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Exculpatory clause valid under N.C. law and barred consequential damages under contract and negligence theories.

Severn Peanut Co., et al. v. Industrial Fumigant Co., et al.
-- F.3d – (2015) (December 2015)
by Gregory Emrick, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://caselaw.findlaw.com/us-4th-circuit/1719778.html

On April 20, 2009, Severn Peanut Co., (“Severn”) entered into a contract with Industrial Fumigant Co., (“IFC”) to apply phosphine to one of the peanut storage domes owned and operated by Severn. In exchange for $8,604.00, IFC agreed to apply the phosphine in a “manner consistent with instructions… and precautions set forth in [its] labeling.” It was agreed in the contract that the contract amount was not “related to the value of Severn’s premises or the contents therein” and was solely the “value of the services provided.”

On August 4, 2009, IFC began to treat the storage facility with phosphine tablets by pouring them in a single hatch, causing them to pile below the hatch in contradiction to the manufacturer’s instructions. Phosphine is highly flammable and six (6) days after application, a fire began and was unable to be extinguished. On August 29, an explosion occurred that caused extensive damage to the storage dome and to 20,000,000 pounds of peanuts. Severn was paid $19 Million Dollars for the damages, lost business and fire remediation and suppression costs by its insurer. Severn then sought recovery from IFC for all the amounts paid, under theories of breach of contract and negligence.

The United States District Court for the District of North Carolina granted summary judgment in IFC’s favor, holding that contractual provision limiting consequential damages barred the breach of contract claim. Thereafter, the Court sua sponte requested the parties brief the issue of contributory negligence, and then held that Severn was contributorily negligent. Severn timely appealed the District Court’s ruling.

The Court of Appeals for the Fourth Circuit first addressed the contractual limitation of consequential damages in North Carolina law. The Court found that North Carolina gave contracting parties substantial freedom to prepare contracts, including allowing “a person [to] effectively bargain against liability for harm caused by his ordinary negligence in the performance of a legal duty arising out of a contractual relation.” Id. at 2, (quoting Hall v. Sinclair Refining Co., 89 S.E.2d 396, 397 (N.C. 1955). While not favored and strictly construed, the Court held that Severn-IFC’s exculpatory clause was a proper limitation on consequential damages. The Court further dismissed Severn’s argument that the clause should be voided on public policy grounds, since the clause could be performed without violating Federal Insecticide, Fungicide, and Rodenticide ACT (“FIFRA”) and North Carolina law.

The Court then addressed the negligence claims, holding that the District Court erred in barring the claim based on contributory negligence, as a matter of law. The Court, however, held that the doctrine of “Economic Loss” precluded recovery for negligence. The economic loss doctrine “prohibits recovery for purely economic loss in tort when a contract, a warranty, or the UCC operates to allocate risk.” Id. at 5. The Court noted that while the contract was for “services”, the “pesticide which allegedly caused the fire and the peanuts and dome which that fire allegedly destroyed were … contractually and practically bound up together.” Id. at 6. Severn had the best opportunity to mitigate the risk through contract negotiations, but failed to do so. As there was a contract addressing the loss, the negligence claims failed.