Summary of a Recent
Judicial Development in
Commercial Transactions

City's Sale of Water to Meat Processor
Was Sale of Goods Under the UCC

Lynn Cox
National AgLaw Center Research Assistant

In an action brought by a meat processing company against a city for negligence, breach of express warranty, and breach of implied warranty of fitness for a particular purpose, alleging that the water that the city supplied to the meat processing company contained a foreign substance harmful to its business, the South Dakota Supreme Court has ruled that the city's furnishing of water to the meat processing company was a sale of goods under Article 2 of the Uniform Commercial Code ("UCC"). Dakota Pork Indus. v. City of Huron, 638 N.W.2d 884, 886 (S.D. 2002). It also ruled that the contract for the sale of water did not contain any express warranties and that the contract did not contain an implied warranty of fitness for a particular purpose. See id. at 886-87. It therefore affirmed the trial court's decision to grant summary judgment in favor of the city. See id.

Dakota Pork Industries ("Dakota Pork") operated a meat processing plant in Huron, South Dakota. See id. at 884. In 1991, Dakota Pork and the city of Huron ("City") entered into an agreement providing that the City would supply water to Dakota Pork in exchange for Dakota Pork's water rights in the James River. See id. The parties' written agreement did not contain any special conditions or uses for the water. See id.

A foreign substance that was later discovered to have been calcium carbonate, appeared on the meat processed at Dakota Pork. See id. at 884-85. Dakota Pork claimed that the calcium carbonate came from the water that was supplied to it by the City. See id. On May 29, 1998, Dakota Pork filed a complaint against the City for negligence, breach of express warranty, and breach of implied warranty of fitness for a particular purpose. See id. at 885. The City filed a motion for summary judgment and the trial court granted the City's motion. See id. Dakota Pork appealed the trial court's decision to the South Dakota Supreme Court with respect to its claims for breach of express warranty and breach of implied warranty of fitness for a particular purpose. See id.

The court explained that "[t]he primary inquiry is whether [the] City's furnishing of water to Dakota Pork constitutes a sale of goods under Article 2 of the Uniform Commercial Code (UCC)." Id. at *6. It also explained that in Canavan v. City of Mechanicville, 128 N.E. 882 (N.Y. 1920),

the New York Court of Appeals examined the sale of water under the Uniform Sales Act. Under that Act, goods were defined in part as "all chattels personal other than things in action or money." The court held that "[t]he furnishing of water, through a system of waterworks, by a water corporation, either private or municipal, to private consumers, at a fixed compensation, is a sale of goods within the meaning of the statute . . . . It is a sale of goods as if the water were collected and delivered in bottles for a price."

Id. at *7 (quoting Canavan, 128 N.E. at 883).

The court further explained that

[t]he UCC defines "goods" as all things "which are movable at the time of identification to the contract for sale[.]" Goods "must be both existing and identified before any interest in them can pass." "Whatever can be measured by a flow meter has "movability" as that term is used in connection with the definition of goods."

Id. (citations omitted).

The court agreed with the viewpoint expressed in Canavan, a pre-UCC case, and held that "the sale of water by a municipality . . . [constitutes a] sale of goods and a transaction which is governed by the UCC." Id. Having made this determination, the court next considered Dakota Pork's claims for breach of express warranty and breach of implied warranty of fitness for particular purpose. See id.

Dakota Pork asserted that water quality was discussed during contract negotiations and that the City was aware of its water needs, even though it conceded that the written contract did not contain an express warranty with respect to water quality standards. See id. Dakota Pork relied on S.D. Codified Laws § 57A-2-313, which provides that

[t]erms . . . which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence . . . of a contemporaneous oral agreement but may be explained or supplemented (a) [b]y course of dealing or usage of trade or by course of performance, and (b) [b]y evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Id.

The City denied that it made any oral guarantees or express warranties with respect to the quality of the water it would supply to Dakota Pork. See id. at 886. It argued that "because the contract is a complete and exclusive statement of the agreement between Dakota Pork and City," § 57A-2-313 "precludes the supplementation of terms to the contract." Id.

The court ruled in favor of the City, stating that

Supplemental terms cannot be introduced through contemporaneous statements because, in this case, the written contract was a complete and exclusive statement of terms. Furthermore, when asked to identify and any express warranties relating to water quality, Dakota Pork simply referred to the contract, which was silent . . . . Dakota Pork's alleged oral understanding with City is not consistent with the written contract. The express terms of the contract control in the face of inconsistency . . . . We agree that the trial court properly granted summary judgment on this issue.

Id. at 886-87.

The court also ruled that the sale of water "carried no implied warranties of merchantability or fitness for a particular purpose. See id. It explained that in Canavan the court stated that

[w]hile we have found decisions holding that suppliers of electric power, natural gas, and bottled fuel gas may be held liable to their customers on the theory of . . . breach of implied warranty, we have been cited to no authority nor have we found any holding there is an express or implied warranty of merchantability or fitness for a particular purpose in connection with the sale and supply of water.

Id. (citation omitted).

The court agreed with the ruling in Canavan and concluded that "the furnishing of water by a municipality through its water works system does not carry an implied warranty of fitness for a particular purpose." Id.

The case was decided on January 2, 2002; this summary was posted August, 2003