Industrial Uniform Rental Co. v. International Harvester Co.

463 A.2d 1085, 317 Pa. Super. 65, 36 U.C.C. Rep. Serv. (West) 762, 1983 Pa. Super. LEXIS 3512

• Court: Supreme Court of Pennsylvania
• Decided: July 15, 1983
• Docket: 2572
• Status: Published

Opinions

JOHNSON, Judge:

The question before this court is whether Pennsylvania courts should recognize a claim in strict liability¹ for recovery of economic losses,² where the injury is only in the deterioration of the product itself, and is not the result of a defect causing some untoward occurrence thereby damaging the product.

In September 1971 Avis Rent A Car System, Inc. purchased a certain number of trucks from International Harvester Co. In October 1971 the appellant corporations,Industrial Uniform Rental Co., Inc. and Stork Diaper Service, Inc., leased the trucks from Avis -for use in their business. Then in October 1974 the appellant corporations purchased these same trucks from Avis.

In December 1972 two of these trucks had allegedly developed cracks and failures in the frames, which were repaired by Avis. Then, after the 1974 purchase of the trucks, twelve more trucks allegedly developed cracks and failures in the frames. These cracks were repaired by the appellant corporations.

In June of 1978 the appellant corporations commenced this suit in trespass against International Harvester, the manufacturer of the trucks, alleging negligent design, manufacture and sale of the trucks, and requesting damages for the cost of the repairs to the trucks. In its answér, under New Matter, International Harvester raised the bar of the statute of limitations, which the appellants denied in their reply, alleging that this being a “property damage” claim it was within the statute of limitation for trespass actions.

A certain amount of discovery was undertaken until March 1981 when International Harvester filed a motion for summary judgment, arguing that the appellants’ claim was solely for economic losses, that the allegations in the complaint that the trucks were defective, poorly designed and not adequate for their contemplated use, sounded in breach of warranty, and that therefore the action was barred by section 2-275 of the Uniform Commercial Code (UCC).³

In answer to the motion for summary judgment, the appellants argued inter alia that their claim for damages included not only repairs to the trucks but also a “diminution in use expectancy,” and that their claim was indeed a tort action. In their memorandum of law in support of their answer the appellants raised for the first time the question of section 402A of the Restatement (Second) of Torts, asserting that Pennsylvania law supported their action “under 402A and in negligence against the manufacturer of trucks where defects cause damages sustained.”

The trial court in its opinion stated that the uncontradicted evidence established that the plaintiffs were seeking damages for defects of quality evidenced by internal deterioration or breakdown which constituted economic loss not recoverable in a claim under strict liability, and granted the motion for summary judgment.

On appeal to this court the appellant purchasers of the trucks assert that the (unspecified) defects in the trucks brought about the cracking and caused damages to the trucks, thus creating a cause of action for “property damage” under section 402A of the Restatement (Second) of Torts.

We believe, on the contrary, that the claim in this case is ’ precisely the type of claim envisaged by the UGC. See 13 Pa.C.S.A. § 2714, which provides:

§ 2714. Damages of buyer for breach in regard to accepted goods

(a) Damages for nonconformity of tender.—Where the buyer has accepted goods and given notification (section 2607(c)) he may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the breach of the seller as. determined in any manner which is reasonable.

(b) Measure of damages for breach of warranty.—The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have if they had been as warranted, unless special circumstances show proximate damages of a different amount.

(c) Incidental and consequential damages.—In a proper case any incidental and consequential damages under section 2715 (relating to incidental and consequential damages of buyer) may also be recovered.

We do not agree with appellants that the facts of this case call for the application of Section 402A of the Restatement (Second) of Torts,⁴ which provides:

§ 402A. Special Liability of Seller of Product for Physical Harm to User or Consumer

(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

(a) the seller is engaged in the business of selling such a product, and

(b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold.

(2) The rule stated in Subsection (1) applies although

(a) the seller has exercised all possible care in the preparation and sale of his product, and

(b) the user or consumer has not bought the product from or entered into any contractual relation with the seller.

There are two lines of cases on the issue presented by this appeal. There is the majority view, led by the landmark decision of the Supreme Court of California in Seely v. White Motor Co., 63 Cal.2d 9, 403 P.2d 145, 45 Cal.Rptr. 17 (1965). There is also the minority view, led by the equally significant decision of the Supreme Court of New Jersey in Santor v. A. & M. Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965).

