1980);

Speidel, Warranty Theory, supra note 19, at 47.

'°^See Speidel, Warranty Theory, supra note 19, at 46.



1988] VERTICAL PRIVITY 43

privity with the retailer, it is unfair to impose on the retailer the cost

of first litigating as a defendant with the buyer and then as a plaintiff

with the distributor a claim which ultimately will be the responsibility

of the manufacturer. If there is no break in the chain of distribution,

the retailer may be able to recover most of his losses from the party
immediately above the retailer in the chain, but the cost to him in terms

of both time and money, particularly if he must pay an award for

personal injuries or property damage, may be an unreasonable or im-
possible burden for the retailer to bear, even if only temporarily. And,

if there is a break in the chain immediately above him, the retailer must

bear the entire cost.*'^

In a case strikingly similar to Candlelight Homes, the Arizona Su-
preme Court imposed the privity barrier between the buyers of a woefully

defective mobile home and its manufacturer, and stated rather cavalierly
the philosophy underlying the vertical privity requirement in implied

warranty cases: *'In short, we believe that a buyer should pick his seller
with care and recover any economic loss from that seller . . . ."^'^ The

court surely could not have meant that any buyer of a mobile home,

an automobile, or other equipment of major cost should first obtain a

favorable, current credit report on her seller before completing the

purchase in order to be protected, or did it? It seems so. It requires

little imagination to realize the impossibihty of this task for the buyer

of a family mobile home or of an office copying machine. The blun-
derbuss of caveat emptor, one of the weapons which the implied warranty

of merchantability was designed to neutralize with respect to product

quality, fires anew from the tower of vertical privity. In a business
climate replete with the failure of retail businesses, "^ the burden of

unmerchantability should be placed where it belongs, on the manufac-
turer, not on the buyer who unknowingly selected a failing retailer or
on the retailer who dealt with an insolvent distributor. What buyer, for
example, could have foreseen the demise of retailing giant W.T. Grant?
Yet the courts requiring privity demand such foresight. The better policy
was expressed in the context of a buyer's attempt to revoke acceptance^ '^

against a remote importer-distributor of a defective automobile: ''A

"°See supra note 107.

'"Flory V. Silvercrest Indus., Inc., 129 Ariz. 574, 580, 633 P.2d 383, 389 (1981)

(emphasis added); accord Hole v. General Motors Corp., 83 A.D.2d 715, 716, 442 N.Y.S.2d

638, 640 (1981); State ex rel. Western Seed Prod. Corp. v. Campbell, 250 Or. 262, 267,

442 P.2d 215, 217 (1968), cert, denied, 393 U.S. 1093 (1969); White & Summers, supra
note 8, § 11-6, at 410; see James Sausage Co. v. Novalco, Inc., 17 U.C.C. Rep. Serv.

(Callaghan) 1027, 1034 (Okla. Ct. App. 1975).

"^See statistics cited supra note 107,

'''See U.C.C. § 2-608.



44 INDIANA LAW REVIEW [Vol. 21:23

consumer cannot be expected to foresee the demise of local dealerships;

instead he is entitled to rely on the distributor who induced him to buy
the automobile. "1^^

In many jurisdictions, the success of the assault on privity depends
to a large extent on the type of injury for which particular damages

are being sought: personal injury, direct property damage caused by the
unmerchantable goods, loss of bargain from the failure of the goods

themselves, or consequential economic loss, such as loss of profits. ^'^

As a matter of fairness and practicality, the type of damages sought
should be no impediment to the success of the assault.

Today, most actions involving personal injury or property damage
in Indiana are based on the Product Liability Act,'^^ which imposes

strict liability upon all sellers of defective products that cause personal
injury or property damage regardless of a lack of vertical or horizontal
privity.*'^ The Product Liability Act does not supersede the Code, how-
ever, so actions for personal injuries resulting from a breach of any

Code warranty are still available.''^
As one Indiana judge has observed: "The modern trend is to reject

the privity requirement" in all cases involving personal injury because

privity is of '* 'no consequence' " in such cases. ''^ It appears that the

'"•Durfee v. Rod Baxter Imports, Inc., 262 N.W.2cl 349, 358 (Minn. 1977).
"'See White & Summers, supra note 8, § 11-2.
"^IND. Code § 33-1-1.5 (1982 and Supp. 1987); see White & Summers, supra note

8, § 11-3.

'"See IND. Code § 33-1-1.5-3 (Supp. 1987):
(a) One who sells, leases or otherwise puts into the stream of commerce any
product in a defective condition unreasonably dangerous to any user or consumer

or to his property is subject to liability for physical harm caused by that product

to the user or consumer or to his property if that user or consumer is in the

class of persons that the seller should reasonably foresee as being subject to

the harm caused by the defective condition, and, if:

(1) the seller is engaged in the business of selling such a product; and

(2) the product is expected to and does reach the user or consumer without

substantial alteration in the condition in which it is sold by the person sought

to be held liable under this chapter.

