Cargill, Inc. v. Ron Burge Trucking, Inc. addresses the issue of whether the implied warranties that exist in a contract for the sale of goods also exist in a service contract.

In a recent UCC Article 2 seminar, Thomas Archbold and Jeffrey Post explored the application of implied warranty claims in the context of contracts for the sale of goods. In Cargill, Inc. v. Ron Burge Trucking, Inc. and Nat’l Interstate Ins. Corp. (D. Minn. Feb. 2, 2013), the Minnesota Federal District Court examined whether implied warranties extended to service contracts. The court also explored whether the recent Minnesota Supreme Court case of Glorvigen v. Cirrus Design Corp., 816 N.W.2d 572 (Minn. 2012) precluded tort claims because of the existence of a contract. Both of these issues raise significant concerns when drafting or litigating service contracts.

In Cargill, Cargill’s customer sued Cargill because the customer claimed that the salt Cargill sold it contained rocks. In turn, Cargill sued its trucking company, claiming that the trucking company was the source of the rocks. Among Cargill’s claims was one for breach of implied warranty of fitness for a particular purpose. Id. at *5. The court concluded that the in the context of service contract an implied warranty did not arise by operation of law. Id. at *5-6.

From a business perspective, the court’s rejection of an implied warranty claim has two significant implications. First, in drafting a service contract, the party purchasing the service should press to make sure that the contract explicitly lists the purchasing party’s performance expectations. For instance, a party purchasing transportation services would want to contain explicit prohibitions that guard against contamination. Second, a company pursuing litigation will want to examine how closely its claims relate to the actual duties spelled out in the service contract. The lack of an explicit duty should negatively impact a company’s case evaluation.

The Cargill court also ruled on Glorvigen’s impact on tort claims. In Glorvigen, the Minnesota Supreme Court seemed to extend the economic-loss doctrine from sales of goods contracts to service contracts, in effect precluding tort claims. Id., 816 N.W. 2d at 30-31. In Cargill, the court held that Cargill could not pursue tort claims because the parties’ duties arose out of a contract. Id. at 6-7.

The application of Glorvigen going forward creates significant uncertainty regarding the viability of tort claims when there is a valid service contract. A court that interprets Glorvigenbroadly could hold that there are no tort claims if there is a contract. A court interpreting the case more narrowly may hold that tort claims are preempted only where there is a specific contractual clause covering the conduct that gives rise to the tort claim. Another court could hold that certain types of services (e.g., legal or medical) traditionally give rise to both tort and contractual duties. There will be a lack of predictability until Glorvigen’s scope and application are clarified.

Again, from a business perspective, the Glorvigen and Cargill decisions mean that a party purchasing business services must carefully spell out its expectations in the contract because a fallback claim based on tort law may not be available. In the litigation context, the extension of the economic-loss doctrine to service contracts means that a business should focus on its core contract claims and remedies in evaluating and pursuing litigation involving a contract for services.