Balio, J. (dissenting).

I agree with the majority's conclusion that plaintiff's cause of action for breach of implied warranty must be dismissed on the ground that it is time-barred and that it was error to dismiss Honeywell's third-party cause of action for implied indemnification based upon breach of warranty. I am compelled to dissent, however, because the majority has erroneously determined that the physical damage to plaintiff's property constitutes "economic loss".

Rochester Central Alarms, Inc., operated a burglary alarm protection service and maintained a central station so it could simultaneously serve multiple customers in the Rochester area. Several months after plaintiff contracted for the protection service, the alarm company purchased the Centrak system equipment manufactured by AVCO Corporation and installed that equipment at its central station. Compatible equipment was installed at the jewelry store. Honeywell then acquired the business of Rochester Central Alarms, replacing existing equipment. Plaintiff alleges that, prior to entering its jewelry store, burglars cut or interrupted telephone lines, causing an electrical signal of an unlawful entry to be transmitted to Honeywell's central station, and that, by reason of a manufacturing defect in the Centrak equipment at the central station, no audible signal of the break-in was given to a Honeywell employee monitoring the equipment. As a result, no steps were taken to prevent or minimize the physical damage to plaintiff's safe, display cases and fixtures or the theft of jewelry and other merchandise.

Plaintiff, in its bill of particulars, states that the stolen merchandise had a replacement value of $138,103.20, and that the cost of repairing or replacing the safe, display cases and other fixtures damaged during the break-in amounted to $6,636.86. Plaintiff also seeks $2,000,000 for the loss of future business. The majority concludes that all of plaintiff's damages "must be characterized as economic because they resulted only from the failure of the burglary alarm to perform as intended and not from any accidental occurrence". I am unable to agree with this determination for two reasons: physical damages suffered by a non-user bystander by reason of the malfunction of a product do not constitute economic loss and, even assuming that the majority's analysis is applicable, AVCO failed to negate the existence of factual issues whether the equipment failed to perform as intended or whether the equipment accidentally malfunctioned due to a manufacturing defect.

I begin my analysis by acknowledging the general rule that a remote consumer or user has no cause of action sounding in negligence or strict products liability against a manufacturer for economic loss only suffered by reason of a product's failure to perform as intended (see, Schiavone Constr. Co. v Mayo Corp., 56 N.Y.2d 667, revg 81 A.D.2d 221 on dissenting opn below; Hemming v Certainteed Corp., 97 A.D.2d 976). Recovery is permitted, however, for physical damage to person or property (including damage to the product itself) resulting from the malfunction of a product (see, Schiavone Constr. Co. v Mayo Corp., 81 A.D.2d, supra, at 228; Dudley Constr. v Drott Mfg. Co., 66 A.D.2d 368). It is settled law that non-user bystanders may recover for damages to their person or property (Codling v Paglia, 32 N.Y.2d 330). Further, the product malfunction need not be the direct cause of injury. Liability may be imposed if the product "defect was a substantial factor in bringing about [the] injury or damages" (supra, at 342), and includes situations where the defect aggravated the nature or extent of the injuries suffered by the plaintiff (see, Bolm v Triumph Corp., 33 N.Y.2d 151; Butler v Pittway Corp., 770 F.2d 7). In the subject case, plaintiff, a non-user of the central station equipment, contends that damage to his property was aggravated by the failure of the Centrak equipment to give an audible signal, thereby preventing a response by police to the scene.

Where a plaintiff seeks to recover damages for an injury to the defective product, courts, in determining whether the damage is economic or physical, have considered whether the loss was occasioned by an accidental malfunction due to a manufacturing defect or by the failure of the product to meet the buyer's expectations (see, e.g., Schiavone Constr. Co. v Mayo Corp., 81 A.D.2d, supra, at 232-234, distinguishing Dudley Constr. v Drott Mfg. Co., 66 A.D.2d 368, supra; see also, Gaebler, Negligence, Economic Loss, and the U.C.C., 61 Ind L J 593, 595, n 8; Comment, Recovery for Economic Loss Under a Products Liability Theory: From the Beginning Through the Current Trend, 70 Marq L Rev 320, 345-346 [1987]; Note, Economic Loss in Products Liability Jurisprudence, 66 Colum L Rev 917, 918). Although this court has extended that same analysis to instances where property other than the product itself was damaged (see, e.g., Hemming v Certainteed Corp., supra; Cayuga Harvester v Allis-Chalmers Corp., 95 A.D.2d 5, 25-26; but see, All-O-Matic Indus. v Southern Specialty Paper Co., 49 A.D.2d 935 ; Prosser and Keeton, Torts § 101, at 708 [5th ed]; Gaebler, op. cit., at 595, n 8; Franklin, When Worlds Collide: Liability Theories and Disclaimers in Defective Product Cases, 18 Stan L Rev 974, 981 [1966]), the rationale supporting that analysis has no application to the property of non-user bystanders. Simply stated, the non-user has no expectation regarding product performance at a certain level, and thus, his property is not damaged because the defective product failed to meet his expected level of performance.

