Arkwright-Boston Mfrs. Mut. Ins. Co. v. Westinghouse Elec. Corp.

• Decision Date: 17 May 1988
• Docket Number: ARKWRIGHT-BOSTON,No. 87-1139,87-1139
• Citation: 844 F.2d 1174
• Parties: 6 UCC Rep.Serv.2d 73, Prod.Liab.Rep.(CCH)P 11,856 MANUFACTURERS MUTUAL INSURANCE COMPANY, Plaintiff-Appellant, v. WESTINGHOUSE ELECTRIC CORP., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1174

844 F.2d 1174

6 UCC Rep.Serv.2d 73, Prod.Liab.Rep.(CCH)P 11,856

ARKWRIGHT-BOSTON MANUFACTURERS MUTUAL INSURANCE COMPANY Plaintiff-Appellant, v. WESTINGHOUSE ELECTRIC CORP., Defendant-Appellee.

No. 87-1139.

United States Court of Appeals Fifth Circuit.

May 17, 1988.

Michael Sean Quinn, Robins, Zelle, Larson & Kaplan, Dallas, Tex., for plaintiff-appellant.

Joseph L. Hood, James L. Gallagher, El Paso, Tex., for defendant-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before GOLDBERG, POLITZ and DAVIS, Circuit Judges.

GOLDBERG, Circuit Judge:

This diversity action results from a broken blade in an electrical turbine. The broken blade caused extensive damage to the turbine. The defendant manufactured and sold the turbine. The turbine's purchaser procured insurance for the turbine from the plaintiff. The magistrate granted the defendant's motion for summary judgment, and the plaintiff appeals. Finding no error, we affirm.

I. FACTS

1. One nonparty and the parties. El Paso Electric Company ("El Paso") has provided electric power in the El Paso area for over eighty years, and operates three power stations with eleven turbines. Although El Paso is not a party, this case concerns one of El Paso's turbines, a W-501B4 Econo-Pac combustion turbine generating unit ("the Turbine"). El Paso purchased the Turbine from the defendant-appellee, Westinghouse Electric Corp. ("Westinghouse"), pursuant to their December 20, 1977 contract ("the Contract"). The plaintiff-appellant, Arkwright-Boston Manufacturers Mutual Insurance Company ("Arkwright"), insured El Paso against damage to the Turbine. Arkwright seeks recovery from Westinghouse, in contract and tort, for payments it made to El Paso for damage to the Turbine.

2. El Paso's purchase of the Turbine. In 1976, El Paso decided to build a new power station, the Copper station. Four manufacturers, including Westinghouse, submitted proposals for a turbine for this new station. In January 1977, El Paso selected a Westinghouse proposal ("the Proposal") which was later attached to the Contract as Exhibit B. Subsequently, Westinghouse and El Paso engaged in several months of extensive contract negotiations. During this negotiation period officials of El Paso and El Paso's in-house counsel reviewed drafts of the Contract and met with Westinghouse officials. The El Paso personnel involved in these negotiations had prior experience in negotiating turbine purchase contracts. In the summer of 1977 they reached an agreement on contract terms. On December 20, 1977, Westinghouse and El Paso executed the Contract for El Paso's purchase of the Turbine from Westinghouse at a price of $6,853,000.

3. The Turbine's failure. The Turbine contained four rows of blades which were similar to propeller blades. On October 19, 1981, a fourth row blade in the Turbine broke. The broken blade damaged the Turbine but neither damaged any other property nor caused any injuries. Repair of the damage to the Turbine cost El Paso $813,223.61. El Paso made no claim under the warranty provision of the Contract with Westinghouse; by the time that the blade broke the contractual warranty period had expired.

When turbine blades operate at, or near, the blades' natural resonance point resulting vibratory stresses may cause the blades to break. Manufacturers generally design turbine blades so that the blades do not vibrate at their natural frequency. Vibrations at, or near, the natural frequency of the fourth row blades caused the Turbine's blade to break.

Three similar failures occurred in turbines sold by Westinghouse before the December 1977 Contract for the purchase of the Turbine. A total of seven similar failures had occurred in the Westinghouse turbines before Westinghouse shipped the Turbine to El Paso in July 1979. By October 1981, when the blade broke, a total of ten similar failures had occurred in Westinghouse turbines.

Westinghouse disclosed the potential problem in a presentation at the December 1978 Gas Turbine User's Conference. El Paso personnel attended this conference and heard the Westinghouse presentation. In addition, Westinghouse discussed the potential problem in a 1979 Product Improvement Bulletin sent to El Paso. Although both of these disclosures included a representation that operation within normal limits would not lead to any problem, El Paso planned to replace the fourth row blades at the Turbine's next scheduled maintenance outage.

