In 1951 the plaintiff contracted with the defendant builder to have a house built on his land and with the defendant architect to have the construction supervised. Cracks appeared in the ceilings because the concrete used was well below the requisite strength. The plaintiff claimed damages for the reconstruction of the ceilings which were in danger of collapse. Because he was out of time for a contract claim the plaintiff based his claim on the delictual provisions § 823 I BGB and § 823 II BGB in connection with § 330 of the Criminal Code (StGB) or § 367 no. 15 StGB.

Reasons

The Court of Appeal was right to find that the facts disclosed no tort on which the plaintiff’s claim for damages could be based.

1. There is no question of a claim for damages under § 823 I BGB on the basis that the plaintiff’s property (Eigentum) has been damaged by fault. The land owned by the plaintiff, as compared with what it was, has suffered no harm through the defective method of construction. In so far as the land has been built on, as the Court of Appeal rightly stated, the plaintiff never owned it in an undefective condition. As the building proceeded, the plaintiff’s ownership attached to each part of the building as it was constructed in the condition in which it was constructed, with all the qualities and defects resulting from the incorporation of the building materials. To make someone the owner of a defective building is not to invade an already existing ownership (compare RG JW 1905, 367; OLG Karlsruhe NJW 1956, 913).

The decision of the Senate in LM no. 4 to § 830 BGB was a different case; there defective concrete balconies which had been built onto the top storey caused the collapse of the whole building.

2. The Court of Appeal was also right to reject the claim for damages based on § 823 II BGB in connection with § 330 StGB. Under this last-named provision a person ‘who in supervising or erecting a building in breach of generally recognized rules of building practice acts in such a way as to cause danger to others’ is guilty of an offence. The trial court found that a danger existed within the meaning of this provision and this finding is not subject to review. But as the Court of Appeal stated, § 330 StGB is solely designed to protect the lives and health of individuals [references]. It is only to this extent that the provision is a protective statute whose breach can give rise to a claim for damages under § 823 II BGB. Damages can only be claimed under this text if the harm takes the form of the invasion of a legal interest for whose protection the rule of law was enacted (BGHZ 19, 114, 126; 28, 359, 365 f.). The claim before us is for compensation for harm to an interest other than the legal interest protected by § 330 StGB.

Nor is the claim for those damages justifies by the consideration that the replacement of ceilings which are in danger of collapse is necessary to save the users of the rooms from imminent danger. It still remains the case that the cost of rendering the ceilings represents a harm which affects only the pecuniary interests of the plaintiff. This is evident if one imagines that a ceiling collapses and injures an individual; then certainly the harm attributable to the personal injuries must be compensated under § 823 II BGB and § 330 StGB; but there would still remain the material harm requiring the replacement of the ceilings, and this would still affect only the economic interests of the plaintiff.

3. The plaintiff finally relies on § 823 II BGB in connection with § 367 I no. 15 StGB. This provision provides, inter alia, that it is an offence for a builder or building worker to construct a building in deliberate deviation from the building plan approved by the authority. According to the plaintiff, an offence was here committed because the approval of the plan was based on specific calculations, incorporated in the submission, relating to the load-bearing capacity of the construction, and these calculations were in turn based on the quality of the concrete to be used.

It is not necessary to decide whether the use of concrete inferior to that on which the stress calculations were based constitutes a deliberate deviation from the authorized plan. We agree with the Court of Appeal that § 367 I no. 15 StGB is not designed to offer protection against harm of the sort for which the plaintiff claims damages.

It is true that in its decision reported in LM no. 1 § 823 (Bb) BGB the Bundesgerichtshof recognized that § 367 I no. 15 StGB was a protective statute; that case, however, involved personal injuries suffered by a worker employed on the building site.

In the view of the Court of Appeal, § 367 I no. 15 StGB is like § 330 StGB in offering protection only to the human person.

This view is open to criticism. The final Courts of Appeal have accepted that the cognate provision of § 367 I no. 14 StGB exists for the protection of property as well and that a breach of the provision may also give rise to claims for damages in respect of property damage under § 823 II BGB (RGZ 51, 177–8, BGH, LM no. 2 to § 823 Bd BGB). Both these decisions were concerned with harm caused to neighbouring buildings adjoining the building site and vested in third parties.

Thus it may be taken that the protective purpose of § 367 I no. 15 StGB is also to be construed to guard against damage to property as well as damage to persons. In the present case, however, as has already been stated, there is no damage to property but a pecuniary loss attributable to the defective execution of the building work in breach of contract . . .

Notes to Cases 68-75

1. Cases 68-73 deal with damage to the product and not damage caused by the product and must be compared with the decision of the US Supreme Court in East River reproduced in Addendum 2 to this section. The questions here are basically two: (i) is this economic loss or physical damage and (ii) should the answer be left to the law of contract or be found in an extended law of tort? If the answer favours tort, should the tort duty be determined, both in its scope and extent, by the underlying contract? Cases 74 and 75 face an analogous problem in the context of immovables.

