## Facts

- Chicago Eastern manufactured circular grain storage tanks and purchased corrugated sheet steel from Bethlehem in 1976 for use as tank wall sheets.
- After installation, some tanks developed fractures; Chicago Eastern incurred costs to replace fractured steel and attributed the failures to defects in Bethlehem’s steel.
- Chicago Eastern contended the steel had unusually high nitrogen content that made it brittle and unfit for use in grain-bin walls, though the steel met contractual specifications.
- In 1979, Chicago Eastern placed a second order for steel but did not pay; instead, it sent a “debit memo” attempting to offset the price against its alleged damages from the 1976 purchase.
- Bethlehem sued for the contract price of the 1979 shipment, alleging breach of contract and fraud and seeking compensatory and punitive damages.
- Chicago Eastern counterclaimed for negligence and breach of implied warranties of merchantability and fitness for a particular purpose based on the 1976 shipment.
- A jury found for Bethlehem on its contract claim and against Chicago Eastern on its counterclaims; the district court entered judgment for Bethlehem and refused to instruct on punitive damages.
- Both parties appealed; the district court’s rulings included permitting the counterclaim to proceed despite limitations concerns and rejecting Chicago Eastern’s warranty and tort theories.

## Issues

1. Whether Illinois law allowed Chicago Eastern to assert an otherwise time-barred counterclaim because Bethlehem’s claim arose before the counterclaim became barred.
2. Whether Chicago Eastern presented legally sufficient proof of breach of the implied warranties of merchantability and fitness for a particular purpose.
3. Whether Illinois law barred Chicago Eastern’s negligence and related tort claims under the economic-loss doctrine in a commercial sale-of-goods dispute.
4. Whether evidentiary rulings (including evidence suggesting design or installation causes) and jury instructions warranted reversal.
5. Whether Bethlehem was entitled to a punitive-damages instruction on its fraud theory.

## Decision

- The Seventh Circuit affirmed the judgment in all respects.
- Chicago Eastern’s counterclaim was timely under the Illinois counterclaim statute as applied to the chronology of the parties’ claims.
- The district court properly rejected Chicago Eastern’s implied warranty claims as unsupported as a matter of law on this record.
- Chicago Eastern’s negligence and related tort claims were properly dismissed because the alleged losses were purely economic and arose from a commercial product transaction governed by contract and the UCC.
- The challenged evidentiary rulings and jury instructions were within the district court’s discretion and did not constitute reversible error.
- The district court properly declined to instruct on punitive damages because Bethlehem did not establish the level of misconduct required under Illinois law.

## Legal Principles

- An Illinois counterclaim statute may permit assertion of certain counterclaims after the counterclaim’s limitations period would otherwise expire when the plaintiff’s claim accrued before the counterclaim became barred.
- In a commercial goods transaction, proof that goods met contractual specifications and the presence of plausible alternative causes of failure can defeat implied warranty claims absent legally sufficient evidence of unmerchantability or unfitness.
- Implied warranty of fitness for a particular purpose requires proof that the seller knew of a particular purpose distinct from ordinary use and that the buyer relied on the seller’s skill or judgment for that purpose.
- Under Illinois economic-loss doctrine, tort recovery is unavailable for purely economic losses stemming from disappointed commercial expectations in a contract/UCC setting absent personal injury or damage to other property.
- Punitive damages for fraud under Illinois law require a sufficient factual basis of egregious misconduct; absence of such proof justifies refusal of a punitive-damages instruction.

## Conclusion

The Seventh Circuit left intact a judgment requiring Chicago Eastern to pay the contract price for the 1979 steel shipment and rejecting its offset-based counterclaims, holding that the counterclaim was timely under Illinois statute but failed on the merits, that tort remedies were unavailable for the alleged economic losses, and that no reversible error occurred in the trial rulings or in declining to submit punitive damages to the jury.


Bethlehem Steel Corp. v. Chicago E. Corp., 863 F.2d 508 (7th Cir. 1988)