(b) The rule stated in subsection (a) applies although:

(1) the seller has exercised all reasonable care in the preparation, packaging,

labeling, instructing for use, and sale of this product; and

(2) the user or consumer has not bought the product from or entered into

any contractual relation with the seller.

(Emphasis added.)

See Citizens Gas & Coke Utility v. American Economy Ins. Co., 486 N.E.2d 998 (Ind.
1985); Whittaker v. Federal Cartridge Corp., 466 N.E.2d 480 (Ind. Ct. App. 1984).

"«See Ind. Code § 33-1-1.5-1 (Supp. 1987); Thiele v. Faygo Beverage, Inc., 489
N.E.2d 562 (Ind. Ct. App. 1986).

'"Lane v. Barringer, 407 N.E.2d 1173, 1178 (Ind. Ct. App. 1980) (Ratliff, J.,



1988] VERTICAL PRIVITY 45

"modern trend" has in fact become the majority position. In most
jurisdictions vertical privity between an injured party and a remote

manufacturer need not be shown in a suit for personal injuries or property

damage caused by a breach of the implied warranty of merchantability. '^^

That a plaintiff, such as Mrs. Lane in Lane v. Barringer,^^^ has

four years to bring a U.C.C. warranty action'^^ rather than two years

for a products liability or negligence action'^^ does nothing to upset the

expectations of the manufacturer. In implied warranty cases, the time

begins to run on delivery of the goods to the buyer, whether the defect

is or is not discoverable. ^^"^ In negligence or products Hability cases, the

limitation period begins to run from the time of the injury. *^^ And under
the Product Liability Act, suit may be brought against a manufacturer
up to ten years after delivery of his product to the initial user, usually

the retail buyer. ^^^ Thus, it is possible for the four year statute of

limitations under the Code to expire before the occurrence of any personal
injury or property damage, in which case an action to recover for that

injury or damage will be barred. Yet there may still be an action for
negligence or under the Product Liability Act for an additional six years.

A manufacturer knows that under Indiana law, he is exposed to the
possibility of liability for approximately ten years after he produces and

concurring in part, dissenting in part) (quoting Berry v. G.D, Searle & Co., 56 111. 2d
548, 558, 309 N.E.2d 550, 556 (1974)). Judge Ratliff concurred in the judgment against

the plaintiff only because she was not within the protection of U.C.C. § 2-318 in the

horizontal line. See supra notes 50-56 and accompanying text. Lane is an unusual case

because the plaintiff had allowed the two year statute of limitations for tort actions,

including strict products liability, to expire. The only remedy still available for the personal

injury she suffered was under the U.C.C. for breach of implied warranty of merchantability

which, according to two judges of the court of appeals, required vertical privity.

'^oSee, e.g.. Berry v. G.D. Searle & Co., 56 111. 2d 548, 309 N.E.2d 550 (1974); 2
Frumer & Friedman, supra note 22, §§ 3.02[6] at 3-194, 3.02[7][a] at 3-216 to 3-217; 2
R. HuRSH & H. Bah^ey, supra note 93, § 10.6, at 344; G. Wallach, supra note 93, t
11.15[l][a].

'2' 407 N.E.2d 1173 (Ind. Ct. App. 1980).

'^^See U.C.C. § 2-725(1).

'^^The limitation on a products liability action is two years from the date of the

injury, but no action may be brought more than ten years "after the delivery of the
product to the initial user or consumer." Product Liability Act, Ind. Code § 33-1-1.5-5

(Supp. 1987). The limitation on ordinary negligence actions involving personal injury or

property damage is two years. Ind. Code § 34-1-2-2(1) (1982).
'"^See U.C.C. § 2-725(2); Stumler v. Ferry-Morse Seed Co., 644 F.2d 667 (7th Cir.

1981). An exception is if the warranty expressly extends to future performance, § 2-725(2),
but that involves express, not implied, warranties. See H. Greenberg, supra note 26, §
14.34.

'^'See Dague v. Piper Aircraft Corp., 275 Ind. 520, 418 N.E.2d 207 (1981); Wojcik

V. Almase, 451 N.E.2d 336 (Ind. Ct. App. 1983).

'^"See Ind. Code § 33-1-1.5-5 (Supp. 1987); see also supra note 123.



46 INDIANA LAW REVIEW [Vol. 21:23

distributes his goods. Allowing recovery from a remote manufacturer

for breach of a Code warranty therefore does nothing whatever to change

that expectation of possible exposure.

