Nobility Homes of Texas, Inc. v. Shivers

• Decision Date: 05 October 1977
• Docket Number: No. B-6274,B-6274
• Citation: 557 S.W.2d 77
• Parties: 22 UCC Rep.Serv. 621 NOBILITY HOMES OF TEXAS, INC., Petitioner, v. John W. SHIVERS et al., Respondents.
• Court: Texas Supreme Court

Page 77

557 S.W.2d 77

22 UCC Rep.Serv. 621

NOBILITY HOMES OF TEXAS, INC., Petitioner, v. John W. SHIVERS et al., Respondents.

No. B-6274.

Supreme Court of Texas.

Oct. 5, 1977.

Deison, Crews, Field & Boyd, James W. Stele and Charles W. Boyd, Conroe, for petitioner.

J. Robert Liles, Conroe, for respondents.

POPE, Justice.

This is a products liability case. It presents the question of whether a remote manufacturer is liable for the economic loss his product causes a consumer with whom the manufacturer is not in privity. John Shivers sued Nobility Homes of Texas, Inc., the manufacturer of a mobile home. Shivers purchased the home from Marvin Hurley an independent retail dealer who is now out of business and is not joined as a party to this suit. Shivers's purchase contract was only with Hurley; Shivers was not in privity with Nobility Homes. The trial court, sitting without a jury, found that the mobile home was defective in both its workmanship and materials. There were no findings that these defects made the unit unreasonably dangerous or caused physical harm to Shivers or his property. The trial court did find that the mobile home was negligently constructed and not fit for the purposes for which it was sold. The trial court also found the unit's reasonable market value to be 8,750 dollars less than its purchase price. This is Shivers's economic loss; ¹ it is the only damage which Shivers suffered. The trial court awarded judgment to Shivers. The court of civil appeals, with a divided court, affirmed that judgment. 539 S.W.2d 190. We affirm the judgments of the courts below.

The court of civil appeals allowed Shivers to recover his economic loss against Nobility Homes, a manufacturer with whom Shivers was not in privity. The primary basis of the court of civil appeals decision was "an implied warranty of reasonable fitness of a product as a matter of public policy." 539 S.W.2d at 194. The court of civil appeals explained, "This concept is not adverse to the jurisprudence of this state. The principle was applied over three decades ago with respect to contaminated foods . . . " in Jacob E. Decker & Sons, Inc. v. Capps, 139 Tex. 609, 164 S.W.2d 828 (1942). We do not believe that Decker is authority for allowing the recovery of economic loss. At the time of Decker's writing, the consumer had little remedy for losses caused by defective products. To compensate for this lack of remedy, Decker created "an implied warranty imposed by operation of law as a matter of public policy." 164 S.W.2d at 829. This remedy has been described as, "a freak hybrid born of the illicit intercourse of tort and contract." Prosser, The Assault Upon the Citadel, 69 Yale L.J. 1099, 1126 (1960). The protection of Texas consumers no longer requires the utilization of an "implied warranty as a matter of public policy." Since the Decker decision, Texas has adopted section 402A of the Restatement (Second) of Torts and the Uniform Commercial Code. McKisson v. Sales Affiliates, Inc., 416 S.W.2d 787 (Tex.1967); Tex.Bus. & Comm.Code Ann. §§ 1.101-9.507 (1968). These adoptions furnish the user of defective products remedies which were unavailable at the time of Decker's writing. Today, section 402A of the Restatement (Second) of Torts and the Uniform Commercial Code rather than Decker's "implied warranty as a matter of public policy" should determine a manufacturer's liability.

The important issues in this case are whether section 402A of the Restatement (Second) of Torts or the implied warranties of the Uniform Commercial Code allow a consumer to recover his economic loss against a manufacturer with whom the consumer is not in privity. We hold that Shivers may not recover his economic loss under section 402A of the Restatement (Second) of Torts but may recover such loss under the implied warranties of the Uniform Commercial Code and the theory of common law negligence. Although the court of civil appeals did not discuss negligence, it was an independent basis of the trial court's judgment in favor of Shivers which the court of civil appeals affirmed.

