National Crane Corp. v. Ohio Steel Tube Co.

Boslaugh, J.,

dissenting.

It has been said that the underlying rationales of the doctrine of product liability are (1) consumer protection and compensation, (2) risk distribution, and (3) deterrence of defective manufacture. Note, Comparative Contribution and Strict Tort Liability: A Proposed Reconciliation, 13 Creighton L. Rev. 889 (1980). To require that an injury to a third person must occur before an action for damages in tort arises between the manufacturer and supplier defeats these rationales.

The majority opinion holds that the plaintiff can not recover in tort for what it terms “pure economic loss.” The rationale for this is that the plaintiff had a cause of action for such losses under the warranty provisions of the Uniform Commercial Code. Further, because there is no underlying liability in tort to an injured party, and because there was no express contract provision between the parties, the plaintiff has no right to indemnity or contribution.

Generally, a manufacturer is under a duty to protect the consumer from the risk of unreasonable harm and a duty to use due care in product manufacture and design. Thus, in products liability a manufacturer can be sued both in strict tort and negligence. Kohler v. Ford Motor Co., 187 Neb. 428 , 191 N.W.2d 601 (1971); Friedrich v. Anderson, 191 Neb. 724 , 217 N.W.2d 831 (1974). Actions on both theories are also available against the supplier of a component part. City of Franklin v. Badger Ford *792 Truck Sales, 58 Wis. 2d 641 , 207 N.W.2d 866 (1973). Should the manufacturer be held liable in tort for a defect caused by a supplier, courts permit the mánufacturer to recover from the supplier. Hill v. Joseph T. Ryerson & Son, Inc., 268 S.E.2d 296 (W. Va. 1980). However, as indicated in the majority opinion, courts have generally required an injury to person or property and have not permitted an action in tort for pure “economic loss” against a supplier or manufacturer.

The majority reasons that the loss suffered by the plaintiff was an economic one, as there was no claim for injury or property damage to anything other than the product itself. The proper action, it states, was in warranty only. Had an injured party sued National Crane, National Crane would have been permitted recovery from Ohio Steel Tube.

The effect of the decision is to require that some injury occur either to a person or to property before a manufacturer can recover from the supplier of material or a defective party independently in tort or under theories of indemnity or contribution. Such a result is inconsistent with the policies of consumer protection, risk distribution, deterrence, and equity underlying products liability theories.

It would seem that the plaintiff should be entitled to recover independently in tort from the supplier for the losses suffered to retrofit the cranes. Several rationales are available: (1) The loss resulted from the duty to provide a safe product and was not a “pure economic loss”; (2) The Uniform Commercial Code remedy was inappropriate for such losses; (3) The economic loss distinction is a specious one and should be abolished; and (4) It is against public policy to require an injury before a manufacturer can recover from a supplier of defective material or parts.

The expenses incurred in plaintiff’s retrofit program do not fall neatly into the category designated “economic loss,” for which most jurisdictions do not *793 permit recovery in tort. “ ‘Economic loss’ is defined as the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.” Note, Manufacturers’ Liability to Remote Purchasers for “Economic Loss” Damages — Tort or Contract?, 114 U. Pa. L. Rev. 539 , 541 (1966) (definition quoted in Alfred N. Koplin & Co. v. Chrysler Corp., 49 Ill. App. 3d 194 , 364 N.E.2d 100 (1977)). Generally, the cases which have held that economic loss is recoverable only under the warranty provisions of the Uniform Commercial Code have dealt with defects which affected the product’s performance but did not present an unreasonable risk of harm to persons or property outside of the product itself. See, e.g., Alfred N. Koplin & Co., supra (air-conditioner breakdown); Jones & Laughlin Steel v. Johns-Manville Sales, 626 F.2d 280 (3d Cir. 1980) (roof material blistered and cracked); Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976) (defects in mobile home); Fredonia Broadcasting Corp., Inc. v. RCA Corporation, 481 F.2d 781 (5th Cir. 1973) (defective broadcasting equipment). The rationale behind these cases was expressed in Seely v. White Motor Co., 63 Cal. 2d 9, 18 , 403 P.2d 145, 151 , 45 Cal. Rptr. 17, 23 (1965): ‘‘[A consumer] can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will.” Such manufacturer agreements or warranties are covered in the Uniform Commercial Code.