Case 75, BGHZ 39, 366, concerned the question whether a defective design could as such lead to damage to property in the meaning of § 823 I BGB. The court denied this: “The land owned by the plaintiff, as compared with what it was, has suffered no harm through the defective method of construction.” The plaintiff never owned it in a non-defective condition. This restrictive approach must now however be approached with caution. For in BGH, 12 December 2000, NJW 2001, 1361, the BGH held that in principle the criteria developed in cases 68-73 in relation to chattels could be applied by analogy to immovables. Yet, in the case at hand it denied liability under § 823 I BGB. The (simplified) facts were these. The plaintiff bought a site from the defendant and erected buildings on it. The defendant had filled the site with slag that made the site unsuitable for building. Within a couple of years cracks appeared in the buildings. The plaintiff sought a declaratory judgment that the defendant was liable in tort for the cost of repair of the buildings. The BGH held that the plaintiff never owned the building in a non-defective condition. It was of central importance that the site was from the outset unsuitable for building. The defect ‘attached’ to the whole property and could not be confined to one of its ‘components’. The mere fact that the buildings were not defective when build (but became so only subsequently) did not indicate otherwise. Thus, where the building is ‘doomed’ from the outset, whether because of a defective design (here the court relied on case 75) or unsound foundations as in the present case, § 823 I BGB cannot be relied on. In the final analysis one wonders, however, whether this new approach will substantially increase the use of tort law in this area. Purchasers of buildings or building employers will have difficulties to show that they ever owned the land in a non-defective condition. Thus, the main remedy for plaintiffs in such situations will lie in the law of contract, which is not without its pitfalls, given the shorter limitation periods which are ‘objective’ in the sense that they do not depend on whether the plaintiff knew or could have known of the defect.

Plaintiffs who have a cause of action against a local authority for negligently granting permission to build on a site unsuitable for building are, at least in theory, in a better starting position. (This is the situation in case 74, BGHZ 39, 358.) For here, under § 839 BGB, the plaintiff can recover damages also for pure economic loss. This is not say, however, that the plaintiff will recover easily, as case 74 illustrates. For such liability to arise the plaintiff must establish that the local authority violated a duty that specifically protected the plaintiff’s interests. This was denied in case 74. In assessing whether such a duty of care was breached, as will be further explained in Ch. 4 section A 2b, there is ample room for policy considerations. Foreseeability of loss is not a sufficient condition of liability. The courts have, after much hesitation, allowed claims (also for pure economic loss) where the health of potential occupants of a licensed building was potentially affected (e.g. because the building was erected on an abandoned and temporarily forgotten waste damp). The first decision in which the BGH adopted a more generous approach, and in which it awarded damages to a purchaser of a building that was inhabitable because it was erected on polluted soil, was BGH, 26 January 1989, BGHZ 106, 323. Damages were assessed on this basis. The plaintiff’s investment in the site and the building was frustrated. Accordingly, it could be recovered, minus what the land was actually worth. The case law that followed is rich and not easy to reconcile. See, BGH, 6 July 1989, BGHZ 108, 224; BGH, 21 February 1991, BGHZ 113, 367; BGH, 14 October 1993, BGHZ 123, 363; and BGH, 29 July 1999, BGHZ 142, 259. See, also, annotations by Ossenbühl, JZ 1989, 1125; JZ 1991, 922. A detailed examination of these cases at the borderline between public (building) law and the law of delict must be reserved to a specialized treatise. Here, suffice it to make three general observations. First, the factual background of this line of cases was a growing awareness of environmental issues, in particular, of the dangers posed by old waste damps and the like. Secondly, generally speaking, the courts confined this new head of liability to cases where the planning authority (city or district councils) neglected health risks. This enabled the courts, thirdly, to limit liability for pure economic loss to a clearly identifiable, small group of victims. This is achieved by confining the protective scope of the duty of care to those persons who intend to live in a building that is not inhabitable because of the negligent planning. Occasionally, the courts departed from this bright line rule, not always consistently. For instance the BGH awarded damages to a developer who never had the intention to live in the building himself but to sell the property to third parties. (BGHZ 108, 224). In the same case however the court refused to award damages to investors or banks who are, in the court’s view, not included in the protective scope of the duties that the local authority must respect in the course of planning.

2. First, as to defective premises since German law seems quite settled on this point: Dutton v. Bognor Regis UDC ([1972] 1 QB 373) held that the ultimate purchaser of a house that had been built on a rubbish tip and subsequently developed cracks had suffered material damage that could be claimed in tort. (A key extract from Lord Denning’s judgment is reproduced below in Addendum 3.) The House of Lords, in those days in frequent disagreement with the Court of Appeal, approved: Anns v. Merton London Borough Council ([1978] AC 728. These cases stand in stark contrast with the German decisions whose reasoning was: (a) superior and (b) transplantable. In fact English law has, thirteen years later, moved much closer to the German approach, though it has done so gradually (some would say confusingly slowly) and in much more expansive judgments. (See: Peabody Donation Fund v. Sir Lindsay Parkinson & Co. Ltd. ([1985] AC 210); Curran v. Northern Ireland Co-Ownership Housing Ass’n Ltd. ([1987] AC 718); D & F Estates Ltd. v. Church Comm’rs ([1988] 3 WLR 368; and, most significantly, in Murphy v. Brentwood DC [1991] 1 AC 398). The basic tenets nowadays are clearly two: (a) the harm suffered by the plaintiffs in these cases is pure financial harm and not, as originally believed, property damage, and (b) the purpose behind the supervisory powers over building operations conferred by the legislature on local authorities is to protect occupiers of buildings and the public against dangers to their health and personal safety and nothing more.

