Danforth v. Acorn Structures, Inc.

• Court: Supreme Court of Delaware
• Writing for the Court: Before VEASEY; VEASEY
• Citation: Danforth v. Acorn Structures, Inc., 608 A.2d 1194 (Del. 1992)
• Decision Date: 19 May 1992
• Parties: 20 UCC Rep.Serv.2d 116 George DANFORTH, Plaintiff-Below Appellant, v. ACORN STRUCTURES, INC., a Massachusetts corporation, Defendant-Below Appellee. . Submitted:

Page 1194

608 A.2d 1194

20 UCC Rep.Serv.2d 116

George DANFORTH, Plaintiff-Below Appellant, v. ACORN STRUCTURES, INC., a Massachusetts corporation Defendant-Below Appellee.

Supreme Court of Delaware.

Submitted: May 19, 1992.

Decided: June 18, 1992.

Rehearing Denied July 2, 1992.

Upon interlocutory appeal from the Superior Court. AFFIRMED and REMANDED.

John H. Newcomer, Jr. (argued), Bayard, Handelman & Murdoch, Wilmington, for appellant.

Paul Cottrell (argued), Berg, Tighe & Cottrell, P.A., Wilmington, for appellee.

Before VEASEY, C.J., HORSEY and MOORE, JJ.

VEASEY, Chief Justice:

This is an interlocutory appeal from a decision of the Superior Court granting summary judgment to defendant on the ground that the negligence claims of plaintiff are barred by the economic loss doctrine. The question presented is whether the economic loss doctrine applies under Delaware law based on the presence or absence of privity. Having carefully considered the policy reasons advanced in support of and in opposition to the application of the economic loss doctrine and for the reasons stated below, the ruling of the Superior Court that the economic loss doctrine applies under Delaware law, notwithstanding the presence of privity of contract, is affirmed.

FACTS

Acorn Structures, Inc. ("Acorn"), appellee/defendant below, is a Massachusetts corporation engaged in selling building kits for houses. George Danforth ("Danforth"), appellant/plaintiff below, entered into a "Custom Design" contract with Acorn on August 13, 1979, whereby Acorn agreed, for a sum of $1000, to develop an architectural design plan for plaintiff's house. The contract provided that if Danforth was interested in the design plan, Danforth could submit a purchase order for the Acorn "building package" materials. Danforth eventually did so. The contract further provided that the Acorn building materials were subject to a 2-year limited warranty.

Acorn does not engage in the construction of the buildings it designs. Therefore, Danforth contracted with a local builder, recommended by Acorn, for the actual construction of the house. Acorn provided training and on-site supervision to the local builder. The builder is not a party to this litigation.

Construction of Danforth's house was completed in 1981. Danforth contends that the design plan, which called for the use of 3/4"' insulation in the walls of the house, resulted in inadequate ventilation and allowed condensation to form within the walls of the house. In 1989, Danforth first discovered the resultant deterioration and rotting in and around the windows and door frames of the house and on the exterior siding of the house. Danforth sued Acorn, initially under a negligence theory of recovery, claiming damages in excess of $100,000 for corrective work and related repairs. The Superior Court granted summary judgment in favor of Acorn on the ground that the purely economic loss suffered by Danforth is not recoverable in a negligence action, absent either personal injury or damage to other property caused by accident, collision, or explosion, notwithstanding the presence of privity of contract between Danforth and Acorn. Danforth v. Acorn Structures, Inc., Del.Super., C.A. No. 90C-JN-30, slip op. at 18-19, 1991 WL 215658, Herlihy, J. (Aug. 27, 1991).

Danforth immediately filed a motion for reargument claiming that Acorn's negligence "in supplying defective plans that were utilized to construct the subsequently ordered building package" fell squarely within the exception to the economic loss doctrine recognized in Guardian Construction Co. v. Tetra Tech Richardson, Del.Super., 583 A.2d 1378 (1990). ¹ Danforth subsequently amended his complaint setting forth three claims: negligence, breach of express and implied warranties, and negligent misrepresentation. Thereafter, the Superior Court denied Danforth's motion for reargument stating that his negligent misrepresentation claim did not fall within the negligent misrepresentation exception recognized in the Guardian case. ² Danforth v. Acorn Structures, Inc., Del.Super., C.A. No. 90C-JN-30, Herlihy, J., 1991 WL 269956 (Dec. 12, 1991) (ORDER).