In Santor the plaintiff sued the manufacturer of carpeting for defects which- caused lines to appear in the carpeting. The New Jersey supreme court held first that the plaintiff could sue the manufacturer for breach of implied warranty, that privity of contract was not necessary, and that the action could be maintained even though the damage was limited to -loss of value of the carpeting. The New Jersey court then went on to rule that the responsibility of the maker should be no different whether the damage was personal injury, damage to other property or to the product involved, and that strict liability in tort was applicable to actions for economic losses resulting from defective products.

In Seely the plaintiff purchased a truck for heavy-duty hauling. From the beginning the purchasers experienced a “galloping” problem with the truck, which they attempted to repair. Then one day the brakes failed, and the truck overturned, causing no personal injuries but resulting in over five thousand dollars’ worth of damage to the truck. The California supreme court, disagreeing with the New Jersey court, ruled that as the UCC system of recovery was not superseded by the doctrine of strict liability which applied to actions for personal injury and property damage only, and not to actions for economic loss alone, there could be no recovery for the injury to the truck under strict liability. As part of its reasoning the California court considered the purpose for the two distinct remedies:

The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the “luck” of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He 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.... The Restatement of Torts similarly limits strict liability to physical harm to person or property.

Seely v. White Motor Co., 63 Cal.2d at 18, 403 P.2d at 151, 45 Cal.Rptr. at 23 (citations omitted).

The doctrine of products liability was developed primarily as a means by which consumers could be compensated for personal injury and property damage caused by defective products. See Note, Products Liability in Commercial Transactions, 60 Minn.L.Rev. 1061 (1976). See generally, Note, Economic Loss in Products Liability Jurisprudence, 66 Colum.L.Rev. 917 (1966). The warranty theory, however, now governed by the Uniform Commercial Code, provides for liability for losses on bargains and other injuries resulting from failure of the product to meet the expectations of the buyer where the seller has breached express or implied warranties to the buyer. See Ribstein, Guidelines for Deciding Product Economic Loss Cases, 29 Mercer L.Rev. 493 (1978).⁵

It would seem that the Seely and Santor lines of cases differ in that the Seely line focuses on the type of harm caused by the defective product, whereas the Santor line seems to view a defective product as essentially an unmerchantable product under the UCC, see 13 Pa.C.S.A. § 2314(b). See Note, Products Liability in Commercial Transactions, 60 Minn.L.Rev. 1061, 1068-69 (1976).

We believe in the validity of the “type of harm” approach, particularly on the facts of the case before us which involve a commercial buyer of trucks for use in its business claiming its expenses because the trucks it leased and later purchased were allegedly defective. An analysis of the case law in Pennsylvania and elsewhere supports this view.

In Lobianco v. Property Protection, Inc., 292 Pa.Super. 346, 437 A.2d 417 (1981), this court held that a homeowner who had purchased a burglar alarm system which malfunctioned could not bring a strict liability action against the seller of the system for the loss she incurred in the theft of her jewelry.⁶ This case is helpful to the extent that it seems to indicate a reluctance in this court to allow strict liability recovery for purely economic loss. See also R.B. Equipment Co. v. Williams, Shields, Snyder & Goas, 304 Pa.Super. 31, 450 A.2d 85 (1982). In R.B. Equipment the superior court quashed as interlocutory an appeal from the trial court’s order sustaining the defendants’ preliminary objections to the strict liability counts of a complaint against manufacturers and suppliers of allegedly defective cement and concrete used in constructing roads, sidewalks, curbing and stairs in a public school project. Wickersham, J. dissenting, would have affirmed the trial court. Part of the rationale of the dissenting opinion was that the plaintiff was not the school authority—the user of the product, but an assignee of the general contractor. More importantly for our purposes, though, Judge Wickersham quoted with approval from the rationale in Posttape Associates v. Eastman Kodak Co., 537 F.2d 751 (3d Cir.1976), q.v. page — infra.