The cases are more evenly divided when the damages sought are
economic in nature. '^^ Such damages may be of two distinct types. The
first type, direct damages or loss of bargain damages, results from the

effect of the unmerchantability of the goods on the value of the goods

themselves. The buyer simply did not get what he bargained for. The

second, consequential damages such as loss of profits, results from the

buyer's inability to use the goods as expected. ^^^ Although the majority

of courts apparently do not yet permit buyers to recover either type of

economic damages from remote manufacturers without privity, ^^^ the

number of jurisdictions allowing such damages in non-privity situations
is increasing, '^° and the majority of writers on the subject consider privity

to be an illogical, antiquated requirement which should be eHminated

as a requirement in all warranty cases regardless of the type of damages

sought. ^3^

If the goods are not worth what the buyer paid because of a

nonconformity attributable to the manufacturer, there is no reason why,

privity or no privity, that the manufacturer should be insulated from

responsibility for that economic damage to the buyer. That responsibility

'^'See G. Wallach, supra note 93, 1 lL15[l][a].

'^'See Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976); White &
Summers, supra note 8, § 11-5. One writer calls these "repair loss"—the cost of repair
or replacement when the product self-destructs without harming anything else—and "ex-
pectation loss"—the loss of use of the product. Franklin, When Worlds Collide: Liability
Theories and Disclaimers in Defective-Product Cases, 18 Stan. L. Rev. 974, 981 (1966).

'^^See White & Summers, supra note 8, at §§ 11-5, 11-6.
'^"See, e.g.. Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976); Spring

Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555, 489 A.2d 660 (1985); Comment,
Rights of Remote Sellers, supra note 29, at 881. In their first edition, White & Summers
characterized the courts awarding economic damages as "a healthy minority." J. White
& J. Summers, Handbook of the Law under the Uniform Commercial Code § 11-5
(1972).

•'•See, e.g., WiLLiSTON ON Sales, supra note 10, § 22-5, at 167-68; Edmeades, supra
note 12; Rabin & Grossman, supra note 87; Razook, The Ultimate Purchaser's and Remote
Seller's Guide through the Code Defenses in Product Economic Loss Cases, 23 Am. Bus.
L.J. 84 (1985); Schwartz, Economic Loss in American Tort Law: The Examples o/ J'Aire
and of Products Liability, 23 San Diego L. Rev. 37 (1986); Speidel, Warranty Theory,
supra note 19 at 24-25; but see, e.g.. White & Summers, supra note 8, at §§ 11-5, 11-
6; Prosser, The Assault, supra note 5, at 1124-34. One writer has suggested that during
Dean Prosser's service in the assault on the citadel of privity, he "was a secret agent
serving its defenders," and "completed his undercover mission for the defenders of the

citadel by openly advocating that there should be no liability to the out-of-privity plaintiff

for products which only caused him economic loss." Edmeades, supra, at 648-49.



1988] VERTICAL PRIVITY 47

is certainly within his expectations. ^^^ The buyer expects merchantable

goods; the manufacturer expects his goods to be merchantable. As stated

by the Michigan Court of Appeals:

On principle the manufacturer should be required to stand behind
his defectively-manufactured product and held to be accountable

to the end user even though the product caused neither accident

nor personal injury. The remote seller should not be insulated

from direct liability where he has merely mulcted the consumer. ^^^

Nor will the remote manufacturer be liable for more than he should

be; the provisions of the Code protect him. For example, it has been
suggested that the manufacturer should not be responsible to the buyer

for the difference between the retail price paid by the buyer and the

actual value of the unmerchantable goods, '^^ apparently because the

manufacturer received less than the retail price from the retailer or

wholesaler who purchased the goods from him.*^^ But that is exactly
the amount for which the manufacturer ultimately should be and will

be Hable if there is no break in the chain of distribution. ^^^

For example, assume that the wholesale price paid by Retailer to

Manufacturer is $50 and the retail price paid by Buyer is $100. If the

goods are completely worthless because of their nonconformity, Buyer's

loss of bargain damage is $100. If Buyer sues Retailer, Buyer will recover

$100. If Retailer impleads or vouches in Manufacturer' ^^ or brings a

separate suit against Manufacturer, Retailer's damages are $100, which

consist of the $50 he paid to Manufacturer for the worthless goods plus

the consequential damage of $50 in profit he lost because of that

worthlessness.'^^

Similarly, if a remote seller sells used goods to the retailer who then
sells them as new to the buyer for considerably more money than he
would have charged for used goods, *^^ the remote seller should not suffer

^^^See supra text accompanying notes 94-100.

'"Cova V. Harley Davidson Motor Co., 26 Mich. App. 602, 609, 182 N.W.2d 800,
804 (1970); see Speidel, Warranty Theory, supra note 19, at 46.

'^''The Code's measure of damages for breach of warranty is "the difference at the

time and place of acceptance between the value of the goods accepted and the value they

would have had if they had been as warranted." U.C.C. § 2-714(2). The buyer may also
recover incidental and consequential damages. U.C.C. § 2-714(3). Presumably, the retail

price will be the value of the goods if they had been as warranted, i.e,, merchantable.

