Queen City Terminals, Inc. v. General American Transportation Corp.

73 Ohio St. 3d 609

• Court: Ohio Supreme Court
• Decided: September 6, 1995
• Docket: No. 94-113
• Status: Published

Opinions

Pfeifer, J.

I

In its second proposition of law, appellant, Trinity, argues that the economic damages sustained by BP and QCT are not recoverable because the economic damages did not arise out of any personal injury or tangible property damage. Appellees, BP and QCT, argue that the mere coexistence of physical injury or property damage and economic damage makes the economic damages recoverable in tort absent privity of contract.

As a result of the city of Cincinnati’s exercising its right to revoke QCT’s street permit, QCT alleged it sustained economic damages of $6.2 million in useless terminal improvements.

Having been forced to reroute its benzene from its Lima plant to St. Louis as opposed to using the QCT terminals in Cincinnati, BP alleges that it also sustained economic damages in the form of lost profits from lower sales and increased transportation costs.

This court has not previously determined when indirect economic losses are recoverable in tort when a physical injury or other direct property damage has also been sustained.”

In deciding this issue, we first distinguish direct economic losses from indirect economic losses. As defined by this court in Chemtrol Adhesives, Inc. v. Am. Mfrs. Mut. Ins. Co. (1989), 42 Ohio St.3d 40, 537 N.E.2d 624, ‘“[d]irect’ economic loss includes the loss attributable to the decreased value of the product itself. Generally, this type of damages encompasses ‘the difference between the actual value of the defective product and the value it would have had had it not been defective.’ ” Id. at 43, 537 N.E.2d at 629. “Indirect” economic loss includes the consequential losses sustained, which may include the value of production time lost and the resulting lost profits. Id. at 44, 537 N.E.2d at 629.

We conclude that the economic damages sought by BP and QCT are indirect economic damages. The lost profits and additional expenses of BP and the diminished value of QCT’s terminal were not economic losses caused by the failure of the bottom washouts. Instead, the economic losses were caused by the revocation of QCT’s street privilege.

The ultimate question in this case is whether Trinity is liable to BP and QCT for these indirect economic losses. In Chemtrol, we held that in the absence of injury to persons or damage to other property, economic losses may not be recovered in the tort theories of strict liability or negligence. Id. at paragraph one of syllabus. In this case, both BP and QCT sustained some property damage. BP lost benzene, and QCT had the premises that it leases damaged by the benzene spill. Thus, Chemtrol does not preclude the recovery of indirect economic losses for BP or QCT.

In deciding Trinity’s liability to BP and QCT, we hold that in order to recover indirect economic damages in a negligence action, the plaintiff must prove that the indirect economic damages arose from tangible physical injury to persons or from tangible property damage. Indirect economic damages that do not arise from tangible physical injury to persons or from tangible property may only be recovered in contract.

In a discussion of economic damages, this court in Floor Craft Floor Covering, Inc. v. Parma Community Gen. Hosp. Assn. (1990), 54 Ohio St.3d 1, 3, 560 N.E.2d 206, 208, cited with approval the following excerpt from Prosser and Keeton’s treatise on torts:

“In the absence of privity of contract between two disputing parties[,] the general rule is ‘there is no * * * duty to exercise reasonable care to avoid intangible economic loss or losses to others that do not arise from tangible physical harm to persons and tangible things.’ Prosser & Keeton, Law of Torts (5 Ed.1984) 657, Section 92.”

The converse of this statement is also true: there is a duty to avoid intangible economic loss or losses to others that do arise from tangible physical harm to persons and tangible things.

Thus, the mere coupling of personal injury or property damages with indirect economic damages is not enough to entitle a plaintiff to recover the indirect economic damages. The plaintiff must show that the indirect economic damages arose from the property damage or personal injury. There must be a direct causal nexus between the tangible damage and the indirect economic losses in order for the economic losses to be recoverable.

We decline to apply this rule to direct economic damages because, by definition, they arise from property damage. As stated earlier, direct economic damages result from the diminished value of the defective product itself.

We must now apply these standards to the jury verdicts awarded to BP and QCT. “It is the duty of the trial court in a jury trial to submit to the jury the question of proximate causal relationship between the injury received and the result claimed, where the evidence is such that reasonable minds might reach different conclusions upon that question.” Bowling v. Indus. Comm. (1945), 145 Ohio St. 23, 30 O.O. 245, 60 N.E.2d 479, paragraph three of the syllabus.

