Summary
holding that "the purchaser of a product pursuant to contract cannot recover economic losses from the seller manufacturer on claims in tort based on negligent manufacture or strict liability in the absence of physical harm to persons or property caused by the defective product"
Summary of this case from Nebraska Plastics v. Holland Colors AmericasOpinion
No. 81-747.
Filed March 25, 1983.
1. Torts: Strict Liability: Damages. The doctrine of strict liability in tort may be used to recover damages to the defective product itself where the damage occurred as a result of a sudden, violent event and not as a result of an inherent defect that reduced the property's value without inflicting physical harm to the product. 2. Torts: Negligence: Strict Liability: Case Disapproved. To the extent that Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973), held that strict liability in tort may not be used to recover for physical harm to property only, it is disapproved. 3. Torts: Negligence: Strict Liability. The purchaser of a product pursuant to contract cannot recover economic losses from the seller manufacturer on claims in tort based on negligent manufacture or strict liability in the absence of physical harm to persons or property caused by the defective product.
Appeal from the District Court for Lancaster County: SAMUEL VAN PELT, Judge. Affirmed.
Fredric H. Kauffman and Terry R. Wittler of Cline, Williams, Wright, Johnson Oldfather, for appellant.
Michael G. Helms of Schmid, Ford, Mooney Frederick, for appellee.
KRIVOSHA, C.J., BOSLAUGH, McCOWN, CLINTON, WHITE, HASTINGS, and CAPORALE, JJ.
This is an action under various tort and contract theories to recover all or a portion of the cost of conducting a retrofit program to replace all steel tubing manufactured and sold by the defendant to plaintiff and incorporated into cranes manufactured and sold to ultimate users or consumers by the plaintiff. The District Court sustained defendant's demurrers and dismissed plaintiff's petitions. The plaintiff has appealed.
The plaintiff, National Crane Corporation, is a Nebraska corporation which manufactures and sells a diversified line of cranes. The defendant, Ohio Steel Tube Company, is an Ohio corporation engaged in the business of designing and manufacturing various types of steel tubing.
During the period beginning in July 1970 and ending in May 1975, plaintiff purchased sections of welded steel tubing from the defendant for use in the tilt cylinder mechanism of cranes manufactured by plaintiff. During the period of time from January 1, 1971, to June 1, 1976, 1,232 cranes manufactured by plaintiff utilizing the steel tubing purchased from defendant were sold by the plaintiff to various customers.
Failures of the tilt cylinder mechanism of the cranes containing the steel tubing supplied by defendant commenced on April 4, 1973, when the first failure occurred. Three more failures occurred in 1974. Each failure was reported to defendant by plaintiff. Defendant represented to the plaintiff that the first failure was due to an inadequacy of material specification. In two 1974 cases defendant acknowledged the failure was due to an imperfection in the weld, and in the other reported that the material met specifications and the weld was satisfactory.
In March 1975, following inquiry by plaintiff, defendant advised plaintiff that the tubing which had been and was still being furnished to plaintiff had been thoroughly and completely tested. The last tubing manufactured by the defendant and involved in this case was delivered to plaintiff in May 1975.
Between January 1976 and June 1976 four more cylinder failures occurred, each of which was also reported to defendant. All the cranes involved in this action were sold by June 1, 1976.
In July 1976 plaintiff launched its own internal investigation and analysis of the cylinder failures which were being reported. Three additional cylinder failures occurred between July 22 and November 5, 1976, in one of which a loss of life occurred.
By December 1976 plaintiff's testing and investigation reflected that the failures were not caused by overloading or piston seal leakage and that the cylinder design was adequate. Although plaintiff concluded that the cylinder failure problem must lie with the cylinder material, it was unable to reach specific, precise conclusions on which it could reasonably rely.
On December 29, 1976, plaintiff engaged independent engineering and testing consultants to assist in determining the precise cause of the cylinder failures. Thereafter, and throughout the year 1977, representatives of the plaintiff met with representatives of the defendant, and the defendant was advised of the status of the engineering testing and evaluation being carried on.
Between January 17 and December 7, 1977, four more cylinder failures occurred. In January 1978 defendant formally advised plaintiff that it would not participate in the testing and evaluation program because defendant believed the failures were not the result of any defects in defendant's manufacturing.