'"White & Summers, supra note 8, § 11-5, at 409.
"*See Ribstein, Guidelines for Deciding Product Economic Loss Cases, 29 Mercer

L. Rev. 493, 521-22 (1978).

'"See supra notes 101-102 and accompanying text.

''^See U.C.C. §§ 2-714, 2-715(2)(a).

"'5ee White & Summers, supra note 8, § 11-5, at 409, where they pose this problem
as another justification for not awarding loss of bargain damages in the absence of privity.



48 INDIANA LAW REVIEW [Vol. 21:23

because of the retailer's misrepresentation or fraud. For the purposes

of calculating damages under section 2-714, the value of the goods as

warranted should be based on whose implied warranty of merchantability

is being enforced. If it is the implied warranty of the remote seller, the

*'as warranted" value used in the calculation should be of merchantable,

used goods as impHedly warranted by the remote seller, not the value

of new goods as either expressly or impliedly warranted by the misrep-
resentation of the retailer. The misrepresentation should not be imputed

to the remote seller without more facts that connect him to the retailer,

such as actual or apparent authority.

Furthermore, allowing buyers to recover loss of bargain damages

will not subject the manufacturer to unreasonably large or unpredictable

damages. The upper limit on the manufacturer's exposure for this type
of damage is the retail value of the goods, a figure well within the
manufacturer's contemplation. A manufacturer who markets a product
which is not fit for its ordinary uses should be responsible to every

buyer who purchased one. Anything less would be unfair to the buyers
and a windfall to the manufacturer.

The argument against allowing recovery of consequential economic

damages, such as lost profits, from a remote manufacturer is that

'*[r]emote buyers may use a seller's goods for unknown purposes from
which enormous losses might ensue. "^"^ This sounds remarkably similar

to the argument made in Winterbottom^'^^ where the privity barrier was
first constructed more than a century ago. But section 2-715 of the

Code allows only the recovery of consequential economic damages **re-
sulting from general or particular requirements and needs of which the

seller at the time of contracting had reason to know and which could
not reasonably be prevented by cover or otherwise. . . ."^"^^ This gives

the manufacturer or other remote seller two important protections that

cannot be ignored. First, the buyer's damages must be foreseeable.*^^ A
buyer's unknown or unpredictable requirements or needs can result only
in damages that are not foreseeable. The warranty of merchantability

extends only to ordinary purposes which, by definition, are known to
the manufacturer. '"^^

Second, the requirement that the buyer attempt to mitigate her

damages **by cover or otherwise" or be precluded from recovering

""'White & Summers, supra note 8, § 11-6, at 410.
""Winterbottom v. Wright, 152 Eng. Rep. 402 (1842); see supra text accompanying

notes 19-21.

'«U.C.C. § 2-715(2)(a) (emphasis added).

'"^See H. Greenberg, supra note 26, § 24.15; White & Summers, supra note 8, §
10-4.

^**See Speidel, Warranty Theory, supra note 19, at 50.



1988] VERTICAL PRIVITY 49

consequential damages ^'^^ limits the ultimate liability of the remote man-

ufacturer. For example, a manufacturer of a seed planting machine

expects that it will plant seeds. If the machine does not plant properly/"*^

the manufacturer should reasonably foresee that the farmer-buyer who
uses the defective planter may lose part or all of his crop for that
season. However, if, before the end of planting time, the farmer realizes

that the planter is not operating properly, the farmer's failure to mitigate

his damages by borrowing, renting, or buying another planting machine

may preclude him from recovering his consequential damages from any
defendant, '"^^ including the retailer with whom he is in privity.

The Indiana Supreme Court squarely addressed the issue of con-

sequential economic damages in Barnes v. Mac Brown & Co.,'^^ where
it stated, in the context of the impUed warranty of habitability:

The contention that a distinction should be drawn between mere
*

'economic loss" and personal injury is without merit. Why there
should be a difference between an economic loss resulting from

injury to property and an economic loss resulting from personal

injury has not been revealed to us. When one person is personally
injured from a defect, he recovers mainly for his economic loss.

Similarly, if a wife loses a husband because of injury resulting

from a defect in construction, the measure of damages is totally

economic loss. We fail to see any rational reason for such a
distinction. ^"^^

Having made this observation, the court held that the second purchaser
of a dwelling could recover for breach of the implied warranty of

habitability the cost of repairing and waterproofing the cracked walls

of a damp basement despite the lack of privity with the builder-defendant.
The comment by the same court nine years later, '*We see no reason
to extend the exception to the privity rule any further in this case or

others not involving personal injury, "^^° contradicted the reasoning in

'''See U.C.C. § 2-715(2)(a) and Official Comment 2.
''""See Dutton v. International Harvester Co., 504 N.E.2d 313 (Ind. Ct. App.), transfer

denied (1987).

