Bellevue South Associates v. HRH Const. Corp.

• Decision Date: 13 June 1991
• Citation: 574 N.Y.S.2d 165,78 N.Y.2d 282,579 N.E.2d 195
• Parties: , 579 N.E.2d 195, 60 USLW 2010, 14 UCC Rep.Serv.2d 1012, Prod.Liab.Rep. (CCH) P 12,934 BELLEVUE SOUTH ASSOCIATES, Respondent, v. HRH CONSTRUCTION CORPORATION et al., Respondents, Circle Industries Corp., Appellant, and Third-Party Plaintiff-Appellant, and Masonite Corporation, Appellant and Third-Party Defendant-Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 165

574 N.Y.S.2d 165

78 N.Y.2d 282, 579 N.E.2d 195, 60 USLW 2010,

14 UCC Rep.Serv.2d 1012,

Prod.Liab.Rep. (CCH) P 12,934

BELLEVUE SOUTH ASSOCIATES, Respondent, v. HRH CONSTRUCTION CORPORATION et al., Respondents Circle Industries Corp., Appellant, and Third-Party Plaintiff-Appellant and Masonite Corporation, Appellant and Third-Party Defendant-Respondent.

Court of Appeals of New York.

June 13, 1991.

[78 N.Y.2d 284] [579 N.E.2d 196] Richard A. Rosen, New York City, for Circle Industries Corp., appellant.

[78 N.Y.2d 285] Jay A. Canel and Stephen D. Davis, of the Illinois Bar, Chicago, Ill., admitted pro hac vice, and Lloyd I. Isler, New York City, for Masonite Corp., appellant.

Gerald D. Roth, New York City, for HRH Const. Corp. et al., respondents.

John M. O'Connor and Donald M. Spector, New York City, for Bellevue South Associates, respondent.

[78 N.Y.2d 287] Michael Hoenig, New York City, and Jay M. Smyser, Chicago, Ill., for The Product Liability Advisory Council, Inc., amicus curiae.

OPINION OF THE COURT

KAYE, Judge.

This appeal--in a case seeking damages for the replacement of defective floor tiles throughout plaintiff owner's housing complex--presents two discrete issues: first, whether plaintiff can recover its replacement costs against the tile manufacturer in tort (strict products liability) or is limited to contract remedies and second, whether the flooring subcontractor should be indemnified by the tile manufacturer on a theory of breach of implied warranty.

For the reasons that follow, we conclude that plaintiff's tort claim against the tile manufacturer should have been dismissed, and that the flooring subcontractor's indemnification claim should have been submitted to the jury.

In January 1973, plaintiff (Bellevue South Associates) entered into a contract with defendant HRH Construction Corporation for the construction of Henry Phipps Plaza West in New York City. The development was to consist of eight buildings containing 894 rental units intended for middle- and lower-income tenants. Financing was provided through the State Mitchell-Lama program. Included in the terms of the construction agreement was a requirement that Hartco wood foam-backed tiles, manufactured by Tibbals Flooring Company, be used.

HRH entered into a contract with defendant subcontractor Circle Industries Corporation in November 1974, calling for Circle to supply all wood flooring in the development for $702,000. Circle also agreed to indemnify and hold HRH harmless against liability arising out of performance of the subcontract.

Circle then attempted to substitute a flooring tile manufactured by Sykes Flooring Company for the specified Hartco tile. (Sykes later merged into defendant Masonite Corporation, and will be referred to as Masonite.) Prior approval of substitutions by the project architect and the Department of Housing and Community Renewal, the State supervisory authority, was required. At this time, Masonite did not manufacture a hardwood floor tile with an attached foam backing, and the sample submitted by Circle was rejected. The architect--Frost Associates--insisted that any substitution conform to the attached-backing requirement. Masonite then purchased equipment that enabled it to attach the foam backing to the tile and submitted a second sample.

The Masonite substitution was approved by Frost on condition that the adhesive coverage--binding the tile to the foam backing--match the 100% coverage of the Hartco tile. While Masonite acknowledged that its tile had only 60% adhesive coverage, Circle argued that there was no specification for adhesive coverage in the contract documents, that the only requirement was an attached foam backing. In August 1975, Frost and the Department of Housing and Community Renewal approved the Masonite tile.

At the time of discussions regarding product substitution, Circle, through a subsidiary, owned a 50% interest in Masonite. That interest--held until September 1976--was not disclosed to HRH or Bellevue.

The first sale was made by Masonite to Circle in August 1975, and delivery took place between September 1975 and August 1976. All flooring work was completed by September 1976, when tenants began to occupy the rental units. By spring, there were problems with the tiles. A failure of the adhesion between the wood slats and foam backing--a process known as delamination--caused the slats to become loose and break free of the foam. Delamination was first reported in units occupied by wheelchair users.