In the present case it would seem that the retrofit program was conducted in order to fulfill both the plaintiff’s and the defendant supplier’s duty in tort to protect the consumer from the risk of unreasonable harm. Courts have indicated that manufacturers must take post sale remedial measures once an excessive danger is discovered in a product line. Braniff Airways, Inc. v. Curtiss-Wright Corporation, 411 F.2d 451 (2d Cir. 1969), cert. denied 396 U.S. 959 , *794 90 S. Ct. 431 , 24 L. Ed. 2d 423 (duty to remedy defective aircraft engines); Sterling Drug, Inc. v. Yarrow, 408 F.2d 978 (8th Cir. 1969) (duty to have detail men personally contact physician regarding side effect of drugs). See discussion of this duty in Ramp, The Impact of Recall Campaigns on Products Liability, 44 Ins. Couns. J. 83 (1977). The imposition of such a duty comports with the underlying rationales of products liability.

The plaintiff should be entitled to recover in tort for the losses incurred as a result of the retrofit program, because the expenses were not pure economic losses but, rather, were expenses incurred to fulfill both parties’ duty in tort to the consumer. When a manufacturer has conducted a recall program necessitated by the duty to protect the consumer, that manufacturer should have an action in tort against the supplier of a defective part, provided that the defect caused the recall and was the result of negligent manufacture or design, or presented an unreasonable risk of harm. An injury to a third person or to property should not be a prerequisite.

The court reasons that since the warranty provisions of the Uniform Commercial Code provided a remedy, its refusal to extend tort liability is justified. However, it does not seem that the Uniform Commercial Code was designed with such losses in mind, that is, losses which stem from the post sale duty in tort to the consumer. The Uniform Commercial Code is primarily concerned with contract notions of losses on bargains and the expectations of parties. It is neutral on consumer safety. Ribstein, Guidelines for Deciding Product Economic Loss Cases, 29 Mercer L. Rev. 493 (1978).

For example, the losses incurred to finance a recall program are consequential, not actual, damages under the Uniform Commercial Code. See Neb. U.C.C. §§2-714, 2-715 (Reissue 1980). The test for such damages is whether the losses were foreseeable by the seller at the time of the contracting. *795 See Burgess v. Curly Olney’s, Inc., 198 Neb. 153 , 251 N.W.2d 888 (1977). One commentator has stated that this test, when applied to recall situations, requires consideration of other factors, i.e., the willfulness of the breach and the relative sizes of the economic units involved, before an equitable result under the law of contract can be reached. This author proposes legislative changes to handle allocating the risk of loss in recall situations. Stone, Recovery of Consequential Damages for Product Recall Expenditures, 1980 B.Y.U. L. Rev. 485; Stone, Allocation of Risk for Product Recall Expenditures: A Legislative Proposal, 1975 Det. C.L. Rev. 1. Arguably, the equitable doctrine of contribution may be better suited to the recall situation, as both are based upon tort concepts. See, Jensvold, A Modem Approach to Loss Allocation Among Tortfeasors in Products Liability Cases, 58 Minn. L. Rev. 723 (1974); Note, Comparative Contribution and Strict Tort Liability: A Proposed Reconciliation, 13 Creighton L. Rev. 889 (1980).