'''See U.C.C. § 2-715(2)(a); White & Summers, supra note 8, § 10-4, at 395-96; The
Citadel Stands, supra note 12, at 678-80. Professor Edmeades suggests that courts are

often stingy in awarding consequential damages because of their inherently speculative

nature. See id.

"'«264 Ind. 227, 342 N.E.2d 619 (1976). See supra notes 65-69 and accompanying

text.

''^Id. at 230, 342 N.E.2d at 621.

""Citizens Gas & Coke Utility v. American Economy Ins. Co., 486 N.E.2d 998, 1001
(Ind. 1985).



50 INDIANA LAW REVIEW [Vol. 21:23

Barnes and was both short-sighted and substantially broader than required

in the case before the courtJ^'

If the theoretical basis for continuing the privity requirement in all

warranty cases is to protect remote manufacturers from unpredictable

or catastrophic damage awards, as it purports to be, then no recovery

whether for personal injury or economic loss, in warranty or strict

liability, should be recoverable, and Winterbottom^^^ should again reign

supreme. Abolishing the privity requirement only in personal injury or

property damage cases, as has occurred in most states, *^^ also conflicts

with this theoretical basis for the privity defense. The exposure of a

manufacturer to liability for personal injury or direct property damage

can be far more unpredictable and far more devastating than exposure

to liability for economic loss.*^^ If the defective seed planting machine,^^^

instead of merely not planting the farmer's crop, had thrown and seriously

injured or killed him, and then ran wildly through his barn, destroying

it and the animals in it, the damages could far exceed what the man-

ufacturer might be required to pay to replace a defective machine or a

lost crop.

^^^ Citizens Gas involved horizontal, rather than vertical, privity. The plaintiffs were

the purchasers of a residence from a prior homeowner who had a gas water heater installed
by the gas company and had also executed a waiver of the applicable plumbing code

requirements in order have the heater installed as requested. As a consequence of the

code violation, the heater later malfunctioned, flooded the plaintiffs' home, and caused

approximately $12,000 in property damage but no personal injury. The court based its

ruling against plaintiffs on the absence of privity with the gas company, but could just

as well have decided that the only warranty to which plaintiffs were entitled was the

warranty which their predecessor on the horizontal line had received, as limited by the

waiver.

See also Essex v. Ryan, 446 N.E.2d 368, 372 (Ind. Ct. App. 1983), in which the

court grudgingly conceded that Barnes was not limited to personal injury but added that

personal injury was a significant factor in Barnes. In Sanco v. Ford Motor Co., 771 F.2d

1081 (7th Cir, 1985), the court ruled that although the majority in Barnes rejected the

requirement of privity in warranty cases involving either personal injury or economic loss,

Indiana courts would continue to deny recovery of purely economic losses in negligence

actions.

'"152 Eng. Rep. 402 (1842), discussed supra notes 19-21 and accompanying text.

'"S^e supra note 120 and the accompanying text.

""See Schwartz, Economic Loss in American Tort Law: The Examples of J'Aire and

of Products Liability, 23 San Diego L. Rev. 37, 60-61 (1986), in which the writer suggests

that in very large economic loss cases, the buyer will usually have dealt directly with the

manufacturer rather than with someone lower in the chain of distribution, thereby es-

tablishing privity. With the purchase of more ordinary products by consumers, "and even

businesses can be consumers in the sense that they buy and use products about which

they cannot bargain and have little expertise", the ultimate economic loss will be small

but the personal injury loss can be staggering.

'"5ee Button v. International Harvester Co., 504 N.E.2d 313 (Ind. Ct. App.), transfer

denied (1987).



1988] VERTICAL PRIVITY 51

Furthermore, if the theoretical basis for eliminating privity as a

requirement in personal injury or direct property damage cases is "hu-

manitarian," as it seems to be,*^^ the emphasis is misplaced. A farmer's
loss of a season's crop,^" or the inability of a small business to use a

truck^^^ or a computer system^^^ can have far more disastrous conse-

quences to the buyer than a broken arm or leg. Yet for such physical
injuries, damages would be available from the manufacturer in a products

Hability action or in the majority of jurisdictions which permit recovery

for personal injuries resulting from breach of a U.C.C. warranty in the

absence of privity.*^

2. The Implied Warranty of Fitness for Particular Purpose.—Like
the express warranty, the implied warranty of fitness for particular

purpose requires some affirmative conduct on the part of the person
who makes the warranty: the buyer must have a particular purpose for
the goods, usually something other than the ordinary purpose;*^' the

seller must have reason to know the buyer's particular purpose; the seller
must have reason to know that the buyer is relying on the seller's
expertise to furnish goods suitable for that purpose; and the buyer must

in fact rely on the seller. '^^ jf ^ny of these elements is missing, the

warranty does not exist. Unlike the implied warranty of merchantability

which arises automatically if the seller is a merchant who deals in the
kind of goods involved, ^^^ not every sale by a merchant creates the

implied warranty of fitness, nor is it necessary that the warrantor of

fitness for particular purpose be a merchant for the warranty to exist. ^^"^

'«5ee Citizens Gas & Coke Utility v. American Economy Ins. Co., 486 N.E.2d 998,
1001 (Ind. 1985).

