Cooperative Power Ass'n v. Westinghouse Elec. Corp.

• Decision Date: 14 December 1992
• Docket Number: No. 920017,920017
• Citation: 493 N.W.2d 661
• Parties: 22 UCC Rep.Serv.2d 685, Prod.Liab.Rep. (CCH) P 13,387 COOPERATIVE POWER ASSOCIATION, Plaintiff, v. WESTINGHOUSE ELECTRIC CORPORATION, Defendant. Civ.
• Court: North Dakota Supreme Court

Page 661

493 N.W.2d 661

22 UCC Rep.Serv.2d 685, Prod.Liab.Rep. (CCH) P 13,387

COOPERATIVE POWER ASSOCIATION, Plaintiff, v. WESTINGHOUSE ELECTRIC CORPORATION, Defendant.

Civ. No. 920017.

Supreme Court of North Dakota.

Dec. 14, 1992.

Steven A. Storslee (appearance), of Fleck, Mather & Strutz, Bismarck, and David S. Evinger (argued) and David A. Engen (appearance), of Robins, Kaplan, Miller & Ciresi, Minneapolis, MN, for plaintiff.

Lawrence A. Dopson (argued), of Pearce & Durick, Bismarck, for defendant.

JOHNSON, Justice.

Under Rule 47, N.D.R.App.P., the United States District Court for the District of North Dakota certified to this court the following question of law:

"May a manufacturer of a machine sold in a commercial transaction be held liable in negligence or strict product liability theory for economic loss caused by the failure of a component part of the machine, which causes direct damage to the machine only?"

We answer that question, "no."

Cooperative Power Association (CPA) owns and operates an electrical generating station, the Coal Creek Station, in Underwood, North Dakota. CPA uses step-up transformers to increase the voltage of electricity for transmission over power lines. Westinghouse Electric Corporation manufactures step-up transformers. CPA contracted to purchase a 566 MVA generator step-up transformer from Westinghouse for use at the Coal Creek Station for approximately $1,600,000. The step-up transformer is a large, box-shaped object with electrical coils which are connected to the power lines by metal conductors called bushings. ¹ The contract between CPA and Westinghouse covered both the transformer and its bushings.

Westinghouse delivered the transformer and bushings to CPA in January 1987, and CPA placed the unit in service in November 1987. During installation, a CPA technician noticed that two of the bushings had a loose cap which caused a loose connection between the bushings and the power lines. According to CPA, Westinghouse advised CPA to tighten the bushings with a channel lock pliers without reference to any specified amount of torque.

In December of 1988, an electrical arc in a bushing damaged the bushing and contaminated the transformer coils with metal particles, requiring replacement of the bushings and rewinding of the coils. Westinghouse replaced the bushings, but refused to pay for rewinding the coils.

CPA sued Westinghouse in Federal court, alleging breach of express warranty, breach of contract, negligence, and negligent misrepresentation. CPA alleged that it had incurred damages for repair of the transformer and temporary replacement in an amount in excess of $1,600,000. Westinghouse moved for summary judgment dismissal of CPA's tort claims, asserting that, because CPA claimed damages only to the transformer, CPA's sole remedy was in contract. ² CPA responded by asking the Federal court to certify three questions to this court. ³ Westinghouse objected to certification and also to the form of the questions. The Federal court certified a question essentially identical to the question presently before this court. CPA then moved to amend the certified question, ⁴ contending that the bushing was not a component of the transformer and was a separate product. The Federal court stated that the "bushing is a 'component' part of the transformer unit, even though severable from it" and certified the present question about whether a manufacturer of a machine sold in a commercial transaction may be liable in negligence or strict liability for economic loss for damage to the machine only. ⁵

CPA argues that the certified question should be answered "yes" with the qualification that a plaintiff seeking to recover in tort for economic loss must prove a defective and unreasonably dangerous product. CPA asserts that because products liability law in North Dakota focuses on the cause of injury, i.e., a defective and dangerous product, and not the type of damage incurred, our products liability law applies if a defective and unreasonably dangerous product fails and damages only itself. Westinghouse responds that the certified question should be answered "no" because contract law, not tort law, applies in a commercial setting when a defective product fails and damages only itself.