In September 1977, Masonite reported that the adhesion failure was due to the wheelchair traffic, and that the tile had never been designed to withstand such use. Masonite recommended replacement with rigid nine-inch square block tiles, which HRH completed at no cost to the owner. By January 1978, however, Masonite tiles had begun to fail throughout the complex. Frost concluded that the failures were due to defective materials. In July 1979, HRH and Circle proceeded to replace tiles that had delaminated.

In the summer of 1980, while delamination continued, HRH and Circle refused to undertake further spot replacement. At this time, a rent increase application was being filed, prompting plaintiff to solicit bids for a program to replace the Masonite tile with the Hartco tile on an ongoing basis. As of 1986, Hartco tiles had been installed in 868 units at a cost of $1.7 million. It was projected that the cost of replacing the remaining tiles would be $400,000.

This action was commenced in June 1980. Plaintiff sued HRH and Circle on theories of breach of contract, breach of express warranty, breach of implied warranty of merchantability, and negligence. Plaintiff also sued Masonite for breach of implied warranty, negligence and in strict tort liability. Circle cross-claimed against Masonite for common-law indemnification. Damages alleged included the cost of removing and replacing the defective tiles, additional design and construction costs, carting costs, loss of rental income and diminution of value of the housing project.

The trial court dismissed plaintiff's Uniform Commercial Code claims for breach of implied warranty against all three defendants on the theory that none had supplied goods to plaintiff. All claims against Masonite, except the cause of action in strict products liability, were also dismissed. In addition, the court dismissed plaintiff's negligence claim against Circle and Circle's implied warranty claim against Masonite.

In its verdict sheet, the jury answered that HRH and Circle were liable to plaintiff for breach of contract, for which the jury separately awarded damages of $310,800 against HRH, and $620,600 against Circle. As to Masonite, the jury answered that the tile was defective when it left the factory and that the defect was a proximate cause of plaintiff's damages, and it fixed damages against Masonite in the amount of $1,157,900. No indemnification was allowed by the jury, but the trial court granted judgment notwithstanding the verdict on HRH's contractual indemnity claim against Circle.

The Appellate Division affirmed the judgment, holding that Circle was not entitled to indemnity from Masonite because of its relationship with that company and its involvement in the manufacture of the Masonite tile. The court also rejected Masonite's argument that strict liability could not include plaintiff's economic damages, finding that any such limitation did not extend to situations where the condition caused by the defective product is unduly dangerous. From that affirmance, both Masonite and Circle have appealed.

Plaintiff's Tort Claim Against Masonite

Masonite challenges plaintiff's verdict against it on the ground that the damages sought were not recoverable under tort law. Plaintiff responds that the floor tile was unduly dangerous, making the manufacturer strictly liable in tort for any damage resulting from the defective product.

The doctrine of strict products liability grew out of a public policy judgment that, with increasingly sophisticated, mass-marketed technologies, consumers hurt by defective products needed greater protection than that afforded by the law of warranty (see, East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 866, 106 S.Ct. 2295, 2299, 90 L.Ed.2d 865; Codling v. Paglia, 32 N.Y.2d 330, 340-341, 345 N.Y.S.2d 461, 298 N.E.2d 622; see generally, 2 American Law of Products Liability § 16:4, at 15 [3d ed]. In developing this doctrine--which allows injured consumers to be compensated by remote manufacturers of defective products, regardless of privity, foreseeability or due care--courts of recent decades have reasoned that the manufacturers could better sustain the losses, which could be spread among all their customers (see, Continental Ins. v. Page Eng'g Co., 783 P.2d 641, 648-649 [Wyo.]; Laurens Elec. Coop. v. Altec Indus., 889 F.2d 1323, 1324 [4th Cir.].

Whether this extraordinary tort doctrine should be extended to cases where a product fails to meet the expectation of a commercial customer, where the claimed injury is solely to the product itself, and where the only damages sought are replacement costs, is a question that has concerned several courts, with varying outcomes.

In one of the earliest cases, New Jersey's Supreme Court allowed the purchaser of defective carpeting to recover from the manufacturer on a theory of strict liability (Santor v. A & M Karagheusian, 44 N.J. 52, 207 A.2d 305). Plaintiff's only injury in that case was the reduced value of the carpet--when installed it showed an unusual line. ¹

A contrary view was adopted by the Supreme Court of California in Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145, a case involving an allegedly defective truck. The court held that the economic loss suffered by the plaintiff--including cost of repair and lost profits--could only be recovered under contract law. In such a case, the court concluded, the...