'''See Dutton, 504 N.E.2d 313.

''^See Sanco v. Ford Motor Co., 771 F.2d 1081 (7th Cir. 1985).

''^See Ridge Co. v. NCR Corp., 597 F. Supp. 1239 (N.D. Ind. 1984).
'^See supra text accompanying notes 119-120.

'^'Whether the particular purpose of the buyer must be different from the ordinary

purpose for which the goods are used is a matter of debate. U.C.C. Section 2-315, Official

Comment 2, suggests that the implied warranty of fitness for particular purpose relates
to uses peculiar to the buyer and the implied warranty of merchantability relates to the

ordinary uses of the goods. See, e.g., H. Greenberg, supra note 26, § 14.21; White &
Summers, supra note 8, § 9-9 n.21; Lord, Some Thoughts about Warranty Law: Express
and Implied Warranties, 56 N.D.L. Rev. 509, 608-15 (1980).

'"See U.C.C. § 2-315:

Where the seller at the time of contracting has reason to know any particular
purpose for which the goods are required and that the buyer is relying on the

seller's skill or judgment to select or furnish suitable goods, there is unless

excluded or modified under the next section an impHed warranty that the goods
shall be fit for such purpose.

'"See U.C.C. § 2-314(1).

"^See U.C.C. § 2-315, Official Comment 4.



52 INDIANA LAW REVIEW [Vol. 21:23

A case in which a manufacturer makes an implied warranty of fitness
for particular purpose without there being some connection between the

warranting manufacturer and the retail buyer is exceedingly rare.'^^ In

the usual situation which gives rise to the existence of this warranty,

the manufacturer and the buyer will have communicated with each other

with respect to the buyer's particular needs. This being so, the manu-

facturer will have
*

'participated in the sale," thereby establishing privity

or an exception to it.^^^

There arguably might not be a direct connection between the man-

ufacturer and the buyer when the buyer states his needs to a dealer
who, in turn, relates those needs to the manufacturer and relies on the

manufacturer to furnish goods which will meet the buyer's particular

needs. In such a situation, however, there is still likely to be an exception

to the privity requirement on one of two bases: (1) in relating the

particular needs to the manufacturer, and only for that purpose, whether

the dealer discloses the identity of the buyer or not, the dealer is acting

as the agent of the buyer; ^^"^ (2) the promise of the manufacturer to

furnish goods which meet the particular needs of a particular buyer, as

related to him by the dealer, is a third-party beneficiary contract in

which the buyer is the intended beneficiary. ^^^ In either case, the principles

of agency law or third party beneficiary contract law should furnish the

necessary privity or surmount its barrier.

As with the giving of an express warranty, unless the dealer has

the actual or apparent authority to make warranties on behalf of the
manufacturer, any implied warranty of fitness made by the dealer should

^^^See Rabin & Grossman, supra note 87, at 37-38; Comment, Rights of Remote
Sellers, supra note 29, at 897-898.

'^See Richards v. Goerg Boat & Motors, Inc., 179 Ind. App. 102, 384 N.E.2d 1084,
transfer denied (1979), and the discussion, supra, at note 78 and accompanying text.

'''See Pawlec v. Digiticom, Inc., 192 N.J. Super. 474, 477 n.l, 471 A.2d 60, 62 n.l

(1984).

'''But see Hixon v. Sherwin-WiUiams Co., 671 F.2d 1005 (7th Cir. 1982). The court

said that to hold that an insurance company which hired a contractor to replace an

insured's damaged linoleum floor was the third-party beneficiary of a contract between

the contractor and a subcontractor who failed to follow instructions on use of the glue
was "a transparent effort to evade the privity requirement; if it prevailed, the requirement

would be meaningless." Id. at 1010. Cf. Davidson v. John Deere & Co., 644 F. Supp.
707 (N.D. Ind. 1986), which involved an express warranty claim by a personal representative

whose decedent was killed while using equipment purchased by his employer. The court

observed that because Indiana has adopted U.C.C. § 2-318, Alternative A, no one other

than the persons enumerated therein can be a third party beneficiary of the contract

between the seller and the buyer. Although this case dealt only with horizontal privity,

a court could conceivably take the same position with respect to vertical privity despite

the position of the drafters that the section is neutral on the issue. U.C.C. § 2-318,

Official Comment 3. See supra, notes 30-32 and accompanying text.