BACKGROUND

The economic loss doctrine is a judicially created doctrine that prohibits recovery in tort where a product has damaged only itself (i.e., has not caused personal injury or damage to other property) and, the only losses suffered are economic in nature. ³ The rationale underlying the economic loss doctrine is best understood by considering the distinct functions served by tort law and contract law. Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 751, 435 N.E.2d 443, 448 (1982). "[T]he concept of duty is at the heart of the distinction drawn by the economic loss doctrine." 2314 Lincoln Park West Condominium Assoc. v. Mann, 136 Ill.2d 302, 144 Ill.Dec. 227, 232, 555 N.E.2d 346, 351 (1990). Products-liability tort law has evolved to protect the individual and his property from the risk of physical harm posed by dangerous products. Contract-warranty law has evolved to protect a different interest: viz., the "bargained for expectations" of both contracting parties and other foreseeable users ⁴ who suffer loss when a product fails to meet the qualitative expectations of a consumer, i.e., when a product is unfit for its intended use. E.g., East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 872, 106 S.Ct. 2295, 2302, 90 L.Ed.2d 865 (1986); Moorman, 61 Ill.Dec. at 752, 435 N.E.2d at 449.

The seminal case that recognized and applied this distinction is the case of Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 23, 403 P.2d 145, 151 (1965). In Seely, plaintiff purchased a truck from a dealer. Upon taking possession, plaintiff found that it bounced so violently (an action known as "galloping") that it rendered the vehicle unusable in his business of heavy duty hauling. Subsequently, the brakes failed causing an accident that damaged only the truck. The plaintiff sued the manufacturer, inter alia, for breach of warranty seeking a return of the purchase price and profits lost. The Court recognized that "the law of sales has been carefully articulated to govern the economic relations between suppliers and consumers of goods." Id. 45 Cal.Rptr. at 21, 403 P.2d at 149. [Warranty] "rules determine the quality of the product a manufacturer promises and thereby determine the quality he must deliver." Id. 45 Cal.Rptr. at 22, 403 P.2d at 150. In rejecting the contention that warranty law had been superseded by the doctrine of strict liability in tort, the court recognized that the doctrine of strict liability in tort "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 injury." Id. 45 Cal.Rptr. at 21, 403 P.2d at 149. The California Supreme Court 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. A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market. He can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will. Even in actions for negligence, a manufacturer's liability is limited to damages for physical injuries and there is no recovery for economic loss alone.

Seely, 45 Cal.Rptr. at 23, 403 P.2d at 151 (citations omitted).

The United States Supreme Court has also considered the applicability of the economic loss doctrine in negligence actions brought pursuant to the Court's admiralty jurisdiction in the case of East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986). In East River, charterers of steamships brought suit against the manufacturer of turbine engines to recover the cost to repair the turbines and for lost income caused by alleged design and manufacturing defects which caused the turbines in the supertankers to malfunction while on the high seas. In considering the approaches other courts have taken when determining whether economic loss is recoverable in tort, the Court stated:

At one end of the spectrum, the case that created the majority land-based approach, Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965) (defective truck), held that preserving a proper role for the law of warranty precludes imposing tort liability if a defective product causes purely monetary harm. [Citations omitted]....

At the other end of the spectrum is the minority land-based approach, whose progenitor, Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 66-67, 207 A.2d 305, 312-313 (1965) (marred carpeting), held that a manufacturer's duty to make nondefective products encompassed injury to the product itself, whether or not the defect created an unreasonable risk of harm. [Citation omitted]....

Between the two poles fall a number of cases that would permit a products-liability action under certain circumstances when a product injures only itself. These cases attempt to differentiate between the "disappointed users ... and the endangered ones," Russell v. Ford Motor Co., 281 Or. 587, 595, 575 P.2d 1383, 1387 (1978), and permit only the...