3. On the Dutton, Anns, Murphy problem, American courts have not been able to come up with a uniform answer, so all one can do here is to warn of the diversity of answers. Thus, at one end of the spectrum, many state courts have allowed recovery of economic losses resulting from defects in buildings. See: Sewell v. Gregory 371 SE 2d 82, 84–5 (W.Va. 1988); Cincinnati Riverfront Coliseum v. McNulty and Co., 504 NE 2d 415, 419 (Ohio, 1986); Keel v. Titan Constr. Corp., 639 P. 2d 1228 (Okla. 1981). Probably more courts have opted for the exact opposite view, denying all recovery. See: Atherton Condo. Apartment-Owners Ass’n Bd of Dir. v. Blume Dev. Co., 799 P. 2d 250, 262 (Wash. 1990); Ellis v. Robert C. Morris, Inc., 513 A. 2d 951 (N. H. 1986). Cf., however, Lempke v. Dagenais, 547 A. 2d 290 (N.H. 1988) (allowing recovery for breach of warranty even in the absence of privity). In between these two extremes, one also finds compromise permutations—for instance recovery for remedial work for life-threatening defects. See: Council of Co-OwnersAtlantis Condo., Inc., v. Whiting-Turner Constr. Co. 517 A. 2d 336, 344–5 (Nd. 1986). These problems are discussed by Jones, ‘Economic Loss Caused by Construction Deficiencies: the Competing Regimes of Contract and Tort’, 59 U. of Cin. L. Rev. 1051 (1991); Libertucci, ‘Builders’ Liability to New and Subsequent Purchasers’, 20 SW. U. L. Rev. 219 (1991); Yuen, ‘Absent Privity of Contract Contractors may not Recover Economic Damages caused by an Architect’s Negligence’, 60 U. Cin. L. Rev. 565 (1991).

4. These cases, however, also show that accidents cannot always be neatly categorized. A television set explodes and injures my child: this is product liability and the damage is clearly personal injury (if it damages my table, it is property damage). The same television does not function when switched on. This (according to the better view) is economic loss and the remedy should best be sought in the law of sales, the UCC etc. In this sense: Spring Motors Distrib. Inc. v. Ford Motor Co., 489 A. 2d 660 (N.J.1985); Henry Heide, Inc. v. WRH Prods. Co., Inc., 766 F. 2d 105 (3rd Or.1985). For a systematic analysis see Two Rivers Co. v. Curtiss Breeding Serv., 624 F. 2d 1242 (5th cir.1980). For Germany see Hager, ‘Zum Schutzbereich der Produzentenhaftung’, AcP 184 (1984), 413.

5. In between are cases like 68-73 where a defective component causes further damage to the product but no other damage to persons or other property. This borderline case has caused its problems; and it is here that tort is increasingly used to invade the province of contract law. This unease is reflected in the German cases reproduced in this book. (Note, for example, case 68 and, incidentally, note how superficially (by English standards) earlier case law is brushed aside. This ‘summary’ way that earlier ‘precedents’ are handled by German courts is a subject worthy of further study.) Thus it is said that if the defect and the damage caused by it are not ‘substantially the same’ then recovery for the latter is possible in tort. And conversely, if there is ‘substantial identity’ (Stoffgleichheit) between defect and subsequent harm, then no tort action will be allowed. So where asbestos tiles attached to the plaintiff’s house released in rainy weather a substance which silted up his windows, a tortious claim was successful (BGH NJW 1981, 2250). But in another case (BGH NJW 1981, 2248) insulation material built into a roof caused it to crack as temperature variations produced expansion and contraction. The defect and the damage it caused were here considered to be ‘substantially the same’ so the tort action failed.

6. Decisions such as the above provide illustrations (see also BGH NJW 1983, 812); but the criterion of ‘substantial identity’ has much troubled the German courts as cases 68-73 clearly show. Their study makes hard reading but, basically, one detects an unease with the whole subject evidenced by changing tests and underscored by academic doubts (see, for example, Deutsch, JZ 1984, 308, 311; Stoll, JZ 1983, 501). Thus, originally, the defective part had to be a ‘functionally limited unit’ of the whole product in order to be classed as damage to property when it spread and ‘infected’ the rest of the product. In the Gaszugfall case (71, BGHZ 86, 256) the court decided that one should not focus exclusively on the idea of a ‘functionally limited unit’ but one should, instead, adopt an economic approach. The question to be asked was thus whether the defective part could be separated from the rest of the product without considerable economic loss (see section II.2(b) of case 71). The Kompressorfall case (72, BGH NJW 1985, 2420) now introduces a new test which requires the court to compare the defect of the product when acquired with the damage done when the defect has spread.

7. This German case law has proved highly controversial with academics, but their criticisms have left the judges unmoved. In the light of this, an outside observer must be cautious in expressing his views and should, perhaps, limit his observations to three points. Thus, first comes the advice to the reader to familiarise himself with as much of this literature as possible. The references given in the next paragraph (8.) are meant to assist this process; and the study of foreign laws can only enrich this understanding. Secondly, the reader will be assisted in his task by the comments that Professor Kötz volunteered (in a private letter to the author; Addendum 1) and which refer to the Schwimmerschalter case (68, BGHZ 67, 359, above). The main thrust of his objections (and further references) can also be found in his invaluable Deliktsrecht, pp. 27 et seq. Finally, despite the force of these arguments, the reader will also benefit from looking at these developments from a broader perspective. Thus, another distinguished comparatist, (Professor Fleming in (1989) 105 LQR, 508–511; Addendum 2) seems to regard this case law as a reaction (perhaps inept but, arguably, inevitable) to the restrictive regime that the Code has adopted towards the problem of pure economic loss. Seen in this light, these developments may thus also contain important lessons for Common lawyers.