Thus, we must examine the verdicts awarded to BP and QCT separately in order to determine whether reasonable minds could conclude that each party’s indirect economic damages arose from its physical injury or property damage.

We find that the important distinction separating the indirect economic damages of QCT from those of BP is that QCT’s economic damages arose from a direct and continuous causal chain of events beginning with its property being damaged and ending with its terminal being rendered worthless. For BP, there is no similar chain of events linking its indirect economic damages with its loss of benzene.

A

We first examine QCT’s indirect economic damages, which include over $6 million in useless terminal improvements stemming from the failure of the benzene project with BP. We find that reasonable minds could conclude that QCT’s indirect economic damages did arise from tangible physical injury or tangible property damage to QCT. QCT leased the property which was contaminated with benzene. Because of this contamination to the property, the city of Cincinnati revoked the benzene street permit which was issued exclusively to QCT.

In fact, the city’s action in response to the spill focused exclusively on QCT and not BP. City of Cincinnati Ordinance 136-1985 revoked the previously suspended street permit granted to QCT. The ordinance provided for the removal of the already received benzene by QCT “to secure against its release in time of flood or to allow that stock of benzene to be removed from the City.” Following the removal of the already received benzene, the ordinance also ordered QCT to physically seal the pipeline that connected QCT’s terminal with its unloading facilities. The city council’s issuance, suspension and revocation of the street permit for QCT compels us to find that there is a sufficient causal nexus between the contamination of property leased by QCT and QCT’s indirect economic damages to impose liability upon Trinity.

Because of this causal nexus, the jury’s verdict in favor of QCT and against Trinity was appropriate. We affirm the portion of the judgment of the court of appeals discussing this verdict.

B

We next examine BP. BP’s indirect economic damages consisted of rerouting damages incurred from having to ship benzene through St. Louis instead of Cincinnati. BP alleges that its rerouting damages were comprised of lost profits incurred due to lower sales and increased costs. The pertinent question is whether these rerouting damages arose from physical injury to persons or tangible property damage to BP. We find that they did not. We find no causal nexus between BP’s loss of benzene, which is BP’s only property damage, and the company’s rerouting damages. BP’s rerouting damages arose from the revocation of the QCT’s street permit by the city of Cincinnati. There is no evidence that the city’s revocation arose from BP’s loss of benzene.

We find that from the evidence in this case reasonable minds could only conclude that BP’s rerouting damages did not arise from BP’s loss of forty gallons of benzene. Thus, we conclude that BP’s indirect economic damages are not recoverable. Because BP was not entitled to recover its indirect economic losses, we hold that the trial court improperly overruled Trinity’s motion for a directed verdict against BP on this issue. We therefore reverse the $8,249,428 judgment against Trinity and in favor of BP on the revocation damages. The judgment of the court of appeals affirming this trial court’s judgment is reversed.

II

In its third proposition of law, Trinity contends the court of appeals erred, because “[o]ne who contracts to buy goods or services has no right of recovery against a person whose tortious act interferes with his supplier’s ability to provide the contracted goods or services.” This issue was neither raised in Trinity’s assignments of error submitted to the appellate court nor addressed by the court of appeals in its opinion. We, accordingly,' decline to discuss this proposition of law and reject it. Moats v. Metro. Bank of Lima (1974), 40 Ohio St.2d 47, 49-50, 69 O.O.2d 323, 324, 319 N.E.2d 603, 604.

III

In its fourth proposition of law, Trinity contends that QCT may not recover economic damages from Trinity because the economic damages that QCT incurred had resulted from BP’s breach of contract with QCT and not from Trinity’s negligence.

In essence, Trinity argues that BP’s breach of contract — and not Trinity’s negligence — was the legal cause of QCT’s damages. In Ohio, the “substantial factor” test is used to determine liability when factors other than the negligence of the tortfeasor may have caused the plaintiffs damages. Pang v. Minch (1990), 53 Ohio St.3d 186, 559 N.E.2d 1313. In Pang, this court declared that:

‘Where a plaintiff suffers a single injury as a result of the tortious acts of multiple defendants, the burden of proof is upon the plaintiff to demonstrate that the conduct of each defendant was a substantial factor in producing the harm.” Id. at paragraph five of syllabus.