In May 1978 plaintiff was advised by its engineering and technical consultants that material and product defects existed in the welded tubing used in the manufacture of the boom cylinders for plaintiff's cranes. Plaintiff was informed that unexpected failures of the cylinders could occur at any time without warning and that to insure the safety of others the cylinders must be replaced.
Plaintiff undertook a retrofit program to replace all of the potentially dangerous cylinders with suitable and safe substitute cylinders, and expended $1,078,960 in testing and replacing the defective tubing manufactured by defendant and incorporated in cranes manufactured and sold by plaintiff.
Plaintiff filed its petition in this proceeding on June 20, 1980, seeking recovery of the costs and expenses of the retrofit program under three different theories based on the basic facts set out above. The 15 actual failures are not involved. The first cause of action was for breach of express and implied warranties. The second cause of action was for negligent manufacture of tubing known to be dangerous unless carefully made. The third cause of action was pleaded on the basis of strict liability.
The defendant demurred to the petition on the grounds that the first cause of action was barred by the statute of limitations and the other two causes of action were not available for the recovery of economic loss. The District Court sustained the demurrer on those grounds.
Plaintiff filed an amended petition alleging the same facts but seeking recovery under theories of indemnity and contribution. Defendant demurred to the causes of action in the amended petition upon the grounds that they either were barred by the applicable statute of limitations or were unavailable to the plaintiff, the plaintiff being a volunteer in the alleged action. The District Court sustained defendant's demurrer to the amended petition. Plaintiff elected to stand on the original and amended petitions and the court dismissed them. Plaintiff has appealed.
Plaintiff contends that the principles of tort law should be extended to permit plaintiff to recover the economic losses incurred under the retrofit program involved here, and that plaintiff should not be limited to recovery on the contractual basis of express or implied warranties. The argument is that because the plaintiff and defendant might be liable to an ultimate user or consumer of plaintiff's cranes under tort theories of liability if the defective tubing were not replaced, therefore the expense of eliminating that potential tort liability as between plaintiff and defendant is recoverable as a tort claim rather than being recoverable under contract law as a claim for the breach of express or implied warranties under the Uniform Commercial Code.
The great majority of courts which have considered the issue have held that the purchaser of a product pursuant to contract cannot recover economic losses from the manufacturer on claims based on principles of tort law, in the absence of property damage or personal injury from the use of the product. See Jones Laughlin Steel v. Johns-Manville Sales, 626 F.2d 280 (3d Cir. 1980), and cases and authorities there cited.
The line of demarcation between physical harm and economic loss has been said to reflect the line of demarcation between tort theory and contract theory. See Alfred N. Koplin Co. v. Chrysler Corp., 49 Ill. App.3d 194, 364 N.E.2d 100 (1977), and cases there cited. "Economic loss" in that case was defined by the court as "`damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits — without any claim of personal injury or damage to other property * * *.'" Id. at 199, 364 N.E.2d at 103.
Chief Justice Traynor analyzed the distinction which the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss. "He [the manufacturer] can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He cannot be held for the level of performance of his products in the consumer's business unless he agrees that the product was designed to meet the consumer's demands. A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market. He can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will. Even in actions for negligence, a manufacturer's liability is limited to damages for physical injuries and there is no recovery for economic loss alone." Seely v. White Motor Co., 63 Cal.2d 9, 18, 403 P.2d 145, 151, 45 Cal.Rptr. 17, 23 (1965).
Dean Prosser, after pointing out that a seller's liability for negligence covers any kind of physical harm, including not only personal injuries but also property damage, said: "But where there is no accident, and no physical damage, and the only loss is a pecuniary one, through loss of the value or use of the thing sold, or the cost of repairing it, the courts have adhered to the rule . . . that purely economic interests are not entitled to protection against mere negligence, and so have denied the recovery." W. Prosser, Law of Torts, Products Liability 101 at 665 (4th ed. 1971).
The rule that the purchaser of a product pursuant to contract cannot recover economic losses from the manufacturer under a claim of strict liability in tort has been adopted by this court. In Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973), we said: "From a review of the authorities and giving maximum import to the basic doctrine of strict tort liability, we feel that the doctrine of strict tort liability was not conceived as a substitute for warranty liability in cases where the purchaser has only lost the benefit of his bargain. . . . If the loss is merely economic, the Uniform Commercial Code has given the purchaser an ample recourse under the particular provisions and requirements of the code." Id. at 561-62, 209 N.W.2d at 653.