8. See, more recently: BGH VersR 1989, 91 (Fischfutter); BGH NJW 1990, 908 = VersR 1980, 204 (Weinkorken); BGH VersR 1990, 1283 (with disapproving note by E. Lorenz); BGH VersR 1992, 758 (Nockenwellensteuerrad); BGH VersR 1992, 837 (Kondensator); Steffen, ‘Die Bedeutung der “Stoffgleichheit” mit dem “Mangelunwert” für die Herstellerhaftung aus Weiterfresserschäden’, VersR 1988, 977; Kullmann, ‘Die Recht-sprechung des BGH zum Produkthaftpflichtrecht in den Jahren 1991/92’, NJW 1992, 2669; v. Bar, ‘Probleme der Haftpflicht für deliktsrechtliche Eigentumsverletzungen,’ Mannheimer Vorträge zur Versicherungswissen-schaft (1992).

Addendum 1 (From Professor Dr Hein Kötz)

‘It might shed some . . . light on the Schwimmerschalter decision if one bears in mind that the parties in that case were the buyer and the seller of the product in question and that the buyer had lost his contractual remedy only because he had failed to bring his action within the six-month period laid down in § 477 BGB. Nobody would have raised an eyebrow if the Court had said: “We are sorry that we cannot help the plaintiff since he failed to bring his action within the limitation period of § 477 BGB.” Nobody would have raised an eyebrow if the Court had added: “This is a harsh result since in this case a reasonable man would have been unable to detect the defect before the end of the six-month period, let alone bring an action before that date. We cannot do anything about it, but we ask Parliament to look at the problem and devise a solution, perhaps along the lines of Art. 39 of the Vienna Sales Convention.” It would have been somewhat bolder but perfectly acceptable if the Court had said: “We interpret § 477 BGB restrictively so as to let the six-month period start running not at the time of the delivery of the product but, in the event of a reasonably undetectable defect, at the date at which the buyer did detect it or, as a reasonable man, should have been able to detect it.” The Federal Court, however, did not choose any of these solutions, but came up, quite unexpectedly, with a disastrous fourth solution.

In later cases, the Federal Court applied the Schwimmerschalter rule to cases in which the parties were not linked by a contract but the plaintiff was a buyer further down stream. It follows that a seller may do what he pleases in order to exempt himself from both contractual and tort liability by way of a contractual agreement with his direct customer. All this, however, will not help him at all if a downstream buyer suffers damage to the defective product itself. Let me add that the limitation period for a tort claim is of course three years after detection of the damage and the [identity of the] person responsible for it (§ 852 BGB). In my view, this makes no sense.’

Addendum 2 (Professor John Fleming)

‘This line of attack [contained in the Kompressor case] is reminiscent of the equation of “property damage” with structural change in the pre- D & F Estates cases, also of Justice Traynor’s view in the leading American case of Seeley v. White Motor Co. 403 P.2d 145 (Cal.1965) distinguishing between a claim by a purchaser of a defective truck for the cost of repairs in a causally related accident and a claim for loss of profit due to inability to haul the expected quantity of loads.

What is at issue here is not so much the precise formula suggested by the German court as its willingness, indeed eagerness, to extend tort protection for damage to the defective thing itself. It is the more remarkable because of the Civil Code’s categorical exclusion of tort damages for purely economic loss and the great weight reputedly given by German law to theoretical orthodoxy over pragmatism. Clearly English law would not have to go to the same pains to justify similar results: only traditionalists have to seek refuge in abstractions. The answer is found in a search not for what the law had been thought to be, but what we want it to be. There clearly are options.’

Addendum 3

1. Extract from Lord Denning MR’s judgment from Dutton v. Bognor Regis UDC (CA) [1972] 1 QB 373, 396.

Mr Tapp [attorney for the defendant local authority] submitted that the liability of the council would, in any case, be limited to those who suffered bodily harm: and did not extend to those who only suffered economic loss. He suggested, therefore, that although the council might be liable if the ceiling fell down and injured a visitor, they would not be liable simply because the house was diminished in value. He referred to the recent case of SCM (United Kingdom) Ltd. v. W. J. Whittal & Son Ltd. [1971] 1 QB 337.

I cannot accept this submission. The damage done here was not solely economic loss. It was physical damage to the house. If Mr Tapp’s submission were right, it would mean that if the inspector negligently passes the house as properly built and it collapses and injures a person, the council are liable: but if the owner discovers the defect in time to repair it—and he does repair it—the council are not liable. That is an impossible distinction. They are liable in either case.

I would say the same about the manufacturer of an article. If he makes it negligently, with a latent defect (so that it breaks to pieces and injures someone), he is undoubtedly liable. Suppose that the defect is discovered in time to prevent the injury. Surely he is liable for the cost of repair.