The present case presents a factual scenario that differs slightly from that discussed in Pang. Instead of concurrent tortfeasors causing the same injury, a tortfeasor and a party who has allegedly breached a contract may have caused the same injury. Nevertheless, we apply the rule announced in Pang to this case. In order to prove that the economic damages incurred by QCT were the legal result of Trinity’s negligence, QCT has the burden of proving that Trinity’s conduct was a substantial factor in producing QCT’s damages.

The determination of whether an actor’s conduct was a substantial factor in producing the plaintiffs injury is a question of fact to be determined by the trier of fact. See Baldridge v. Wright Gas Co. (1951), 154 Ohio St. 452, 43 O.O. 369, 96 N.E.2d 300, paragraph three of the syllabus. The trial court in this case instructed the jury on the substantial factor standard prior to its retiring for deliberation. The record is replete with evidence supporting the jury’s determination that Trinity’s negligence was a substantial factor in causing QCT’s economic damages. As stated previously, in response to the benzene’s being leaked on QCT’s leased property, the Cincinnati City Council revoked its street permit. As a result, the expensive improvements made to QCT’s terminal facility became worthless. Because the evidence at trial supports the jury’s determination, we reject Trinity’s fourth proposition of law.

IV

In its first proposition of law, Trinity contends that it cannot be held liable in tort for the economic damages incurred because the damages were caused by legislation enacted by a publicly elected governmental body. In its fifth proposition of law, Trinity also contests the trial court’s instructions to the jury concerning the proper proof of foreseeability of an intervening cause. There are thus two issues. First, was Trinity’s admitted negligence the proximate cause of the Cincinnati City Council’s revocation of the privilege, or was the revocation an intervening cause of the damage? Second, was the revocation of the privilege foreseeable? These contentions can be resolved by carefully reviewing elementary principles of Ohio tort law and scrupulously applying them to the facts.

Proximate causation has been described as “some reasonable connection between the act or omission of the defendant and the damage the plaintiff has suffered.” Prosser & Keeton, Law of Torts (5 Ed.1984) 263, Section 41. The revocation of the street permit was the cause of the economic damages suffered by QCT. This is not challenged. The issue is whether the conceded negligence of Trinity was the proximate cause of QCT’s damage. Special Interrogatory No. 9 discussing QCT’s claims for revocation damages was posed to the jury as follows: “Trinity was negligent. Was Trinity negligent in a manner that proximately caused revocation damages to Queen City?” The jury responded “yes.”

There is sufficient evidence in the record to support the jury’s response. The explicit purpose of the agreement between BP and QCT included the transportation of benzene and other chemicals by pipeline. Cincinnati Ordinance 518-1984 defined the terms and conditions for the granting of a “revocable street privilege * * * to permit the installation, maintenance, and operation of a fourteen inch (14") pipeline * * * for the transportation of benzene and other materials handled by [QCT].” Specific safety measures were designated by experts to be instituted by QCT in order to safely transport and unload the benzene. Most significantly, Cincinnati Ordinance 136-1985, passed March 20, 1985, stated the rationale for the city council’s revocation of the privilege: the benzene spill. It states, “Neither Council nor the residents in the surrounding community have continued confidence that the benzene transhipment system can be operated in the future without additional releases of benzene into the environment.” Reasonable minds could conclude that Trinity’s negligence prompted the revocation of the privilege and functioned as the proximate cause of QCT’s damages.

Trinity contends that the affirmative defense of intervening causation precludes QCT from recovering the economic damages incurred after the city revoked the street permit. We have long recognized that the connection between the defendant’s act or omission and the damage or injury occasioned by the plaintiff may be broken by an intervening event. R.H. Macy & Co. v. Otis Elevator Co. (1990), 51 Ohio St.3d 108, 554 N.E.2d 1313. However, the discretionary nature of Cincinnati Ordinance 136-1985, which revoked the privilege granted to Queen City Terminals, Inc., does not necessarily preclude Trinity’s liability for the economic consequences of the ordinance. “The mere fact that the intervention of a responsible human being can be traced between the defendant’s alleged wrongful act and the injury complained of does not absolve him upon the ground of lack of proximate cause if the injury ensued in the ordinary course of events, and if the intervening cause was set in motion by the defendant.” Mouse v. Cent. Sav. & Trust Co. (1929), 120 Ohio St. 599, 167 N.E. 868, paragraph one of the syllabus.

