A.J. Decoster Co. v. Westinghouse Electric Corp.

MURPHY, Chief Judge. This case involves the distinction between property loss and pure economic loss in determining whether a claim may be brought under a tort or contract theory, or both. It also involves the question whether, in Maryland, a plaintiff may recover in tort under a strict liability theory for property loss resulting from an allegedly defective product manufactured by the defendant, when no death or personal injury, or significant risk thereof, resulted from the defect. I Appellant A.J. Decoster Company (Decoster), a commercial chicken and egg producer, suffered the loss of more than 140,000 chickens on July 20, 1989, when a power failure interrupted the power supply to the ventilation system in Decoster’s chicken houses, and the chickens were suffocated.

The power failure occurred when Choptank Electric Utilities, Inc., the supplier of three-phase electrical power to Decoster, experienced a loss of phase “A” power because of thunderstorms in the area. Decoster’s emergency backup power system, powered by a diesel generator, did not activate, allegedly as a result of a defective transfer switch manufactured by Westinghouse Electric Corporation (Westinghouse). The ventilation system relied upon the Westinghouse transfer switch to transfer from line power, supplied by Choptank, to the generator-powered backup system. The switch was designed to detect and respond to the loss of any phase of power.

When the transfer switch did not sense the loss of phase “A” power and activate the backup power system, the ventilation ²⁴⁸ fans, operating on reduced voltage, overheated and shut down. Decoster claimed losses of more than $100,000 from the death of the chickens, whose primary purpose was egg production. Decoster filed suit against Westinghouse on October 21, 1991 in the Circuit Court for Kent County, alleging counts of negligence, strict liability, breach of express warranty, and breach of implied warranties of merchantability and fitness for a particular purpose. In its complaint, Decoster alleged that it purchased the switch from Westinghouse 1 ; that Westinghouse released the switch in a defective condition; that the defective condition rendered it unreasonably dangerous; that the defective condition caused the injury complained of; and that the switch was expected to reach and in fact did reach Decoster without substantial change in its condition.

On November 27, 1991 Westinghouse filed a motion to dismiss or, in the alternative, for summary judgment. In support of its summary judgment motion, Westinghouse submitted the affidavit of James W. McGill, then a product line manager for Westinghouse, stating that the transfer switch at issue was manufactured and sold in 1979 to an electrical supply dealer, Gilman Electric, of Auburn, Me. With its complaint, Decoster served Westinghouse with interrogatories. Subsequently, in a telephone conversation on November 26, 1991, confirmed by letter from Westinghouse dated November 27, 1991, Decoster agreed to a stay of discovery until fifteen days after any order by the Circuit Court denying Westinghouse’s motion to dismiss. ' By order dated December 1, 1992, the court (Price, J.) dismissed the negligence and strict liability counts without leave to amend, and granted summary judgment in favor of Westinghouse for the breach of warranty counts.

The court’s dismissal of the negligence and strict liability counts was based on a determination that all damages allegedly suffered by Decoster were economic losses not recoverable in tort. ²⁴⁹ The court’s grant of summary judgment on the warranty claims was based on a finding that limitations had run, because Westinghouse had tendered delivery of the switch in 1979, and the statute of limitations for warranties under Maryland Code (1975, 1992 Repl.Vol.) § 2-725 of the Commercial Law Article, expired four years after the cause of action accrued, accrual occurring at the date of tender of delivery. Decoster appealed to the Court of Special Appeals on December 21, 1992. We granted certiorari prior to review by the intermediate appellate court to consider the important issue raised in this appeal, 331 Md. 178 , 626 A.2d 967 . II The Tort Claims In determining whether the trial court erred in granting the motion to dismiss for failure to state a claim pursuant to Md.Rule 2-322(b), we must assume the truth of all well-pleaded relevant and material facts as well as all inferences that reasonably can be drawn therefrom.

Dismissal is proper only if the facts alleged fail to state a cause of action. Faya v. Almaraz, 329 Md. 435, 443 , 620 A.2d 327 (1993); Sharrow v. State Farm Mutual, 306 Md. 754, 768 , 511 A.2d 492 (1986). Decoster argues that it adequately stated a cause of action in tort because the death of the chickens was not an economic loss, but a property loss properly recoverable through a tort action. Decoster further argues that the court erred in failing to apply the strict liability principles of § 402A of the Restatement (Second) of Torts.

It asserts that Maryland has adopted strict liability in tort as a cause of action in accordance with § 402A’s provisions and therefore Westinghouse is subject to liability for harm caused by its defective product to Decoster’s property, i.e., the 140,000 suffocated chickens. A The Negligence Count Losses related to product liability claims may be categorized generally as (1) personal injuries, (2) physical harm to tangible ²⁵⁰ things, and (3) intangible economic loss resulting from the inferior quality or unfitness of the product to serve adequately the purpose for which it was purchased. See W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 101, at 707-08 (5th ed. 1984). Historically, a purchaser suffering only economic loss has ordinarily been unable to bring a tort action for negligence or in strict liability; such purchasers have been limited to contract actions for breach of a warranty or, in the case of fraud, a tort action for deceit.