2. Uniform Commercial Code, § 2–318

Third-Party Beneficiaries of Warranties Express or Implied

Alternative A

A seller’s warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume, or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

Alternative B

A seller’s warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume, or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

Alternative C

A seller’s warranty whether express or implied extends to any person who may reasonably be expected to use, consume, or be affected, by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends. As amended 1966.

3. Restatement Second, Tort, § 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.

Addendum 4

East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 106 S. Ct. Rep. 2295 (1986)

Justice BLACKMUN delivered the opinion of the Court.

In this admiralty case, we must decide whether a cause of action in tort is stated when a defective product purchased in a commercial transaction malfunctions, injuring only the product itself and causing purely economic loss. The case requires us to consider preliminarily whether admiralty law, which already recognizes a general theory of liability for negligence, also incorporates principles of products liability, including strict liability. Then, charting a course between products liability and contract law, we must determine whether injury to a product itself is the kind of harm that should be protected by products liability or left entirely to the law of contracts.

I. In 1969, Seatrain Shipbuilding Corp. (Shipbuilding), a wholly owned subsidiary of Seatrain Lines, Inc. (Seatrain), announced it would build the four oil-transporting supertankers in issue—the TT Stuyvesant, TT Williamsburgh, TT Brooklyn, and TT Bay Ridge. Each tanker was constructed pursuant to a contract in which a separate wholly owned subsidiary of Seatrain engaged Shipbuilding. Shipbuilding in turn contracted with respondent, now known as Transamerica Delaval, Inc. (Delaval), to design, manufacture, and supervise the installation of turbines (costing $1.4 million each, see App. 163) that would be the main propulsion units for the 225,000-ton, $125 million (ibid.) supertankers. When each ship was completed, its title was transferred from the contracting subsidiary to a trust company (as trustee for an owner), which in turn chartered the ship to one of the petitioners, also subsidiaries of Seatrain. Queensway Tankers, Inc., chartered the Stuyvesant; Kingsway Tankers, Inc., chartered the Williamsburgh; East River Steamship Corp. chartered the Brooklyn; and Richmond Tankers, Inc., chartered the Bay Ridge. Each petitioner operated under a bareboat charter, by which it took full control of the ship for 20 or 22 years as though it owned it, with the obligation afterwards to return the ship to the real owner. See G. Gilmore and C. Black, Admiralty §§ 4–1, 4–22 (2nd edn. 1975). Each charterer assumed responsibility for the cost of any repairs to the ships. Tr. of Oral Arg. 11, 16–17, 35.

The Stuyvesant sailed on its maiden voyage in late July 1977. On December 11 of that year, as the ship was about to enter the Port of Valdez, Alaska, steam began to escape from the casing of the high-pressure turbine. That problem was temporarily resolved by repairs, but before long, while the ship was encountering a severe storm in the Gulf of Alaska, the high-pressure turbine malfunctioned. The ship, though lacking its normal power, was able to continue on its journey to Panama and then San Francisco. In January 1978, an examination of the high-pressure turbine revealed that the first-stage steam reversing ring virtually had disintegrated and had caused additional damage to other parts of the turbine. The damaged part was replaced with a part from the Bay Ridge, which was then under construction. In April 1978, the ship again was repaired, this time with a part from the Brooklyn. Finally, in August, the ship was permanently and satisfactorily repaired with a ring newly designed and manufactured by Delaval.

The Brooklyn and the Williamsburgh were put into service in late 1973 and late 1974, respectively. In 1978, as a result of the Stuyvesant’s problems, they were inspected while in port. Those inspections revealed similar turbine damage. Temporary repairs were made, and newly designed parts were installed as permanent repairs that summer.

When the Bay Ridge was completed in early 1979, it contained the newly designed parts and thus never experienced the high-pressure turbine problems that plagued the other three ships. Nonetheless, the complaint appears to claim damages as a result of deterioration of the Bay Ridge’s ring that was installed in the Stuyvesant while the Bay Ridge was under construction. In addition, the Bay Ridge experienced a unique problem. In 1980, when the ship was on its maiden voyage, the engine began to vibrate with a frequency that increased even after speed was reduced. It turned out that the astern guardian valve, located between the high-pressure and low-pressure turbines, had been installed backwards. Because of that error, steam entered the low-pressure turbine and damaged it. After repairs, the Bay Ridge resumed its travels.

II. The charterers’ second amended complaint, filed in the United States District Court for the District of New Jersey, invokesadmiralty jurisdiction. It contains five counts alleging tortious conduct on the part of respondent Delaval and seeks $3.03 million in damages, App. 73, for the cost of repairing the ships and for income lost while the ships were out of service. The first four counts, read liberally, allege that Delaval is strictly liable for the design defects in the high-pressure turbines of the Stuyvesant, the Williamsburgh, the Brooklyn, and the Bay Ridge, respectively. The fifth count alleges that Delaval, as part of the manufacturing process, negligently supervised the installation of the astern guardian valve on the Bay Ridge. The initial complaint also had listed Seatrain and Shipbuilding as plaintiffs and had alleged breach of contract and warranty as well as tort claims. But after Delaval interposed a statute of limitations defense, the complaint was amended and the charterers alone brought the suit in tort. The non-renewed claims were dismissed with prejudice by the District Court. Delaval then moved for summary judgment, contending that the charterers’ actions were not cognizable in tort.