Strict Liability Issue

The application of the tort doctrine of strict liability to economic loss has prompted considerable commentary. ² Courts of other jurisdictions are split on whether to extend strict liability to economic loss. ³ The two leading judicial opinions are probably Santor v. A. and M. Karagheusian, Inc.,44 N.J. 52, 207 A.2d 305 (1965) and Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965). In Santor, the New Jersey Supreme Court held the purchaser of defective carpeting could sue the manufacturer, with whom he was not in privity, on either a breach of implied warranty of reasonable fitness or strict liability. In Seely v. White Motor Co., supra, the California Supreme Court rejected Santor's holding. The California court held that White Motor Co. breached an express warranty to Seely but condemned Santor's application of strict liability to economic loss. Writing for the California Supreme Court in Seely, Chief Justice Traynor stated:

The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the "luck" of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He cannot be held for the level of performance of his products in the consumer's business unless he agrees that the product was designed to meet the consumer's demands. 45 Cal.Rptr. at 23, 403 P.2d at 151.

Texas courts of civil appeals have consistently preferred the result in Seely and have held that strict liability does not apply to economic losses. ⁴ A strict liability action in Texas is based upon section 402A of the Restatement (Second) of Torts. McKisson, supra. Section 402A requires that the defective product be, "unreasonably dangerous to the user or consumer or to his property . . . " and that the product cause, "physical harm to the ultimate user or consumer, or to his property . . .." ⁵ The courts of civil appeals have correctly reasoned that economic loss is not "physical harm" to the user or his property. As stated in Melody Home Manufacturing Co. v. Morrison, 455 S.W.2d 825 (Tex.Civ.App.1970, no writ): "There is a distinction between physical harm, or damage, to property and commercial loss." We agree and hold that strict liability does not apply to economic losses. There is no finding in this case that the product was unreasonably dangerous to Shivers or caused physical harm to Shivers or his property.

Uniform Commercial Code Issues

Chief Justice Traynor stated in Seely that:

The law of sales has been carefully articulated to govern the economic relations between suppliers and consumers of goods. The history of the doctrine of strict liability in tort indicates that it was designed, not to undermine the warranty provisions of the sales act or of the Uniform Commercial Code but, rather, to govern the distinct problem of physical injuries. 45 Cal.Rptr. at 21, 403 P.2d at 149.

In writing about claims for economic loss, Dean Keeton has explained:

Jurisprudentially, it is difficult to understand how the Code can be ignored in dealing with such claims. Those who drafted the Code doubtless contemplated that the obligations imposed by law for commercial losses, without respect to fault, were exclusively contained in the Code." Keeton, Torts, 1971 Survey of Tex. Law, 25 Sw.L.J. 1 (1971).

The Code was drafted specifically to govern commercial losses and obviously provides the proper remedies to recover such losses.

To support a recovery for economic loss, the Uniform Commercial Code provides both express and implied warranties. Neither the Code's express warranty, Tex.Bus. & Comm.Code Ann. § 2.313 (1967), nor the Texas Deceptive Trade Practices Consumer Protection Act, Tex.Bus. & Comm.Code Ann. § 17.41 to .63 (Supp.1976-1977), are before us; consequently, these remedies are not affected by this decision. The Code also provides two implied warranties the warranty of merchantability, section 2.314, and the warranty of fitness, section 2.315. Section 2.314's warranty of merchantability is before us. Section 2.314 explains that a seller impliedly warrants that goods are merchantable, and that goods are merchantable if they are, "fit for the ordinary purposes for which such goods are used . . .." Tex.Bus. & Comm.Code Ann. § 2.314(b)(3) (1967). Under the terms of the Code, a manufacturer may also be a seller. The Code does not limit its definition of seller to the immediate seller of a product. Instead, the Code defines a seller as "a person who sells or contracts to sell goods." Tex.Bus. & Comm.Code Ann. § 2.103(4). Nobility Homes "sells or contracts to sell goods"; consequently, Nobility Homes is a seller under the Code.

Plaintiff Shivers pleaded and the trial court found that Nobility Homes breached its warranty of merchantability to Shivers by manufacturing a product which, "was unfit for the purpose for which it was purchased, to-wit, a home." Without discussion, the court of civil appeals affirmed this holding. A critical question in this case is whether Nobility Homes' implied warranty of merchantability runs to Shivers with whom Nobility Homes is not in privity. We now hold that a manufacturer can be responsible, without regard to privity, for the economic loss which results from his breach of the Uniform Commercial Code's implied warranty of merchantability.

The Uniform Commercial Code as enacted by the Texas Legislature is neutral as to the requirement of privity. This neutrality is expressed in the Code's statement that:

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