Intervening causation is not proven if the alleged intervening cause was reasonably foreseeable by the one who was guilty of the negligence. Neff Lumber Co. v. First Natl. Bank of St. Clairsville (1930), 122 Ohio St. 302, 309, 171 N.E. 327, 330. “ ‘It is not necessary that the defendant should have anticipated the particular injury; it [is] sufficient that his act was likely to result in injury to some one.’ ” Id. We reaffirm the principle upheld in Neff that a particular defendant need not foresee the specific harm caused by its negligence, if the harm would have been foreseeable to a reasonably prudent person. Cf. Menifee v. Ohio Welding Products, Inc. (1984), 15 Ohio St.3d 75, 77, v15 OBR 179, 180, 472 N.E.2d 707, 710.

The test used to determine foreseeability of the intervening cause to the original negligent actor is “whether the original and successive acts may be joined together as a whole, linking each of the actors as to the liability, or whether there is a new and independent act or cause which intervenes and thereby absolves the original negligent actor.” (Emphasis added.) Cascone v. Herb Kay Co. (1983), 6 Ohio St.3d 155, 160, 6 OBR 209, 214, 451 N.E.2d 815, 819. This is the standard that was read to the jury in Instruction No. 14. When applying the Cascone test, the term “independent” means the “absence of any connection or relationship of cause and effect between the original and subsequent act of negligence.” Leibreich v. A.J. Refrigeration, Inc. (1993), 67 Ohio St.3d 266, 269, 617 N.E.2d 1068, 1072. The term “new” means that the second act could not reasonably have been foreseen.

Special Interrogatory No. 17 asked the jury if there was “an intervening act that relieved Trinity of liability to Queen City for revocation damages.” The jury responded “no.”

There is sufficient evidence in the record for the jury to conclude that the city council’s revocation of the street permit was not independent of Trinity’s negligence. Trinity conceded negligence from the outset of this action. A plant manager from Trinity testified at trial that, during his dealings with GATX, it was “common knowledge” that there was local opposition to the benzene project. BP’s project manager testified that he stressed to Trinity the importance of the fittings on the TankTrains because QCT “was in the process of obtaining permits, and anything that will jeopardize those permits might be a possible leak from the TankTrain.” Based upon this evidence reasonable minds could have fairly concluded that the actions taken by city council in response to the benzene leak were reasonably foreseeable and thus not an intervening cause. Accordingly, we reject Trinity’s first and fifth propositions of law.

V

In its sixth proposition of law, Trinity contends that the trial court correctly entered a directed verdict as to BP’s and QCT’s products liability claim against Trinity. BP and QCT argue that the Trinity’s faulty manufacture of the TankTrain falls within the realm of products liability law, and thus recovery should be allowed in strict liability. The appellate court held that the directed verdict was incorrect because commercial entities are not precluded as plaintiffs in product liability cases.

Because the products liability claim accrued before January 5, 1988, it is governed by 2 Restatement of the Law 2d, Torts (1965), Section 402A, adopted by this court in Temple v. Wean United, Inc. (1977), 50 Ohio St.2d 317, 4 O.O.3d 466, 364 N.E.2d 267, and not by R.C. 2307.71 to 2307.80. Under certain circumstances when a defective product injures a user or consumer, that consumer is entitled to recover damages from the manufacturer in strict liability. It is accepted that large commercial entities are consumers and can bring products liability claims against the manufacturer of the goods that they consume. Chemtrol, supra, 42 Ohio St.3d at 42, 537 N.E.2d at 628.

The Restatement, though, does not specify exactly what constitutes a product meriting the application of strict liability. Strict liability developed to achieve specific policy objectives. Situations which would not further these objectives have long been recognized to be outside the purview of strict liability. Restatement Section 402A, Comment/ We first examine the reasons for imposing strict liability on manufacturers of defective products.

Policy Behind Products Liability

The policies underlying products liability doctrine are noted within the Restatement and have been consistently recognized by this court. The first and foremost objective of strict liability is to promote product safety. The doctrine of strict products liability provides manufacturers a strong incentive to design, manufacture, and distribute safe products. Prosser & Keeton, Section 4 at 25-26. “The basis for the rule is the ancient one of the special responsibility for the safety of the public undertaken by one who enters into the business of supplying human beings with products which may endanger the safety of their persons and property, and the forced reliance upon that undertaking on the part of those who purchase such goods.” Restatement Section 402A, Comment / This court has expressly stated that “the public interest in human life and safety can best be protected by subjecting manufacturers of defective products to strict liability in tort when the products cause harm.” Leichtamer v. Am. Motors Corp. (1981), 67 Ohio St.2d 456, 464-465, 21 O.O.3d 285, 291, 424 N.E.2d 568, 575.