The District Court granted summary judgment for Delaval, and the Court of Appeals for the Third Circuit, sitting en banc, affirmed. East River SS Corp. v. Delaval Turbine, Inc., 752 F. 2d 903 (1985). The Court of Appeals held that damage solely to a defective product is actionable in tort if the defect creates an unreasonable risk of harm to persons or property other than the product itself, and harm materializes. Disappointments over the product’s quality, on the other hand, are protected by warranty law. Id., at 908, 909–10. The charterers were dissatisfied with product quality: the defects involved gradual and unnoticed deterioration of the turbines’ component parts, and the only risk created was that the turbines would operate at a lower capacity. Id., at 909. See Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F. 2d 1165, 1169–70 (3rd cir. 1981). Therefore, neither the negligence nor the strict liability claims were cognizable.

III. . . .

B. [2] The torts alleged in the first, second, third, and fifth counts clearly fall within the admiralty jurisdiction. . . .

C. [3] With admiralty jurisdiction comes the application of substantive admiralty law. . . . Absent a relevant statute, the general maritime law, as developed by the judiciary, applies. . . . Drawn from state and federal sources, the general maritime law is an amalgam of traditional Common-law rules, modifications of those rules, and newly created rules. . . .

[4] The Courts of Appeals sitting in admiralty overwhelmingly have adopted concepts of products liability, based both on negligence . . . and on strict liability. . . .

We join the Courts of Appeals in recognizing products liability, including strict liability, as part of the general maritime law. . . . Our incorporation of products liability into maritime law, however, is only the threshold determination to the main issue in this case.

IV. Products liability grew out of a public policy judgment that people need more protection from dangerous products than is afforded by the law of warranty. See Seely v. White Motor Co., 63 Cal. 2d 9, 15, 45 Cal. Rptr. 17, 21, 403 P. 2d 145, 149 (1965). It is clear, however, that if this development were allowed to progress too far, contract law would drown in a sea of tort. See G. Gilmore, The Death of Contract, 87–94 (1974). We must determine whether a commercial product injuring itself is the kind of harm against which public policy requires manufacturers to protect, independent of any contractual obligation.

A. [5] The paradigmatic products-liability action is one where a product ‘reasonably certain to place life and limb in peril’, distributed without reinspection, causes bodily injury. See e.g. MacPherson v. Buick Motor Co., 217 NY 382, 389, 111 NE 1050, 1051, 1053 (1916). The manufacturer is liable whether or not it is negligent because ‘public policy demands that responsibility be fixed wherever it will most effectively reduce the hazards to life and health inherent in defective products that reach the market’. Escola v. Coca Cola Bottling Co. of Fresno, 24 Cal. 2d, at 462, 150 P. 2d, at 441 (concurring opinion).

For similar reasons of safety, the manufacturer’s duty of care was broadened to include protection against property damage. See Marsh Wood Products Co. v. Babcock & Wilcox Co., 207 Wis. 209, 226, 240 NW 392, 399 (1932); Genesee County Patrons Fire Relief Assn. v. L. Sonneborn Sons, Inc., 263 NY 463, 469–73, 189 NE 551, 553–5 (1934). Such damage is considered so akin to personal injury that the two are treated alike. See Seely v. White Motor Co., 63 Cal. 2d, at 19, 45 Cal. Rptr., at 24, 403, P. 2d, at 152.

In the traditional ‘property damage’ cases, the defective product damages other property. In this case, there was no damage to ‘other’ property. Rather, the first, second, and third counts allege that each supertanker’s defectively designed turbine components damaged only the turbine itself. Since each turbine was supplied by Delaval as an integrated package, see App. 162–3, each is properly regarded as a single unit. ‘Since all but the very simplest of machines have component parts, [a contrary] 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 and Engineering Corp. v. Caterpillar Tractor Co., 623 P. 2d 324, 330 (Alaska 1981). The fifth count also alleges injury to the product itself. Before the high-pressure and low-pressure turbines could become an operational propulsion system, they were connected to piping and valves under the supervision of Delaval personnel. See App. 78, 162–3, 181. Delaval’s supervisory obligations were part of its manufacturing agreement. The fifth count thus can best be read to allege that Delaval’s negligent manufacture of the propulsion system—by allowing the installation in reverse of the astern guardian valve—damaged the propulsion system. Cf. Lewis v. Timco, Inc., 736 F. 2d 163, 165–6 (CA5 1984). Obviously, damage to a product itself has certain attributes of a products-liability claim. But the injury suffered—the failure of the product to function properly—is the essence of a warranty action, through which a contracting party can seek to recoup the benefit of its bargain.

B. The intriguing question whether injury to a product itself may be brought in tort has spawned a variety of answers.3 [Footnote omitted.] At one end of the spectrum, the case that created the majority land-based approach, Seely v. White Motor Co., 63 Cal. 2d 9, 45 Cal. Rptr. 17, 403 P. 2d 145 (1965) (defective truck), held that preserving a proper role for the law of warranty precludes imposing tort liability if a defective product causes purely monetary harm. See also Jones and Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F. 2d 280, 287 and n. 13 (CA3 1980) (citing cases).