A recent case applying Pennsylvania law is Pennsylvania Glass Sand Corporation v. Caterpillar Tractor Co., 652 F.2d 1165 (3d Cir.1981). Pennsylvania Glass Sand Corporation [PGS] brought a diversity action against Caterpillar Tractor, the manufacturer, to recover damages it incurred as a result of a fire in a front-end loader purchased from Caterpillar. The fire broke out, four years after the purchase, in the front of the loader near the hydraulic lines. The fire spread, severely damaging the loader, although no personal injuries resulted. The basis of PGS’ complaint in negligence and strict liability (§ 402A) was the absence of a fire suppression or extinction system. (In a footnote the court explained that the four-year UCC statute of limitations had possibly barred the claim.) The court, predicting how the Supreme Court of Pennsylvania would address the question of whether accidental injury to the defective product itself should be regarded as an economic loss recoverable only in a contract warranty action, expressed the belief that the Pennsylvania supreme court would draw a distinction between the type of injury to a defective product that constitutes mere economic loss, and the type of injury that amounts to the sort of physical harm traditionally compensable in tort. 652 F.2d at 1173.

The PGS court discussed its earlier decision in Posttape Associates v. Eastman Kodak Co., 537 F.2d 751 (3d Cir. 1976). In Posttape a film maker sought to recover increased costs and lost profits resulting from defective film supplied by Kodak. The Posttape court decided that section 402A was of doubtful utility in a commercial setting when the damages were consequential and arose from a non-dangerous impairment of quality of the product, and that the provisions of the UCC were better tailored to such a situation.

The PGS court noted that “implicit in [the Posttape ] opinion is a recognition of the difference between claims for economic loss and for physical damage to the defective product.” 652 F.2d at 1174. “In addition, the [Posttape ] opinion alluded to the policy distinctions that make the U.C.C. the proper vehicle for redressing losses occasioned by impairment of quality, and make § 402A the superior device for-rectifying the consequences of dangerously defective products. [Posttape, 537 F.2d] at 755.” PGS, 652 F.2d at 1174.

Finally, reviewing the circumstances of the damage alleged by PGS, the court decided that, as the nature of the defect and the type of risk it poses are the guiding factors, and that as the damage was the result of a fire, and that the defect constituted a safety hazard, the complaint brought by PGS appeared to fall within the policy of tort law that the manufacturer should bear the risk of hazardous products. Id. at 1174-75. Furthermore, said the court, the complaint did not appear to implicate the policies of warranty law, because there were no allegations that the loader was of poor quality or otherwise unfit to perform its job. Id. at 1175. The court concluded that Pennsylvania courts would regard the injury stemming from the allegedly hazardous defect in the loader as the sort of physical injury compensable under tort law. It was the hazardous condition that removed the situation from the embrace of the UCC.

The United States Court of Appeals for the Third Circuit, predicting, in another case, how the Supreme Court of Illinois⁷ would decide the question whether economic losses are recoverable under tort theories of liability, ruled that the purchaser of a roof could not recover under strict liability or negligence for failure of the roof to perform.⁸ As the court explained:

The rationale behind strict liability in personal injury situations is not well-suited to claims alleging only economic loss. Economic loss results from the failure of the product to perform to the level expected by the buyer and the seller. Such loss is most frequently measured by the cost of repairing the infirmity or by the difference in the value of the product as it exists and the value it would have had if it performed as expected. Thus, 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. The original purchaser, particularly a large company such as Jones & Laughlin, can protect itself against the risk of unsatisfactory performance by bargaining for a warranty. Alternately, it may choose to forego warranty protection in favor of a lower purchase price for the product. Subsequent purchasers may do likewise in bargaining over the price of the product. In any event, because persons other than the owner of the product will not incur economic losses resulting from the product’s poor performance, the costs associated with economic loss will likely be reflected in the price of the product. There accordingly would seem to be no need to internalize these costs through a non-price mechanism such as strict liability.

Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F.2d 280, 288-89 (3d Cir.1980) (footnote omitted).

The court further explained:

Finally, the extension of strict liability proposed here by Jones & Laughlin would appear to conflict with the decision by the Illinois Legislature to enact the sale provisions of the Uniform Commercial Code (UCC)____ Section 2-313 of the Code recognizes the existence of express warranties, and § 2-314 enacts an implied warranty of merchantability and fitness. Section 2-314 provides that “[u]nless excluded or modified ..., a warranty that the goods shall be merchantable is implied in a contract for their sale .... To be merchantable, the goods, inter alia, must be “fit for the ordinary purposes for which such goods are used.” ... The Code also provides, however, that the parties to a sales contract may agree that the buyer possesses no warranty protection at all, or may limit any warranties in any reasonable manner. Id. § 2-316. The parties may even agree to exclude the implied warranty of merchantability and fitness if they do so in writing, and may modify the implied warranty by clear and conspicuous language. Id. § 2-316(2).