Id. at 708. However, purchasers claiming physical injury or harm to tangible things generally may recover under negligence or strict liability in tort and breach of warranty theories. 2 Id. Economic losses include such things as the loss of value or use of the product itself, the cost to repair or replace the product, or the lost profits resulting from the loss of use of the product. See W. Page Keeton et al., Prosser and Keeton on the Law of Torts, § 101 at 665 (4th ed. 1971).

See also Comment, Manufacturers’ Liability to Remote Purchasers for “Economic Loss” Damages — Tort or Contract?, 114 U.Pa. L.Rev. 539 (1966). The distinction between tort recovery for physical injury and warranty recovery for economic loss derives from policy considerations which allocate the risks related to a defective product between the seller and the purchaser. A manufacturer may be held liable for physical injuries, including harm to property, caused by defects in its products because it is charged with the responsibility to ensure that its products ²⁵¹ meet a standard of safety creating no unreasonable risk of harm.

However, where the loss is purely economic, the manufacturer cannot be charged with the responsibility of ensuring that the product meet the particular expectations of the consumer unless it is aware of those expectations and has agreed that the product will meet them. Thus, generally, the only recovery for a purely economic loss would be under a contract theory. See Keeton, et al., supra, § 101 at 708 (5th ed. 1984). See also Note, Economic Loss In Products Liability Jurisprudence, 66 Colum.L.Rev. 917 (1966).

We have held that there is no recovery under a negligence theory for purely economic losses, unless the defect causes a dangerous condition creating a risk of death or personal injury. Council of Co-owners v. Whiting Turner, 308 Md. 18 , 517 A.2d 336 (1986), involved an action by a condominium owners’ association against the general contractor, developer and architects of their building, for negligent construction of the building. We there acknowledged the general principle that tort liability is limited to situations in which the negligence causes physical harm to person or property, but concluded that the determination of whether a duty should be imposed should depend upon the risk generated by the negligent conduct rather than the nature of the resultant damage. We noted the increasing number of courts that have declined to distinguish between a risk of injury to person or property and a risk of economic loss.

Accordingly, we allowed recovery in tort to correct construction defects because we found that the defects created a serious risk of injury to residents of the building. Id. at 33-35 , 517 A.2d 336 . Under Whiting Turner , Decoster’s ability to pursue an action in tort against Westinghouse for the loss of its chickens turns upon whether its damages are considered physical harm or economic losses and, if the latter, whether the defective switch caused a dangerous condition creating a risk of death or personal injury to humans. We need not reach the second part of this determination, because the death of the chickens is a loss of physical property, rather than an economic loss. ²⁵² Decoster does not seek to recover for the loss of value of the switch, or its replacement or repair costs.

Nor does it seek recovery of lost profits from its diminished egg production. These are all economic losses. Instead, Decoster seeks only the replacement of property that was damaged by the alleged defectiveness of the product manufactured by Westinghouse. In support of its position that the losses suffered in the present case are solely economic in nature, Westinghouse relies upon Copiers Typewriters Calculators v. Toshiba Corp., 576 F.Supp. 312 (D.Md.1983), in which a purchaser of photocopying machines sought recovery for losses resulting from defects in the copiers.

In that case, the court, applying Maryland law, declined to extend a manufacturer’s duty to encompass liability for economic injury and dismissed the plaintiff’s tort claims because the complaint alleged no property damage. Id. at 326 . In Copiers, however, the plaintiff sought recovery for the failure of the defective copiers to perform adequately, not for damage to other property resulting from the copiers’ defects. Id.

Similarly, in Wood Products, Inc. v. CMI Corp., 651 F.Supp. 641 (D.Md.1986), the court dismissed Wood Products’ negligence claims because damages alleged were solely economic in nature, acknowledging that the plaintiffs alleged no damage to property other than the defectively designed furnace. Id. at 648 . While plaintiff’s damages included such future expenses as removal of a boiler, taking down of a silo and repair of a building, these appeared to be expenses associated with the removal and replacement of the defective furnace. Id. at 652-53 .

Westinghouse also relies upon Winchester v. Lester’s of Minnesota, Inc., 983 F.2d 992 (10th Cir.1993), a case involving damage to livestock, in support of its position that Decoster has suffered solely economic damages. Winchester involved an action by hog farmers against the builder of a hog house to recover for damages allegedly resulting from defects in the hog house’s ventilation system. The court found that the breach of warranty claims asserted by the farmers sounded in contract rather than tort. Damages included extra labor, lost hogs, losses due to the sale of underweight hogs, extra veteri ²⁵³ nary bills, lost profits and costs expended to correct the ventilation system.

