Continental Airlines, Inc. v. McDonnell Douglas Corp., No. B020292

• Court: California Court of Appeals
• Writing for the Court: HOFFMAN; HANSON
• Citation: 264 Cal.Rptr. 779,216 Cal.App.3d 388
• Parties: CONTINENTAL AIRLINES, INC., Plaintiff and Respondent, v. McDONNELL DOUGLAS CORPORATION, Defendant and Appellant.
• Docket Number: No. B020292
• Decision Date: 07 December 1989

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264 Cal.Rptr. 779 216 Cal.App.3d 388 CONTINENTAL AIRLINES, INC., Plaintiff and Respondent,
v.
McDONNELL DOUGLAS CORPORATION, Defendant and Appellant. No. B020292. Court of Appeal, Second District, Division 1, California. Dec. 7, 1989.
As Modified on Denial of Rehearing Jan. 5, 1990.
Review Denied March 22, 1990.

[216 Cal.App.3d 397]

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Hufstedler, Miller, Carlson & Beardsley, Seth M. Hufstedler, Otto M. Kaus, Bryan, Cave, McPheeters & McRoberts, Thomas C. Walsh, Dennis E. O'Connell and Steven L. Hogan, Los Angeles, for defendant and appellant.

Sheppard, Mullin, Richter & Hampton, Gregory A. Long, Lisa A. Popovich, Robert Don Lohbeck, Bryan A. Merryman, Parker, Milliken, O'Hara & Samuelian and Brenton F. Goodrich, Los Angeles, for plaintiff and respondent.

[216 Cal.App.3d 398] HOFFMAN, Associate Justice, Assigned. ^*

INTRODUCTION AND PROCEDURAL HISTORY

This action was commenced by plaintiff and respondent Continental Airlines (Continental) in the Los Angeles Superior Court on December 3, 1979, and alleged, against defendant and appellant McDonnell Douglas Corporation (Douglas), causes of action for negligence, strict liability, deceit, breach of warranty and breach of contract.

In 1980, Douglas filed a complaint in the federal court seeking a declaration that the exculpatory provision of Article 12 of its Purchase Agreement with Continental was valid and barred Continental's action. Continental counterclaimed, raising essentially the same claims presented in its state court lawsuit.

In early 1985, the federal court granted a partial summary judgment in favor of Douglas, confirming the validity of the contract's exculpatory clause. The court's ruling, which was made final, foreclosed Continental's state claims based on negligence, strict liability and implied warranty under principles of res judicata. ¹ However, the federal court stated it made no ruling with regard to Continental's claims for breach of the contract's Warranty nor its Service Life Policy, since they were not properly presented in the motion.

The trial in the superior court began on September 26, 1985, on Continental's fraud, breach of express warranty and breach of contract (the Service Life Policy) claims. At the conclusion of plaintiff's case, a nonsuit motion was made by Douglas; it was later granted only with respect to the breach of warranty cause of action.

The case was submitted to the jury on five different fraud theories and one breach of contract theory, based on the Service Life Policy. On January 30, 1986, the jury returned verdicts in favor of Continental for $17 million on its claims for (1) fraud by misrepresentation, (2) fraud by nondisclosure of known facts and (3) negligent misrepresentation. The jury returned verdicts in favor of Douglas on Continental's claims for (1) fraud by concealment and,

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(2) fraud by making a promise without intent to perform. On the [216 Cal.App.3d 399] breach of the Service Life Policy claim, the jury awarded Continental damages of $13.4 million.

On March 19, 1986, the trial court denied Douglas' motions for new trial and judgment notwithstanding the verdict. In response to the jury's determination that prejudgment interest was appropriate, the trial court awarded Continental interest at the rate of 7 percent from March 1, 1978, to January 1, 1983, and at 10 percent thereafter, on the fraud and breach of contract awards. Judgment was granted on the higher fraud award and, alternatively, on the breach of contract award, in the event the fraud verdicts did not withstand an appeal.

This appeal is from that judgment. ² We affirm the judgment as modified.

STATEMENT OF FACTS

On March 1, 1978, a Continental DC-10 aircraft, which had been delivered to Continental by Douglas in 1972, was in its takeoff roll at Los Angeles International Airport when two tires burst on the left landing gear. The captain elected to try to stop the plane, but it ran off the end of the runway at 85 miles per hour. The landing gear broke through the tarmac, burrowed into the ground, and was ripped from the wing, making a 3.7 foot hole which allowed fuel to pour from the wing fuel tanks. The plane was severely damaged by the resulting fire and rendered unrepairable.