Further, the disclaimer provisions of the Uniform Commercial Code permit a seller to limit his liability for consequential damages, provided the disclaimer is not unconscionable. In strict tort, courts do not permit a disclaimer to bar liability when a person or property is damaged. Sipari v. Villa Olivia Country Club, 63 Ill. App. 3d 985 , 380 N.E.2d 819 (1978). See Haugen v. Ford Motor Company, 219 N.W.2d 462 (N.D. 1974). However, the courts will not apply strict tort where the loss is “economic,” and will uphold the disclaimer. The effect of the decision in the present case is to term the costs of fulfilling a duty in tort an “economic loss” and thus permit a supplier to avoid his responsibility for product safety by shifting it to the manufacturer through disclaimer — at least until an accident occurs. To require an accident rather than permit the costs of a preventive recall program to be allocated to the supplier when a disclaimer is present contra- *796 diets the policies of consumer protection, risk allocation, and deterrence, upon which the duty to recall is founded.

Thus, the Uniform Commercial Code seems inappropriate as a sole remedy in this situation because it is concerned not with product safety for the intended consumer but with the benefit of the bargain between two commercial entities. In the recall situation the concern is for product safety, and the cost should be borne by the responsible party. Comment, Comparative Causation, Indemnity, and the Allocation of Losses Between Joint Tortfeasors in Products Liability Cases, 10 St. Mary’s L.J. 587 (1979). A few courts have abolished the economic loss distinction and hold that such loss is recoverable both in tort and warranty. Generally, it is no objection that an alternative remedy was available to the plaintiff.

In Berg v. General Motors, 87 Wash. 2d 584 , 555 P.2d 818 (1976), plaintiff was permitted to sue in negligence for lost profits. In listing its reasons the court said at 592-93, 555 P.2d at 822 -23: “Second, we are not convinced of the accuracy of the statement made in Curtiss-Wright at page 482, that: ‘It is only when the danger inherent in a defectively made article causes an accident that a cause of action against the manufacturer also arises.’ A distinction that would allow recovery if the product in question destroyed the property of another, yet would deny recovery were the same product merely to disintegrate, is a specious one. ... A manufacturer intending and foreseeing that its product would eventually be purchased by persons operating commercial ventures, owes such persons the duty not to impair that purchaser’s commercial operations by a faulty product.”

New Jersey has permitted recovery in strict tort for economic losses. Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 66 , 207 A.2d 305, 312 (1965) (defect in rug): “[Ajlthough the doctrine has been *797 applied principally in connection with personal injuries sustained by expected users from products which are dangerous when defective . . . the responsibility of the maker should be no different where damage to the article sold or to other property of the consumer is involved.” In Monsanto v. Alden Leeds, 130 N.J. Super. 245, 259 , 326 A.2d 90, 97 (1974), the court said, ‘‘Injuries to a man’s business can be as detrimental to our society as injuries to his person."

The plaintiff should be able to recover from the supplier under an indemnity or contribution theory. Contribution is an equitable doctrine which divides the losses between tort-feasors. Contribution applies where both parties are under a common liability to the injured party and one party has paid more than his share of the burden. Note, 13 Creighton L. Rev., supra. Indemnity, also an equitable concept, transfers the entire loss to the tort-feasor who ought to bear it. Id. The right to indemnity or contribution can arise either through express agreement or implication of law. Phillips, Contribution and Indemnity in Products Liability, 42 Tenn. L. Rev. 85 (1974). See Tober v. Hampton, 178 Neb. 858 , 136 N.W.2d 194 (1965).

In product liability actions a manufacturer can seek indemnity from the maker of a defective component part. Hill v. Joseph T. Ryerson & Son, Inc., 268 S.E.2d 296 (W. Va. 1980). The issue presented here is whether a manufacturer can recover under indemnity or contribution if there has been no injury to a third person for which judgment or settlement has been had against the manufacturer.

The reasoning of the majority in the present case appears to follow that expressed in Waldinger Co. v. P & Z Co., Inc., 414 F. Supp. 59, 60 (D. Neb. 1976): ‘‘Contribution and indemnification are inchoate rights which do not arise until one tort feasor has paid more than his share of the damages or judgment.”