A second objective of products liability stems from a cost-shifting rationale. The Restatement elaborates that “public policy demands that the burden of accidental injuries caused by products intended for consumption be placed upon those who market them, and be treated as a cost of production.” Restatement Section 402A Comment c. The assumption is that manufacturers are in a better position to bear the costs of injuries, because they have the ability to “distribute the losses of the few among the many who purchase the products” by charging higher prices. Prosser & Keeton at 693; Bowling v. Heil Co. (1987), 31 Ohio St.3d 277, 284, 31 OBR 559, 565, 511 N.E.2d 373, 378-379. The manufacturer is thus seen as better able to internalize the costs of injuries than the general public.

A third justification for strict liability is that proving negligence can be difficult and costly for the average consumer. Strict liability therefore provides the consumer with a degree of protection from a manufacturer that has launched its product into the stream of commerce. Prosser & Keeton at 693.

B

Reasoning

We find that the product here was coaxed into the market by its consumers. Trinity did not launch this product into the stream of commerce. This was a custom-made order, fashioned expressly at the request of GATX. Because we find that none of the commonly accepted reasons supporting the imposition of strict liability applies to the TankTrain, we find relief based on strict liability in tort is not appropriate in this case.

First, safety policy is not furthered by holding manufacturers in the situation of Trinity strictly liable. The process of manufacturing a custom-made item such as the TankTrain heavily involves the consumers, GATX and BP, in making manufacturing decisions, computing risks, and setting safety specifications. The incentive for Trinity to design and manufacture washout gaskets for the Tank-Trains came entirely from the demands of their customer, GATX, which wished to be able to easily reuse the cars at the termination of BP’s lease of the TankTrains. BP acquiesced in these demands. Trinity made safety concerns known at that time, and expressed a preference for welding. The decision whether or not to use washouts, however, was not Trinity’s decision to make. It does not promote product safety to hold manufacturers strictly liable for the decisions of their consumers.

The cost-shifting rationale for strict liability does not pertain to the facts at hand either. Trinity is not in any better position to assume the costs than the customers in this case. The manufacture of TankTrains is not a mass-scale enterprise for Trinity. GATX owns the design and sole right to manufacture TankTrains. It was GATX that selected Trinity to produce a specific, one-time order of TankTrains to meet the appellees’ need. Trinity fulfilled a specific, limited, custom-made order for one client, GATX. In such a case, the manufacturer has no opportunity to spread the costs throughout its many customers, because no other customers exist. It would be no more efficient for Trinity to internalize the costs of injuries here than for GATX or the ultimate consumer, BP, to do so.

The appellee does not need the extra protections afforded a typical consumer of off-the-shelf products. BP’s experts were heavily involved in the manufacturing process of the TankTrain. BP’s manager for the TankTrain project, Mamouh Hamsho, testified that BP requested and received plans for the TankTrain, subjected them to the scrutiny of the appellee’s Central Engineering Unit, which consisted of over one hundred engineers, and solicited outside consultation. Hamsho conducted a personal inspection of Trinity’s facility during the manufacture of the TankTrain. Further, Hamsho’s testimony indicates that BP was actively involved in a dialogue with GATX and Trinity concerning the design and specifications of the TankTrain, including the decision to install washout plugs instead of welding. Due to this heavy involvement in the manufacturing process, BP was in a position to know and prove that the manufacturer might have been negligent.

It is the decision of this court that strict liability does not extend to the type of product involved in this case. Accordingly, we reverse the portion of the judgment of the court of appeals holding that appellees were entitled to proceed to trial on their claim of strict products liability against Trinity. This holding is not meant to be a panacea for all manufacturers of defective products, but is instead intended to address the rare factual circumstance where the purchaser and lessee of a product are heavily involved in the manufacturing process of the defective item.

Judgment affirmed in part and reversed in part.

Moyer, C.J., Wright and F.E. Sweeney, JJ., concur. Douglas, Resnick, and Cook, JJ., concur in part and dissent in part.