The court stated that “although plaintiffs’ loss of hogs due to poor ventilation is property damage of a sort, the essence of their claim is the loss of the benefit of a properly ventilated hog house, plus consequential damages.” Id. at 996 . We do not find the reasoning in Winchester to be persuasive in the present case, where the entirety of the plaintiff’s claim is the loss of the chickens and thus solely a claim for loss of property. Copiers and Wood Products, supra, are equally distinguishable because, here, Decoster’s damage claims include only the physical injury to property wholly distinct from the allegedly defective product, rather than the costs associated with replacing or repairing the product. A more persuasive case is Yasuda Fire & Marine Ins. v. Lake Shore Elec., 744 F.Supp. 864 (S.D.Ind.1990), involving a fact pattern virtually identical to the present case.

There, the plaintiff filed a subrogation action to recover sums paid to its insured for losses occurring when a switch malfunctioned and caused a loss of power to ventilation fans in a poultry house, resulting in the suffocation of numerous chickens. The court rejected the defendants’ contention that the loss of the chickens was an economic rather than a property loss and thus nonrecoverable. Id. at 870-71 . There was no dispute in Yasuda that the chickens constituted “property”; rather, the dispute was over the construction of a provision of an Indiana statute which allowed recovery for physical harm to a consumer or his property.

The statute defined physical harm to property as “sudden major damage” and excluded from recovery any “gradually evolving” damage to property or economic losses from such damage. The question was not whether the chickens constituted property but whether “such damage” referred only to “gradually evolving” damage or “sudden major” damage, as well. The court reasoned that if all economic loss from any property damage were disallowed, then, for practical purposes, recovery for property damage would be negated. Id. at 871-72 .

Having no such limiting language to construe, ²⁵⁴ we need only conclude, in agreement with the court in Yasuda, that there is no question that chickens are property. Thus, consistent with our decision in Whiting Turner , we hold that the trial judge erred in dismissing the negligence count of Decoster’s complaint because the damages alleged were property damages rather than purely economic in nature. B Strict Liability Count With regard to Decoster’s strict liability count, we have not heretofore applied the doctrine of strict liability to a case involving injury to property alone. However, we have applied the doctrine in a case involving personal injury caused by a defective product.

In Phipps v. General Motors Corp., 278 Md. 337 , 363 A.2d 955 (1976), a man was injured when a car he was driving accelerated suddenly and crashed into a tree, allegedly as a result of a defective accelerator mechanism. In Phipps , in an opinion for the Court by Judge Eldridge, we adopted the theory of strict liability set forth in the Restatement (Second) of Torts § 402A (1965): “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 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 ²⁵⁵ (b) the user or consumer has not bought the product from or entered into any contractual relation with the seller.” See Phipps, supra, at 353 , 363 A.2d 955 . Decoster argues that the trial court erred in dismissing its strict liability claim, asserting that this Court, in Phipps , adopted § 402A in its entirety and therefore property damages such as Decoster’s are recoverable in Maryland under a strict liability theory. Westinghouse avers that in a commercial situation such as the instant case, Decoster’s remedies must be limited to breach of warranty claims.

It argues that the legislature, through its enactment of the Uniform Commercial Code with its breach of warranty remedies, created a comprehensive scheme for the recovery of economic losses in commercial situations. Because we have determined that the losses in the present case are property damage rather than economic losses, we need not further discuss the issue of when economic losses may be recoverable. However, in response to Westinghouse’s contention that the legislature has provided the sole remedies for commercial property losses, 3 we will reiterate our response to the same contention by the manufacturer in Phipps . We will also briefly review the development of strict liability principles in the context of commercial property losses.

In Phipps , the automobile manufacturer argued that we should not adopt the theory of strict liability in tort because the warranty provisions of the Maryland Uniform Commercial Code adequately protected the interests of consumers and sellers. The manufacturer further contended that the legislature, in enacting the warranty provisions of the U.C.C., had preempted the field of products liability law and that the adoption of strict liability would alter substantially the tradi ²⁵⁶ tional rights of consumers and sellers. Id. at 348-49 , 363 A.2d 955 . We rejected the preemption contention, noting an “absence of any expression of intent by the legislature to limit the remedies available to those injured by defective goods.” Id. at 350 , 363 A.2d 955 .

We acknowledged in Phipps that the requirement of privity, formerly an obstacle to recovery under a contract action, had been eliminated by the legislature in actions for breach of warranty resulting in personal injury. But we recognized that there were other limitations imposed by contract law which did not exist under tort law. We noted the possibility of waiver of warranty liability by a manufacturer’s use of a disclaimer. We also recognized the existence of notice requirements for breach of warranty actions by buyers.

And we