The extension of strict liability to cover economic losses in effect would make a manufacturer the guarantor that all of its products would continue to perform satisfactorily throughout their reasonably productive life. Inasmuch as the doctrine of strict liability does not permit a manufacturer to limit its liability through the use of a waiver or a limited warranty, importation of strict liability into the economic loss area would effectively supersede § 2-316 of the UCC. Yet, there is nothing in prior opinions of the Illinois Supreme Court to suggest that it would undertake such an encroachment on the legislative prerogative. As the Supreme Court of Idaho remarked recently in dealing with this very question:

[T]he legislatures of nearly every state in the Union, have adopted the UCC which carefully and painstakingly sets forth the rights between the parties in a sales transaction with regard to economic loss. This Court, in the common law evolution of the tort law of this state, must recognize the legislature’s action in this area of commercial law and should accommodate when possible the evolution of tort law with the principles laid down in UCC. [Clark v. International Harvester Co., 99 Idaho 326, 335, 581 P.2d 784, 793 (1978)].

Consequently, we do not believe that the Illinois Supreme Court would extend its common law of tort liability in the manner suggested by Jones & Laughlin.

For the foregoing reasons, we predict that the Illinois Supreme Court would hold that economic losses are not recoverable under claims based on principles of tort law.

Id. at 289 (footnote omitted).

This rationale, which appears to coalesce with the view of most jurisdictions on this issue, seems to this court to be the correct one, and the one which Pennsylvania courts should adopt.

We find further support in recent cases in other jurisdictions following the majority view.

The Supreme Court of Nebraska has held that the purchaser of a defective product cannot recover economic losses under negligence or strict liability absent physical harm to persons or property caused by the defective product. In National Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 332 N.W.2d 39 (1983), the plaintiff was a manufacturer of cranes which sought to recover for the costs and expenses of removing defective steel tubing used in the tilt cylinder mechanism of its cranes. The Nebraska supreme court concluded that the damages involved were those resulting from the purchase of unsatisfactory products and that the cause of action for such loss should be pursued under a warranty or contract theory.

The Supreme Court of Illinois, approving the Third Circuit’s rationale in Pennsylvania Glass Sand, supra, held that “where only the defective product is damaged, economic losses caused by qualitative defects falling under the ambit of a purchaser’s disappointed expectations cannot be recovered under a strict liability theory.” Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 85, 61 Ill.Dec. 746, 753, 435 N.E.2d 443, 450 (1982).⁹

In Northern Power & Engineering Corp. v. Caterpillar Tractor Co., 623 P.2d 324 (1981), in an action by a buyer against the manufacturer of a generator whose engine failed causing severe damage to the machine, the Supreme Court of Alaska held that the buyer’s loss was entirely economic and thus could not be recovered under strict liability in tort.

In Northern Power the buyer argued further that the oil pressure shutoff mechanism, being defective and having damaged the engine, was a defective product resulting in damage to the plaintiff’s property, the generator (i.e. causing “property damage”). This is the same argument presented to this court by the appellant corporations now before us. The Alaska court responded to the argument thus:

While we think this proposition may have some validity where the components are sold separately or are provided by different suppliers, we find no justification or support for such a rule where both components are provided by one supplier as part of a complete and integrated package. Since all but the very simplest of machines have component parts, such a broad holding would require a finding of “property damage” in virtually every case where a product damages itself. Such a holding would eliminate the distinction between warranty and strict products liability.

Northern Power & Engineering Corp. v. Caterpillar Tractor, 623 P.2d at 330 (footnote omitted). The Alaska supreme court ruled that when a defective product creates a situation potentially hazardous to persons or other property, and loss occurs as a result of that danger, strict liability in tort is an appropriate theory of recovery even though the damage is confined to the product itself. 623 P.2d at 329.¹⁰ But because in the generator case there was no evidence that the defective shut down system presented any danger to persons or other property, but simply caused the engine to seize up and stop operating, this was economic loss only.

We borrow from this rationale and dispose likewise of appellants’ property damage argument. We shall not classify allegedly defective manufacture leading to deterioration of the product as property damage in the section 402A sense.

The Supreme Court of Minnesota has similarly preferred the Seely rationale and held that economic losses arising out of commercial transactions, excepting those involving personal injury or damage to other property, are not recoverable under tort theories of negligence or strict liability. Superwood Corp. v. Siempelkamp Corp., Minn., 311 N.W.2d 159 (1981) (where the buyer of a hot plate press of which the cylinder failed brought an action for damage to the press and for lost profits).