Douglas had approached Continental in 1968 to sell Continental DC-10 aircraft. Douglas used a series of briefings and sales brochures in its sales campaign. The sales brochures given to Continental consisted of hundreds of pages of technical information drafted by Douglas' engineers, and reviewed by its top management, for the express purpose of explaining the DC-10 design and a "Detail Type Specification" ("Detail Specification" or "Specification") to potential aircraft purchasers. That Specification, as its name implies, described the technical details of the DC-10. The briefings, the question and answer period following, and the brochures, were intended by Douglas to constitute Continental's review of the DC-10 specifications.

The Douglas briefings covered the landing gear and wing design, as did many of its brochures. Continental personnel used the brochures to write portions of Continental's "Tri-Jet Evaluation," a comparison between the [216 Cal.App.3d 400] DC-10 and Lockheed's L-1011, which became a basis for Continental's decision to purchase the DC-10.

The brochures contained statements that "[t]he fuel tank will not rupture under crash load conditions;" that the landing gear "are designed for wipe-off without rupturing the wing fuel tank;" that "the support structure is designed to a higher strength than the gear to prevent fuel tank rupture due to an accidental landing gear overload;" that the DC-10 "is designed and tested for crashworthiness;" that the "landing gear will be tested" to demonstrate the fail safe integrity and wipe-off characteristics of the gear design; and that "good reliability" for the DC-10 landing gear could be predicted with an "unusually high degree of confidence" because of its close similarity to the successful design on the DC-8 and DC-9 aircraft.

When Continental decided to purchase the DC-10, instead of the L-1011 aircraft, it finalized a Purchase Agreement with Douglas which contained an integration clause and incorporated by reference the Detail Specification for the DC-10. In contrast to the absolute guarantees of the brochures, the Detail Specification used qualified language on the subject of the landing gear breakaway characteristic. It recited, in relevant part, that the landing gear "shall be designed" so that, under certain specified load conditions, failure of the landing gear "is not likely" to rupture the wing fuel tanks or fuel lines. That clause, its interpretation, and the pre-contract representations which varied the

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terms of the Specification, became the focus of the instant trial. CONTENTIONS

I. Douglas contends with respect to Continental's fraud claims that:

A. Continental's negligent misrepresentation claim was barred by the exculpatory clause of the Purchase Agreement.

B. The jury instruction on fraud by "failure to disclose" was incomplete in two vital particulars.

C. The trial court prejudicially erred in refusing to admit the "Six Bulletin."

D. The trial court prejudicially erred in admitting the "Starlof Letter" and the evidence associated with it.

E. The trial court prejudicially erred in refusing to permit Douglas' expert witness McCarthy to testify from documents prepared by his subordinates.

[216 Cal.App.3d 401] F. The trial court prejudicially erred in permitting the contractual term of the Detail Specification to be varied, amplified and supplemented by parol evidence.

G. There was no substantial evidence of fraud: (1) the Detail Specification was not false, and (2) pre-contract promotional materials cannot form the basis of a fraud claim.

H. There was no substantial evidence that Douglas' misrepresentations were material or that Continental reasonably relied on them in deciding to purchase the DC-10.

I. The trial court's treatment of the Service Life Policy issues prejudiced the entire case.

J. The trial court erroneously instructed the jury on the measure of damages for fraud.

K. The trial court erred in awarding prejudgment interest at 10 percent.

II. Douglas contends Continental's claim for breach of contract under the Service Life Policy was submitted to the jury in error because:

A. The value of the aircraft cannot be recovered under the Service Life Policy.

B. Continental never "triggered" the policy by giving the required notice.

C. Continental's insurer had no standing to make a claim under the policy since it is non-assignable.

DISCUSSION

I. The Fraud Claims

A. Continental's Cause of Action For Negligent Misrepresentation Was Not Barred by the Exculpatory Clause of the Contract.

Douglas contends Continental's claim for negligent misrepresentation was barred by Article 12 of the Purchase Agreement wherein Continental expressly agreed to waive all claims for negligence. Although the cause of action was submitted in accordance with BAJI No. 12.45, which is [216 Cal.App.3d 402] entitled "Fraud and Deceit--Negligent Misrepresentation," on the instruction given to the jury, the court changed the name of the tort to "fraud and deceit by representation without reasonable grounds."

While Douglas makes much ado about this name change, the real question presented is whether negligent misrepresentation is a species of fraud which, pursuant to California statutory and case law, may not be waived by an exculpatory clause.

The elements of a cause of action for negligent misrepresentation are: "1. The defendant must have made a representation as to a past or existing material fact. [p ] 2. The representation must have been untrue; [p ] 3. Regardless of his actual belief the defendant must have made the representation without any reasonable ground for believing it to be true; [p ] 4. The representation must have been made...