At the other end of the spectrum is the minority land-based approach, whose progenitor, Santor v. A and M Karagheusian, Inc., 44 NJ 52, 66–7, 207 A. 2d 305, 312–13 (1965) (marred carpeting), held that a manufacturer’s duty to make nondefective products encompassed injury to the product itself, whether or not the defect created an unreasonable risk of harm.1 See also LaCrosse v. Schubert, 72 Wis. 2d 38, 44–5, 240 NW 2d 124, 127–8 (1976). The courts adopting this approach, including the majority of the Courts of Appeals sitting in admiralty that have considered the issue,2 e.g., Emerson GM Diesel, Inc. v. Alaskan Enterprise, 732 F. 2d 1468 (CA9 1984), find that the safety and insurance rationales behind strict liability apply equally where the losses are purely economic. These courts reject the Seely approach because they find it arbitrary that economic losses are recoverable if a plaintiff suffers bodily injury or property damage, but not if a product injures itself. They also find no inherent difference between economic loss and personal injury or property damage, because all are proximately caused by the defendant’s conduct. Further, they believe recovery for economic loss would not lead to unlimited liability because they think a manufacturer can predict and insure against product failure. See Emerson GM Diesel, Inc. v. Alaskan Enterprise, 732 F. 2d, at 1474.

Between the two poles fall a number of cases that would permit a products-liability action under certain circumstances when a product injures only itself. These cases attempt to differentiate between ‘the disappointed users . . . and the endangered ones’, Russell v. Ford Motor Co., 281 Or. 587, 595, 575 P. 2d 1383, 1387 (1978), and permit only the latter to sue in tort. The determination has been said to turn on the nature of the defect, the type of risk, and the manner in which the injury arose. See Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F. 2d 1165, 1173 (CA3 1981) (relied on by the Court of Appeals in this case). The Alaska Supreme Court allows a tort action if the defective product creates a situation potentially dangerous to persons or other property, and loss occurs as a proximate result of that danger and under dangerous circumstances. Northern Power and Engineering Corp. v. Caterpillar Tractor Co., 623 P. 2d 324, 329 (1981).

We find the intermediate and minority land-based positions unsatisfactory. The intermediate positions, which essentially turn on the degree of risk, are too indeterminate to enable manufacturers easily to structure their business behavior. Nor do we find persuasive a distinction that rests on the manner in which the product is injured. We realize that the damage may be qualitative, occurring through gradual deterioration or internal breakage. Or it may be calamitous. Compare Morrow v. New Moon Homes, Inc., 548 P. 2d 279 (Alaska 1976), with Cloud v. Kit Mfg. Co., 563 P. 2d 248, 251 (Alaska 1977). But either way, since by definition no person or other property is damaged, the resulting loss is purely economic. Even when the harm to the product itself occurs through an abrupt, accident-like event, the resulting loss due to repair costs, decreased value, and lost profits is essentially the failure of the purchaser to receive the benefit of its bargain—traditionally the core concern of contract law. See E. Farnsworth, Contracts § 12.8, pp. 839–40 (1982).

We also decline to adopt the minority land-based view espoused by Santor and Emerson. Such cases raise legitimate questions about the theories behind restricting products liability, but we believe that the countervailing arguments are more powerful. The minority view fails to account for the need to keep products liability and contract law in separate spheres and to maintain a realistic limitation on damages.C. Exercising traditional discretion in admiralty, see Pope and Talbot, Inc. v. Hawn, 346 US 406, 409, 74 S. Ct. 202, 204, 98 L. Ed. 143 (1953), we adopt an approach similar to Seely and hold that a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself.

‘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.’ Seely v. White Motor Co., 63 Cal. 2d, at 18, 45 Cal. Rptr., at 23, 403 P. 2d, at 151. When a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.

The tort concern with safety is reduced when an injury is only to the product itself. When a person is injured, the ‘cost of an injury and the loss of time or health may be an overwhelming misfortune’, and one the person is not prepared to meet. Escola v. Coca Cola Bottling Co. of Fresno, 24 Cal. 2d, at 462, 150 P. 2d, at 441 (concurring opinion). In contrast, when a product injures itself, the commercial user stands to lose the value of the product, risks the displeasure of its customers who find that the product does not meet their needs, or, as in this case, experiences increased costs in performing a service. Losses like these can be insured. See 10A Couch on Insurance §§ 42: 385–42: 401, 42: 414–17 (2nd edn. 1982); 7 Benedict on Admiralty, Form no. 1.16–7 (7th edn. 1985); 5A Appleman, Insurance Law and Practice § 3252 (1970). Society need not presume that a customer needs special protection. The increased cost to the public that would result from holding a manufacturer liable in tort for injury to the product itself is not justified. Cf. United States v. Carroll Towing Co., 159 F. 2d 169, 173 (CA2 1947).

Damage to a product itself is most naturally understood as a warranty claim. Such damage means simply that the product has not met the customer’s expectations, or, in other words, that the customer has received ‘insufficient product value’. See J. White and R. Summers, Uniform Commercial Code 406 (2nd edn. 1980). The maintenance of product value and quality is precisely the purpose of express and implied warranties.2 See UCC § 2–313 (express warranty), § 2–314 (implied warranty of merchantability), and § 2–315 (warranty of fitness for a particular purpose). Therefore, a claim of a non-working product can be brought as a breach-of-warranty action. Or, if the customer prefers, it can reject the product or revoke its acceptance and sue for breach of contract. See UCC §§ 2–601, 2–608, 2–612.

Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements.1 The manufacturer can restrict its liability, within limits, by disclaiming warranties or limiting remedies. See UCC §§ 2–316, 2–719. In exchange, the purchaser pays less for the product. Since a commercial situation generally does not involve large disparities in bargaining power, cf. Henningsen v. Bloomfield Motors, Inc., 32 NJ 358, 161 A. 2d 69 (1960), we see no reason to intrude into the parties’ allocation of the risk.

While giving recognition to the manufacturer’s bargain, warranty law sufficiently protects the purchaser by allowing it to obtain the benefit of its bargain. See J. White and R. Summers, supra, ch. 10. The expectation damages available in warranty for purely economic loss give a plaintiff the full benefit of its bargain by compensating for forgone business opportunities. See Fuller and Perdue, ‘The Reliance Interest in Contract Damages’ 1, 46 Yale LJ 52, 60–3 (1936); R. Posner, Economic Analysis of Law § 4.8 (3rd edn. 1986). Recovery on a warranty theory would give the charterers their repair costs and lost profits, and would place them in the position they would have been in had the turbines functioned properly.2 See Hawkins v. McGee, 84 NH 114, 146 A. 641 (1929). Thus, both the nature of the injury and the resulting damages indicate it is more natural to think of injury to a product itself in terms of warranty.

A warranty action also has a built-in limitation on liability, whereas a tort action could subject the manufacturer to damages of an indefinite amount. The limitation in a contract action comes from the agreement of the parties and the requirement that consequential damages, such as lost profits, be a foreseeable result of the breach. See Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854). In a warranty action where the loss is purely economic, the limitation derives from the requirements of foreseeability and of privity, which is still generally enforced for such claims in a commercial setting. See UCC § 2–715; J. White and R. Summers, Uniform Commercial Code 389, 396, 406–10 (2nd edn. 1980).

In products-liability law, where there is a duty to the public generally, foreseeability is an inadequate brake. Cf. Petitions of Kinsman Transit Co., 388 F. 2d 821 (CA2 1968). See also Perlman, ‘Interference with Contract and Other Economic Expectancies: A Clash of Tort and Contract Doctrine’ 49 U. Ch. L. Rev. 61, 71–2 (1982). Permitting recovery for all foreseeable claims for purely economic loss could make a manufacturer liable for vast sums. It would be difficult for a manufacturer to take into account the expectations of persons downstream who may encounter its product. In this case, for example, if the charterers—already one step removed from the transaction—were permitted to recover their economic losses, then the companies that subchartered the ships might claim their economic losses from the delays, and the charterers’ customers also might claim their economic losses, and so on. ‘The law does not spread its protection so far.’ Robins Dry Dock and Repair Co. v. Flint, 275 US 303, 309, 48 S. Ct. 134, 135, 72 L. Ed. 290 (1927).

And to the extent that courts try to limit purely economic damages in tort, they do so by relying on a far murkier line, one that negates the charterers’ contention that permitting such recovery under a products-liability theory enables admiralty courts to avoid difficult linedrawing. Cf. Ultramares Corp. v. Touche, 255 NY 170, 174 NE 441 (1931); State of Louisiana ex rel. Guste v. M/V Testbank, 752 F. 2d 1019, 1046–52 (CA5 1985) (en banc) (dissenting opinion), cert. pending, no. 84–1808.

D. For the first three counts, the defective turbine components allegedly injured only the turbines themselves. Therefore, a strict products-liability theory of recovery is unavailable to the charterers. Any warranty claims would be subject to Delaval’s limitation, both in time and scope, of its warranty liability. App. 78–9. The record indicates that Seatrain and Delaval reached a settlement agreement. Deposition of Stephen Russell, p. 32. We were informed that these charterers could not have asserted the warranty claims. See Tr. of Oral Arg. 36. Even so, the charterers should be left to the terms of their bargains, which explicitly allocated the cost of repairs.

In the charterers’ agreements with the owners, the charterers took the ships in ‘as is’ condition, after inspection, and assumed full responsibility for them, including responsibility for maintenance and repairs and for obtaining certain forms of insurance. Tr. of Oral Arg. 11, 16–17, 35; App. 86, 88, 99, 101, 112, 114, 125–6, 127. In a separate agreement between each charterer and Seatrain, Seatrain agreed to guarantee certain payments and covenants by each charterer to the owner. App. 142–6. The contractual responsibilities thus were clearly laid out. There is no reason to extricate the parties from their bargain.

Similarly, in the fifth count, alleging the reverse installation of the astern guardian valve, the only harm was to the propulsion system itself rather than to persons or other property. Even assuming that Delaval’s supervision was negligent, as we must on this summary judgment motion, Delaval owed no duty under a products-liability theory based on negligence to avoid causing purely economic loss. Cf. Flintkote Co. v. Dravo Corp., 678 F. 2d 942 (CA11 1982); S. M. Wilson and Co. v. Smith International, Inc. 587 F. 2d 1363 (CA9 1978). Thus, whether stated in negligence or strict liability, no products-liability claim lies in admiralty when the only injury claimed is economic loss.

While we hold that the fourth count should have been dismissed, we affirm the entry of judgment for Delaval.

Back to top

This page last updated Thursday, 01-Dec-2005 11:04:42 CST. Copyright 2007. All rights reserved.