1988] VERTICAL PRIVITY 53

not be attributable to or the responsibility of the manufacturer. The

absence of the required element of the manufacturer's reason to know
the buyer's particular purpose, whatever the basis for that lack of reason

to know, is fatal to the existence of such a warranty from the manu-

facturer.

It follows, therefore, that if the buyer is able to show that there

is an implied warranty of fitness for particular purpose and that the

warranty was made by the manufacturer, it will be almost impossible
for the manufacturer to show that there was no privity with the buyer

or an exception thereto. And once the warranty and its breach have
been established, the buyer-plaintiff is entitled to the full range of

remedies granted by the Code.

One difficulty that may arise is that the Indiana courts, both federal
and state, seem to lump the implied warranty of fitness with the implied

warranty of merchantability under the label "impHed warranties," with-

out distinguishing between them or considering their specific elements.

In Richards v. Goerg Boat & Motors, Inc,,^^^ the court flatly stated,
without considering how the two warranties differ, *'[I]mplied warranties
of merchantability and fitness for a particular use, as they relate to

economic loss from the bargain, cannot ordinarily be sustained between

the buyer and a remote manufacturer. "'^° In another case, the court

concluded that "the particular purpose of a passenger automobile is to

drive on the public streets and highways safely without uncontrolled and

unsafe behavior," and that the implied warranty of fitness had been

breached.'^' And in Candlelight Homes, the court noted that the amended
complaint referred only to the "implied warranty of fitness, "'^^ but the

court treated the case as if it involved the implied warranty of mer-

chantability.*^^

The analysis of these courts is incorrect. As demonstrated above,
if the facts show that there is an implied warranty of fitness attributable

to the manufacturer, no matter how far up the chain of distribution,
there is a connection between the manufacturer and the buyer that should

'^^179 Ind. App. 102, 384 N.E.2d 1084 transfer denied (1979).
'™179 Ind. App. at 112, 384 N.E.2d at 1092; accord Dutton v. International Harvester

Co., 504 N.E.2d 313, 315 (Ind. Ct. App.) transfer denied (1987).

'^'Karczewski v. Ford Motor Co., 382 F. Supp. 1346, 1351 (N.D. Ind. 1974), aff'd
mem., 515 F.2d 511 (7th Cir. 1975). The federal court incorrectly concluded, without

Lane v. Barringer or Candlelight Homes yet decided, that Indiana state courts would not
require privity in an action for personal injuries resulting from a breach of warranty

under the Uniform Commercial Code.
'^^414 N.E.2d at 981.

'^The facts stated in the opinion do not support the existence of the fitness warranty,

much less its breach. Thus, the result reached by the Indiana Court of Appeals, judgment
in favor of the manufacturer, was probably correct but the court's analysis was flawed.



54 INDIANA LAW REVIEW [Vol. 21:23

support a finding of privity or an exception to the privity requirement.

If the Indiana courts distinguish between the impHed warranties of

merchantabihty and of fitness for particular purpose, as they should,

then a careful analysis of the facts in future cases would eliminate privity

as a barrier in actions for breach of the implied warranty of fitness for

particular purpose. Thus, the principal task of a damaged buyer will

be to prove the existence of the warranty and its breach.

3. Protection for the Manufacturer or Other Remote Seller.—Con-
trary to the arguments of the defenders of the privity citadel, permitting

a buyer to recover from a remote manufacturer or other remote seller

does not convert that seller into an insurer. As discussed earlier, even

if the remote manufacturer does nothing more than market his goods,

he will not be liable for any damages peculiar to a particular buyer

unless the seller knows or has reason to know of the buyer's needs. To
be recoverable, the damages must be reasonably foreseeable. ''^'* If the

buyer misuses the goods or puts them to some extraordinary or unusual

use, the seller should not be liable for any of the resulting damages. ^^^

Furthermore, if the buyer could have avoided the claimed consequential

damages by mitigating her losses but failed to do so, the consequential

damages will not be recoverable. ^^^

The Code also furnishes other protections to the seller, some of

which the seller must affirmatively invoke, others of which are built

into any Code transaction. The most important of these from the view-
point of a seller or manufacturer is the ability to modify or disclaim

warranties and to limit liability for damages. '^^ The manufacturer of

new goods does not usually attempt to disclaim all warranties, although
he may do so. A disclaimer of all warranties, express and implied, which
must clearly be brought to the attention of the buyer in order to be

effective, ^"^^ will likely have a chilling effect on the buyer's desire to buy

the product, a result that no manufacturer wants. More typically, the
manufacturer will give the buyer an express warranty that the goods

shall be free of defects for a specific period of time, will disclaim all

other warranties, express and implied, will Hmit the buyer's remedies in

case of defect to repair or replacement of defective parts exclusively,

and will disclaim liability for any consequential damages, all of which

the Code expressly permits. ^^^ By doing so, and if the manufacturer

'^"See U.C.C. § 2-715(2). See also supra notes 140-154 and accompanying text.