*798 However, it does not appear that a judgment is always required before recovery in contribution or indemnity can be had. Restatement of Restitution §86, Comment d at 391 (1937), states: “The rule stated in this Section is applicable whether or not suit has been brought by the injured person against the payor. If, however, suit is not brought by the injured person, and the payor seeks restitution from a fellow tortfeasor, it is necessary for him to prove that his payment terminated or reduced a valid claim against the other . . . .” Section 86 at 389 states, “A person who has discharged a tort claim to which he and another were subject is entitled to indemnity or contribution . . . .” The illustrations indicate that settlements are contemplated by this section.

In Restatement (Second) of Torts § 886B at 344 (1979), it is stated: “(1) If two persons are liable in tort to a third person for the same harm and one of them discharges the liability of both, he is entitled to indemnity from the other if the other would be unjustly enriched at his expense by the discharge of the liability.”

The Comment states that the basis for indemnity is restitution, which seeks to prevent unjust enrichment. A person confers a benefit when he saves the other from expense or loss.

Indemnity is permitted for settlement of a claim if the indemnitee can prove at least potential liability to the third party. Central Nat. Ins. Co. v. Devonshire Coverage, 565 F.2d 490 (8th Cir. 1977).

In Burlington Northern, Inc. v. Hughes Bros., Inc., 671 F.2d 279, 283 (8th Cir. 1982), the court said: “As this court recently observed, ‘the indemnitee need not prove its legal liability to the injured party when its indemnitor denies liability under a contract and refuses to assume defense of the claim or to otherwise hold the indemnitee harmless for any loss.’ . . .

“BN notified Hughes of the claim and requested that it assume responsibility. BN also kept Hughes *799 informed about the settlement negotiations. Hughes refused to participate in any manner.

“In the present case, BN’s potential liability under the FELA was established as a matter of law. . . . Under the FELA, BN possessed a ‘nondelegable duty to provide its employees with a safe place to work.’ . . . Additionally, BN was liable for its employee’s injury if its negligence ‘played any part, even the slightest, in producing the injury.’ . : . The placement of the wall and the failure to remove the snow and ice were undisputably contributory factors .... Thus the likelihood that the railroad would be held liable was clearly established and the only issue which should have been submitted to the jury was the reasonableness of the amount of the settlement.”

In Parfait v. Jahncke Service, Inc., 484 F.2d 296 (5th Cir. 1973), cert. denied 415 U.S. 957 , 94 S. Ct. 1485 , 39 L. Ed. 2d 572 (1974), the court discussed the equitable concepts underlying implied indemnity between tort-feasors when one has settled an action without the consent of the other. The court held that a showing of potential liability was necessary in order to get indemnity.

In the present case both the manufacturer and the supplier owe a duty to the consumer. When the manufacturer is required to rectify a defect caused by the supplier which, under the law of strict liability, will almost certainly result in liability, the manufacturer should be permitted to maintain an action for indemnity. Such recall expenses terminate a potential valid claim against the supplier. To permit the supplier the benefit of this form of settlement is a form of unjust enrichment which equity seeks to prevent. To require an injury to a third person to occur before indemnity can be had would also seem to violate the principles of equity.

The following rule, suggested by the plaintiff, should be applicable in cases such as this: “One who sells a product in a defective condition unreasonably dangerous to a user or consumer is entitled *800 to receive indemnity from a supplier of a defective component part for the reasonable costs of remedying the defect, if

“(a) the defective condition is created by the supplier’s defective component part;

“(b) the defective product creates a substantial risk of serious injury or loss of life to users or third parties;

“(c) a warning alone would be inadequate to avoid the risk created; and

“(d) the supplier of the defective component part has been given reasonable notice of the existence of the defect and an opportunity to provide, or participate in, the remedial action.”

Hastings, J., joins in this dissent.