4. Arkwright's payment. El Paso had a policy of insuring its generating equipment. In accordance with this policy El Paso had procured insurance for the Turbine from Arkwright. This insurance became effective June 5, 1980 and covered "damage to the ... [Turbine] which necessitates repair or replacement of the [Turbine]." El Paso made a claim under this policy for the repair cost of $813,223.61. Arkwright subtracted the $468,000.00 policy deductible and paid El Paso the remaining $345,223.61 expended for the repairs.

5. Disposition below. Arkwright properly invoked federal diversity jurisdiction. 28 U.S.C. Sec. 1332(a)(1). Pursuant to 28 U.S.C. Sec. 636(c), Westinghouse and Arkwright agreed to adjudication of this case by a magistrate. The magistrate determined that Texas law governs Arkwright's claims. On appeal neither party disputes this determination.

The magistrate granted Westinghouse's motion for summary judgment. Summary judgment was proper if Westinghouse showed that there was "no genuine issue as to any material fact" and that it was "entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In reviewing the magistrate's decision we apply the same general standard. Gatx Aircraft Corp. v. M/V Courtney Leigh, 768 F.2d 711, 714 (5th Cir.1985); McCrae v. Hankins, 720 F.2d 863, 865 (5th Cir.1983). We view the record and inferences from the facts in the light most favorable to Arkwright, the nonmoving party. Gatx Aircraft, 768 F.2d at 714.

Arkwright makes tort claims based on negligence and warranty claims under the Contract. In addition, Arkwright makes tort and warranty claims based on an implied-in-fact services contract that Arkwright alleges arose after the Contract. The magistrate concluded that summary judgment was proper in this case because the terms of the Contract and applicable tort and contract law precluded recovery by Arkwright.

II. NEGLIGENCE CLAIMS

Arkwright alleged that Westinghouse was negligent (1) in designing the Turbine, (2) in misrepresenting the effects of the design defect, ¹ (3) in failing, after installation, to adequately warn of the design defect, and (4) in failing to unilaterally replace the fourth row blades with modified fourth row blades before installation. For purposes of summary judgment, Westinghouse's negligence is presumed. Arkwright's only claim for damages, however, was for economic loss ² from damage to the Turbine itself. The magistrate granted Westinghouse's summary judgment motion on these negligence claims on two alternative grounds. First, the magistrate held that Texas law does not permit recovery under a negligence theory for economic loss resulting from damage to a defective product. Second, the magistrate held that the Contract's terms barred Arkwright's tort claims. Finding the magistrate's conclusion on the first issue correct, we need not discuss the magistrate's alternative holding that the Contract terms barred Arkwright's negligence action.

The leading Texas Supreme Court case on recovery for economic loss under a negligence theory is Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.1986). In Jim Walter Homes v. Reed the court rejected the Reeds' attempt to recover for defects in their home under a negligence theory. The court held that "when the injury is only the economic loss to the subject of a contract itself, the action sounds in contract alone." ³

Arkwright urges that we distinguish Jim Walter Homes because the Reed's home simply did not fit together well, while El Paso's Turbine "suddenly and catastrophically failed." The Texas Supreme Court has given no indication that it would make such a distinction. Indeed the indications are to the contrary. First, the Texas Supreme Court used broad, all inclusive language in Jim Walter Homes. Second, the Jim Walter Homes court cited two products liability cases to support its holding. One, Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77 (Tex.1977), dealt with another mobile home that simply did not fit together well. The second, Mid Continent Aircraft Corp. v. Curry County Spraying Service, 572 S.W.2d 308 (Tex.1978), dealt with a sudden catastrophic failure in an airplane. ⁴ The Mid Continent court, "while recognizing that the product had caused physical harm to itself, accepted the argument that there is 'no difference between a product that is unusable because of a defect and one that causes physical harm to itself because of a defect.' " ⁵

Sitting in diversity, our duty is to do, as best we can, what we think the state court would do. ⁶ There is simply no indication that a Texas court would adopt the distinction Arkwright urges, and we decline to do so. Summary judgment is rarely appropriate in a negligence action. ⁷ But this is simply not a negligence case. The magistrate found, and we agree, that Texas tort law would not allow Arkwright to recover in tort for its economic loss. We therefore affirm the magistrate's conclusion that, as a matter of law, Arkwright could not prevail on its negligence claim. ⁸

III. WARRANTY CLAIMS

Having found that Arkwright cannot recover in tort, we turn to Arkwright's warranty claims based on the Contract. Arkwright makes claims under both express and implied warranties.

A. Express Warranty Claims

Article 5 of the Contract included five express warranty provisions in lettered sections A through E: (A) an equipment warranty; (B) a performance warranty; ⁹ (C) a warranty for technical services provided in connection with...