The same conclusion may be reached by considering the nature of economic damage or loss. Economic damages include direct economic loss, i.e., the diminution of value of the product (e.g., loss of the bargain, costs of replacement or repair of the product) and indirect or consequential economic loss (e.g., lost profits, loss of future business opportunities, loss of ability to replace the product) (see, Solimine, Recovery of Economic Damages in Products Liability Actions and the Reemergence of Contractual Remedies, 51 Mo L Rev 977, 979 [1986]; Comment, Product Defects Resulting in Pure Economic Loss: Under What Theory Can a Consumer Recover?, 50 Mo L Rev 625, 626-627 [1985]; see also, Note, Economic Loss in Products Liability Jurisprudence, 66 Colum L Rev 917, 918 [1966]; Note, Manufacturers' Liability to Remote Purchasers for "Economic Loss" Damages — Tort or Contract?, 114 U Pa L Rev 539, 541 [1966]) or what has been described as "fitness loss" (product's failure to perform specific task contemplated), "expectation loss" (loss of use of product, loss of valuable deal) and "repair loss" (cost to repair or replace the damaged product) (see, Franklin, op. cit., at 981). Although definitions may differ semantically, the essence of economic loss is that it is occasioned by the failure of the product to perform at the level of performance expected by the buyer, resulting in a loss of the bargain (see, Hemming v Certainteed Corp., 97 A.D.2d 976, supra). Because "'[e]conomic loss results from the failure of the product to perform to the level expected by the buyer and the seller * * * economic loss is almost always incurred by the owner of the product, not by persons who merely use it or come into contact with it'" (Schiavone Constr. Co. v Mayo Corp., 81 A.D.2d, supra, at 232, quoting Jones Laughlin Steel Corp. v Johns-Manville Sales Corp., 626 F.2d 280, 288). In the subject case, plaintiff was not a purchaser or consumer of the central station alarm system. It had no contractual relation with the manufacturer or retailer, could not negotiate a contractual remedy with either, could not inspect the equipment for defects, and as a non-user bystander, had no control over the acquisition of the central alarm system by Honeywell. Plaintiff could not suffer a loss of the bargain for the simple reason that it made no bargain. The majority offers no rationale to support a further extension of the analysis in Hemming (supra) and Cayuga Harvester (supra) to the property of parties who are not purchasers.

Even assuming that the rationale set forth in Hemming (supra) and Cayuga Harvester (supra) does apply, factual issues exist whether the damage resulted from the failure of the product to satisfy a certain level of performance or an accidental malfunction caused by a manufacturing defect. Plaintiff alleges that one or more components of the Centrak system, including a decoder card, were defective when manufactured, and that, when the alarm was transmitted from the jewelry store, the system suddenly and unexpectedly failed. Plaintiff also alleges that AVCO was negligent in its inspection and testing of the Centrak equipment. AVCO, in moving for summary judgment, was obliged to submit evidentiary materials demonstrating that no triable issue of fact existed regarding these allegations and that it was entitled to judgment as a matter of law (see, Alvarez v Prospect Hosp., 68 N.Y.2d 320, 324). Defendant submitted no direct evidence that the equipment failed to perform due to product deterioration or that it failed to meet plaintiff's expectations. AVCO attempted to meet its burden of establishing that the equipment was not defective when placed in the stream of commerce by submitting excerpts of EBT testimony to the effect that no defect was discovered during testing before shipment and that the equipment performed properly until the subject incident. This effort clearly was insufficient. The EBT witness was identified simply as an AVCO representative. He did not testify that he personally tested or supervised testing of the subject equipment. His testimony reveals only the company's custom of testing all equipment before shipment. Defendant failed to submit first-hand evidence of product testing, and the record is devoid of evidence that the testing procedures were adequate to detect latent defects. We are asked to speculate and surmise that, because no defect was detected, the test procedures were adequate, and because the test procedures were adequate, there was no defect. The summary judgment movant must present evidentiary facts by a person having first-hand knowledge; such speculation and surmise cannot support summary judgment (see, Baly v Chrysler Credit Corp., 94 A.D.2d 781; cf., Shaw v Time-Life Records, 38 N.Y.2d 201, 207; Shapiro v Health Ins. Plan, 7 N.Y.2d 56, 63). Assuming, arguendo, that defendant did make a prima facie showing of entitlement to a judgment, plaintiff's evidence that the product malfunctioned by failing to give an audible signal was sufficient to raise a triable issue of fact (see, Mitchell v Maguire Co., 151 A.D.2d 355, 356), and defendant failed to negate the existence of that issue as a matter of law. Indeed, although Honeywell sent the suspect decoder card to Automatic Fire Alarm Company (AFA) for evaluation, neither AFA nor AVCO submitted evidence indicating whether the card was evaluated or whether it was found to be defective. Latent defects can escape inspection and testing (see generally, 1 Madden, Products Liability § 9.8 [2d ed]; 1 American Law of Products Liability 3d §§ 11:7, 11:8; Annotation, Manufacturer's Duty to Test or Inspect as Affecting his Liability for Product-Caused Injury, 6 ALR3d 91), and thus, evidence that it was defendant's custom of testing its equipment and the supposition that no defect was detected during such testing does not, in the absence of evidence that test procedures were adequate and properly performed, demonstrate as a matter of law that no defect existed. Further, the fact that a product performs as intended for several years is merely one of several factors to be considered in determining whether a defect existed before the product left the manufacturer's control (see generally, 1 American Law of Products Liability 3d §§ 3:15, 3:16), and that factor alone fails to demonstrate, as a matter of law, that no latent defect existed (see, Dudley Constr. v Drott Mfg. Co., 66 A.D.2d 368, supra [product failure five years after manufacture]).

In sum, plaintiff suffered physical damage to its property and merchandise, other than economic loss, and is not precluded from seeking recovery upon the theory of negligence or strict products liability (see, Potsdam Welding Mach. Co. v Neptune Microfloc, 57 A.D.2d 993; All-O-Matic Indus. v Southern Specialty Paper Co., 49 A.D.2d 935, supra; Butler v Pittway Corp., 770 F.2d 7, supra; see generally, 1 Weinberger, New York Products Liability § 6:11 et seq.).