I

In East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986), the United States Supreme Court considered a similar issue in the context of admiralty law. The plaintiffs, charterers of four ships, sued the manufacturer of turbines installed in the ships in strict liability and negligence, alleging that the turbines were defectively designed. The plaintiffs alleged that the defects, which caused damage to the turbines themselves, entitled them to damages for the cost of repairs and for lost income while the ships were out of service. The Court, applying products-liability concepts to admiralty law, unanimously held "that a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself." Id. 476 U.S. at 871, 106 S.Ct. at 2302.

The Court outlined the three approaches for determining whether an action may be brought in tort for damage to the product itself: (1) the majority approach, which precludes tort actions if a defective product damages only itself, see Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965); Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F.2d 280 (3rd Cir.1980); (2) the minority approach, which permits tort actions if a defective product damages only itself regardless of whether the defect created an unreasonable risk of harm, see Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965); and (3) the intermediate "degree-of-risk" or "qualitative" approach, which differentiates between disappointed and endangered users and permits only the latter to sue in tort under an analysis focusing on the nature of the defect, the type of risk, and the manner in which the product is damaged. See Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165 (3rd Cir.1981) [permits tort action for damage to a defective product resulting from an unreasonably dangerous condition and precludes tort action for damage resulting from a non-dangerous impairment in the quality of the product]; Northern Power & Engineering Corp. v. Caterpillar Tractor Co., 623 P.2d 324 (Alaska 1981) [permits tort action if a defective product creates a potentially dangerous situation and the product is damaged as a proximate result of the danger under calamitous circumstances].

The Supreme Court rejected the intermediate approach, concluding that it was too uncertain to enable manufacturers to structure their business behavior. The Court said that a distinction which rests on the manner in which the product was damaged, either by gradual deterioration and internal breakage or by a calamitous event, was not persuasive, because, by definition, no person or other property was damaged. Economic losses occurring as a result of a calamitous event essentially represented the failure of the purchaser to receive the benefit of the bargain, which is traditionally the core concern of contract law.

In analyzing the minority approach, the Court recognized that it fostered the safety and insurance rationales underlying tort liability and eliminated an arbitrary distinction between a defective product damaging only itself and a defective product causing bodily injury or damage to other property. However, the Court rejected the minority approach because it failed to keep tort liability and contract law in separate spheres and to maintain a realistic limitation on damages.

In adopting the majority approach, the Supreme Court stressed several factors: (1) tort concerns with safety are reduced when a product damages only itself; (2) damage to only the product itself means the product has not met the customer's expectations and is most naturally understood as a warranty claim; (3) warranty law is well suited for commercial controversies, which generally do not involve large disparities in bargaining power, so the parties can contractually set the terms of their agreements and, within limits, disclaim warranties or limit remedies while allowing purchasers to obtain the benefit of their bargain; (4) warranty law has built-in limitations on liability based on privity and the requirement of foreseeability of consequential damages as a result of a breach, whereas tort law confers a duty to the public generally and permits recovery for all foreseeable claims, which could subject manufacturers to indefinite economic losses by a purchaser's customers; and (5) recovery under warranty law establishes a bright line for damages to the product itself and avoids the uncertainty inherent in any attempt by courts to limit purely economic damages in tort.

The Court's rationale focuses on the different types of interests protected by tort and contract law. Tort liability protects a consumer's interest in freedom from injury regardless of the existence of an agreement between the parties. Underlying tort liability is the recognition that buyers and sellers of consumer products are generally in an unequal bargaining position and courts may desire to provide protection for the public from unsafe products beyond that provided by contract law. Tort law imposes responsibility on manufacturers of defective products because they are best able to encourage safer manufacture and design and to allocate the costs of injury arising from unsafe products. See Johnson v. American Motors Corp., 225 N.W.2d 57 (N.D.1974) [adopting strict liability in tort, as set forth in Restatement (Second) of Torts Sec. 402A, in North Dakota].

A contractual duty arises from society's interest in the performance of promises and has been traditionally concerned with the...