In Nobility Homes of Texas, Inc. v. Shivers, Tex., 557 S.W.2d 77 (1977), the Supreme Court of Texas held that the buyer of a defective mobile home could bring an action against the manufacturer, to recover economic loss, in negligence and in warranty, but not in strict liability because the product was not unreasonably dangerous and did not cause physical harm to the buyer or to his property.

Extrapolating from the above-mentioned authority we formulate the following rule: In an action between commercial enterprises, where defective design, manufacture and sale of a product is alleged, where there is nothing in the record to indicate that the defect is a condition potentially dangerous to persons or to property, and where the purported defect results in progressive deterioration of the product itself, the buyer’s cause of action for its economic losses against the seller is in breach of warranty under the UCC.

Furthermore, the complaint in the instant case, captioned in trespass and alleging “negligence and carelessness ... in designing, manufacturing, and selling the trucks,” nevertheless (1) is totally insufficient to state a cause of action in strict liability, which claim was only asserted at the time of the motion for summary judgment and (2) by its very language that the trucks were “not adequate for their contemplated use” clearly states a possible cause of action in breach of warranty,¹¹ and is therefore barred because it was brought more than four years after tender of delivery of the trucks. 13 Pa.C.S.A. § 2725.

The order of the trial court granting summary judgment is affirmed.

HESTER, J., files a dissenting opinion.

1 . Restatement (Second) of Torts § 402A (1965).

2 . An action to recover for "economic” harm has been defined as "an action brought to recover 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." Note, Economic Loss in Products Liability Jurisprudence, 66 Colum.L.Rev. 917, 918 (1966). See also Appel, Strict Liability: Recovery of "Economic" Loss, 13 Idaho L.Rev. 29, 40 (1976) (stating that damages to the product itself is often referred to as direct economic loss, measured by the loss on the bargain, cost of replacement, or cost of repair).

3 . The Pennsylvania Uniform Commercial Code, Act of April 6, 1953, P.L. 3, No. 1, § 1-101 et seq., as re-enacted, amended and revised, 12A P.S. § 1-101 et seq., was repealed by the Act of November 1, 1979, P.L. 255, No. 86, § 8. It was enacted and transferred to Title 13 of the Pennsylvania Consolidated Statutes without change in substance by the same act. See Act of November 1, 1979, P.L. 255, No. 86, § 7. 13 Pa.C.S.A. §§ 1101-9507 (Purdon Pamp.1982).

4 . Section 402A was adopted by the Supreme Court of Pennsylvania in Webb v. Zern, 422 Pa. 424, 220 A.2d 853 (1966).

5 . Professor Ribstein argues that in fact, there is no clear distinction between cases involving repair loss due to gradual deterioration because of a defect, or property damage to the product where a defect brought about the calamity, causing the injury. He therefore proposes a formula for deciding economic loss cases, where the primary basis of liability for property damage or economic loss, would be representational (i.e. manufacturers would be held to their representations), supplemented by a negligence duty (i.e. requiring the manufacturer to act reasonably and to not intentionally disregard risks) so as to retain the deterrence objective of product liability. 29 Mercer L.Rev. at 511.

6 . The rationale for this decision was joined by two judges, with two judges concurring in the result, and two judges dissenting on the grounds that the seller’s limitation of liability clause was unconscionable.

7 . The Court of Appeals explained that the district court had concluded that a Pennsylvania state court would look to Illinois law under its "interest analysis/significant contacts” choice of law test. See 626 F.2d at 284.

8 . The roof was built to cover a 1.3 million square foot steel finishing plant in a region subject to high speed winds and extreme fluctuation in temperature. Shortly after its completion the roof blistered, wrinkled, and cracked; later, parts of it blew off. As a result, water entered the plant causing serious damage.

9 . In Moorman a food processor filed a complaint in, inter alia, strict liability and negligence for the economic losses resulting from an alleged crack in a grain storage tank. The Illinois Supreme Court concluded that this was a commercial loss of the type protected by the law of warranty.

10 . The Alaska court also ruled that in order to recover on such a theory plaintiff must show (1) that the loss was a proximate result of the dangerous defect, and (2) that the loss occurred under the kind of circumstances that made the product a basis for strict liability. Id.

11 . See, e.g., 13 Pa.C.S.A. §§ 2313, 2314, 2315.