^''^See H. Greenberg, supra note 26, § 14.29.

^''^See U.C.C. § 2-715(2)(a). See also supra text accompanying notes 141-47.

'"See U.C.C. § 2-316 (exclusion or modification of warranties); § 2-719 (contractual

modification or limitation of remedy),

''""See U.C.C. § 2-316 and the Official Comments thereto.
'''See U.C.C. §§ 2-316(2), 2-316(3), 2-719.



1988] VERTICAL PRIVITY 55

fulfills his promises, the expectations of all parties in the chain of

distribution are fulfilled: the manufacturer gets his price; the interme-

diaries in the chain make their profit; the buyer gets goods that are
defect free or at least an adequate remedy for any defect in the goods. '^°

Only if the limitation of remedy fails of its essential purpose, meaning

that it deprives the buyer of the benefit of his bargain, or is uncon-

scionable, will the manufacturer be exposed to liability for all of the

buyer's damages, possibly including consequential damages.'^'

If the buyer inspects the goods before entering into the contract of

sale or refuses to do so on the seller's demand, there is no imphed

warranty with respect to defects which her inspection should have revealed

to her J^2 Should the buyer fail to give notice of breach within a reasonable

time after learning of it, she will be barred from any remedy whatever. ^^^

This is different from the running of the statute of limitations, discussed

earher,'*'* in that the expiration of a reasonable time following breach

can be much shorter than the four-year Hmitation. Moreover, the buyer-
plaintiff must always sustain the burden of proof imposed upon any

party claiming a breach of warranty: she must prove that the warranty

was given by the particular defendant, that it was breached, and that

the breach caused the damages claimed. The buyer's inability to prove

any one of these elements will absolve the remote seller of any liability.

'«°5ee U.C.C. § 2-719.

'''See U.C.C. § 2-719(2), (3). Whether failure of essential purpose under § 2-719(2),

thereby entitling a buyer to the full panoply of remedies given by the Code, also negates

an otherwise valid disclaimer of liability for consequential damages is an issue on which

the courts and the commentators are divided. The better view appears to be that if the

limitation fails of its essential purpose, all damages become available to the buyer, including

consequential damages. Compare, e.g., Mateo Mach. & Tool Co. v. Cincinnati Milacron
Co., 727 F.2d 777 (8th Cir. 1984); Fargo Mach. & Tool Co. v. Kearney & Trecker Corp.,
428 F. Supp. 364 (E.D. Mich. S.D. 1977); Durfee v. Rod Baxter Imports, Inc., 262
N.W.2d 349 (Minn. 1977) (consequential may be recovered) with Chatlos Sys., Inc. v.
National Cash Register Corp., 635 F.2d 1081 (3d Cir. 1980), cert, dismissed, 457 U.S.

1112 (1981); S.M. Wilson & Co. v. Smith Int'l, Inc., 587 F.2d 1363 (9th Cir. 1978);
Stutts V. Green Ford, Inc., 47 N.C. App. 503, 267 S.E.2d 919 (1980) (consequentials may
not be recovered). See H. Greenberg, supra note 26, § 15.23; White & Summers, supra
note 8, § 12-10, at 469-70; Eddy, On the "Essential" Purposes of Limited Remedies: The
Metaphysics of UCC Section 2-719(2), 65 Cal. L. Rev. 28, 88-93 (1977); Special Project,
supra note 9, at 239; Speidel, Warranty Theory, supra note 19, at 54-55 n.l60.

'^^See U.C.C. § 2-316(3)(b). Whether a particular buyer should have discovered defects

during an inspection will depend, to a great extent, on that buyer's expertise. An ordinary
consumer will not be expected to discover defects which only an expert could detect. See

id.. Official Comment 8.
'"5ee U.C.C. § 2-607(3). What constitutes a reasonable time will be a factual issue

dependent upon the identity and knowledge of the buyer as well as the circumstances

surrounding the discovery of the breach. See id.. Official Comment 4.
""See supra notes 121-126 and accompanying text.



56 INDIANA LAW REVIEW [Vol. 21:23

IV. Conclusion

Abandoning the court-created requirement of vertical privity in U.C.C.

implied warranty cases will fix the responsibility for defective goods

precisely where it belongs, on the party who is in fact responsible for
that defect and who is best able to prevent it. Contrary to the arguments
of those who hide behind privity's moss-encrusted walls, abandoning
this archaic defense will neither leave remote parties defenseless nor will

it expose them to any risk beyond those to which they are already

exposed. Not to abandon privity, given the modern structure of sales

transactions, is irrational, illogical, and can result in both hardship for

a damaged buyer or intermediary and a windfall to a cowardly seller
who insists on hiding in the citadel rather than taking responsibility for
his goods. The time has come for Indiana to resume the assault and
press on to ultimate demolition of the citadel.