Sections 323, 395, and 402 A and B of the Restatement (Second) of Torts (1965) all apply to tort liability for "physical harm." The title of 402 A is "Special Liability of Seller of Product for Physical Harm to User or Consumer." The section then provides: "(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if . . . ." Id. at 347-48.
The Restatement sections referred to are applicable only where the product causes physical harm. Nowhere in the comments or illustrations does the Restatement indicate that the doctrine of strict liability covers economic loss in the absence of physical harm caused by the product. In addition, Neb. Rev. Stat. § 25-21,180 (Reissue 1979) defines a product liability action as an action brought "for or on account of personal injury, death, or property damage caused by" the product. The statute refers only to physical harm, not to economic loss.
Section 402 A specifically applies to liability for physical harm caused to the ultimate user or consumer or to his property. It is the unanimous view of the courts that plaintiffs may utilize a strict liability cause of action to recover for damage to property other than the defective product. That consensus is not present, however, as to damage to the defective product itself.
Damage to the product itself is sometimes characterized as economic loss or indirect loss resulting from the inability to make use of the defective product or loss of the benefit of the bargain. The difficulty in determining whether to apply strict liability for any type of economic loss results from the distinction between tort doctrine of strict liability and contract theory embodied in the Uniform Commercial Code.
A majority of courts that have considered the applicability of strict liability to recover damages to the defective product itself have permitted use of the doctrine, at least where the damage occurred as a result of a sudden, violent event and not as a result of an inherent defect that reduced the property's value without inflicting physical harm to the product. See Star Furniture Co. v. Pulaski Furniture Co., 297 S.E.2d 854 (W. Va. 1982). In essence, this court has reached the same result. See Morris v. Chrysler Corp., 208 Neb. 341, 303 N.W.2d 500 (1981).
To the extent that Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973), held that strict liability in tort may not be used to recover for physical harm to property only, it is disapproved. To hold otherwise would penalize the fortunate per sons who escape personal injury and ignore the specific language of 402 A of the Restatement and a virtually unbroken line of decisions of other courts.
In the case at bar the facts pleaded establish that the damages sought to be recovered are the costs and expenses of removing the defective tubing manufactured by the defendant and replacing it. Such damages are not damages resulting from physical harm caused by the defective product. Instead, they are damages resulting from the purchase of defective or unsatisfactory products.
Plaintiff contends that because the "economic loss" here was incurred to remove a potential future liability in tort, such expenses are recoverable by a tort action under theories of negligent manufacture or strict liability in addition to an action under a warranty or contract theory.
At this point it should be noted that the parties tacitly concede that, upon the facts pleaded in the instant case, the plaintiff stated a cause of action against the defendant under a warranty or contract theory of liability. That cause of action, however, was barred by the statute of limitations under the Uniform Commercial Code, and the plaintiff does not seriously contend that the sustaining of the demurrer to the first cause of action on that ground was erroneous. Instead, plaintiff's position is that the facts pleaded gave rise to two separate causes of action, one in tort and one in contract under a theory of express or implied warranty.
The proper relationship between tort law and the Uniform Commercial Code dictates that a cause of action for "economic loss" under the facts of the present case be pursued under a warranty or contract theory. The fact that the incurring of replacement costs here also removed a potential future tort liability to ultimate users or consumers does not convert economic loss into physical harm, nor transform a contract warranty cause of action into a product liability tort action. It should again be noted that the 15 cases in which actual failures in defendant's product occurred are not involved in this litigation.
We hold that the purchaser of a product pursuant to contract cannot recover economic losses from the seller manufacturer on claims in tort based on negligent manufacture or strict liability in the absence of physical harm to persons or property caused by the defective product.
Plaintiff's amended petition, relying on the same basic facts, sets out purported causes of action seeking to recover on the basis of indemnity or contribution. Before a right to indemnity or contribution arises, the underlying liability must first be established. In this case defendant has been found not liable to the plaintiff in contract or in tort on the basic facts pleaded, and therefore cannot be liable to the plaintiff for indemnity or contribution on the same facts.
The action of the District Court in sustaining demurrers to the petition and amended petition was correct and is affirmed.
AFFIRMED.
KRIVOSHA, C.J., concurs in the result.
CLINTON, J., not participating.