Equistar Chemicals v. Dresser-Rand Co.

• Decision Date: 04 May 2007
• Docket Number: No. 04-0121.,04-0121.
• Citation: 240 S.W.3d 864
• Parties: EQUISTAR CHEMICALS, L.P., Petitioner, v. DRESSER-RAND COMPANY, Respondent.
• Court: Texas Supreme Court

240 S.W.3d 864

EQUISTAR CHEMICALS, L.P., Petitioner, v. DRESSER-RAND COMPANY, Respondent.

No. 04-0121.

Supreme Court of Texas.

Argued November 29, 2005.

Decided May 4, 2007.

Claudia Wilson Frost, Christopher Jene Richart, Monica Cristina Flores, Jeremy Jason Gaston, Mayer, Brown, Rowe & Maw LLP, Houston, Thomas H. Cook Jr., Richard G. Urquhart, Zelle Hofmann Voelbel Mason & Gette, LLP, Dallas, for petitioner.

Thomas C. Wright, Michael A. Choyke, Chad Michael Forbes, Wright Brown & Close, LLP, Houston, for respondent.

Ben Taylor, Fulbright & Jaworski L.L.P., Dallas, for amicus curiae.

Justice JOHNSON delivered the opinion of the Court.

This case presents questions of how the economic loss rule is to be asserted in the trial court.

I. Background

In the mid 1970s Equistar Chemicals, LP¹ bought two gas compressors from Dresser-Rand Company. Equistar operated the compressors as part of a chemical manufacturing process. The compressors, OP-I and OP-II, are large gas compression units containing many component parts. Impellers, which resemble large fan blades, are essential parts of the compressors. In 1989 Dresser upgraded the compressors by increasing the size of the existing impellers from 42 inches to 44 inches. While the compressors functioned without major difficulties before the upgrade, afterwards the impellers failed to various degrees in 1991, 1993, and 1995. To address the recurring failures Equistar decided to revert to the 42-inch impellers, but sought to maintain the higher output achieved by the 44-inch impellers. Accordingly, Equistar retained Dresser to trim an impeller that Equistar purchased from Dresser in 1991 from 44 inches to 42 inches and install it on OP-I. To effectuate Equistar's goal to achieve the higher output with the 42-inch impeller, Dresser advised Equistar to operate the 42-inch impeller at a higher speed than the speed at which it was originally operated.

On April 1, 1999 the OP-I impeller failed, causing major damage to the compressor, its turbine and adjacent parts of the plant. Following the April failure Dresser supplied engineering and repair services to help repair and reassemble the compressor. As part of the process Dresser replaced the failed 42-inch impeller with a 42-inch impeller that Dresser had sold to Equistar in the late 1980s. The replacement impeller failed on May 14, 1999, again causing extensive damage.

On July 24, 2000 Equistar sued Dresser because of the April and May 1999 failures. Equistar sought recovery for the cost of repairing and replacing all the damaged property, including the compressor and impellers, and for losses due to interruption of its business. Equistar alleged causes of action for negligence; strict liability for manufacturing, marketing and design defects; and breach of implied warranty of merchantability.

The case was tried to a jury. As to liability the jury found that the negligence of both Equistar and Dresser proximately caused the occurrence(s); manufacturing, design and marketing defects in the impellers were producing causes of the occurrence(s); and the impellers supplied by Dresser were unfit for the ordinary purposes for which they were used and the unfit condition proximately caused the occurrence(s). The jury apportioned causation for the occurrence(s) 80% to Dresser and 20% to Equistar. In answer to the single damages question the jury found that Equistar's damages for repairs to its plant resulting from the occurrence(s) in question were $3,641,210. The trial court instructed the jury that, with respect to damages, it was to consider only the cost of repairs "in Harris County, Texas, to restore the Equistar Chemicals' ethylene plant to the condition it was in immediately before the occurrence(s) in question." The damages question was not conditioned on any other question. Dresser did not object to the damages question or instruction except for objections to the legal and factual sufficiency of the evidence.

Judgment was entered over Dresser's motion for judgment notwithstanding the verdict. Dresser's motion for new trial and second motion for judgment notwithstanding the verdict were overruled by operation of law.

The court of appeals held that Dresser's no-evidence objections preserved error as to the economic loss rule and that Equistar's claims for damages to the compressor were barred by limitations. It reasoned that the compressor was the subject of the relevant contract of sale between the parties, damage to the compressor itself was economic damage recoverable only through a contractual breach of warranty cause of action and the claim for damage to the compressor, whether caused by original or replacement parts, was barred when the statute of limitations ran on claims arising from breaches based on the original 1975 contract for sale of the compressor. 123 S.W.3d 584, 588. The court of appeals rejected Equistar's assertion that the failed impellers were the "products" that formed the basis of the relevant agreement between Equistar and Dresser.² The court of appeals also held that (1) Equistar's claim for consequential business interruption damages, being contractual in nature, was barred by limitations for the same reason that the breach of warranty claims were barred and (2) because consequential damages were barred by limitations, Equistar's appeal of the pretrial summary judgment in favor of Dresser as to those damages was moot. Finally, the court of appeals held that some evidence supported Equistar's tort claims for damage to property other than the compressor and remanded that claim for a new trial.

As relevant to our disposition of the appeal, Equistar questions whether Dresser preserved error for appellate review as to the economic loss rule and if it did, the manner in which the court of appeals applied the rule. Equistar also urges, in part, that (1) the court of appeals improperly and sua sponte made an election of remedies for Equistar; and (2) the court of appeals improperly held Equistar's appeal from the pre-trial summary judgment as to its business interruption damages moot when the case was remanded for a new trial on tort theories.

Dresser asserts that (1) it preserved error as to the economic loss rule by its motion for judgment notwithstanding the verdict; (2) the court of appeals properly applied the economic loss rule; (3) the jury's findings of negligence and design, manufacturing and marketing defects are not supported by legally sufficient evidence; and (4) Equistar's claims in tort are barred by limitations and the statute of repose.

II. The Economic Loss Rule

A. General

The economic loss rule applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself. See Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 79-80 (Tex.1977); Signal Oil & Gas Co. v. Universal Oil Prods., 572 S.W.2d 320, 325 (Tex.1978) ("[W]here only the product itself is damaged, such damage constitutes economic loss recoverable only as damages for breach of an implied warranty under the [Business and Commerce Code]."). The rule does not preclude tort recovery if a defective product causes physical harm to the ultimate user or consumer or other property of the user or consumer in addition to causing damage to the product itself. See Nobility Homes, 557 S.W.2d at 79-80; Signal Oil, 572 S.W.2d at 325; Mid Continent Aircraft Corp. v. Curry County Spraying Serv., 572 S.W.2d 308, 313 (Tex.1978) ("[I]n transactions between a commercial seller and commercial buyer, when no physical injury has occurred to persons or other property, injury to the defective product itself is an economic loss governed by the Uniform Commercial Code.").

B. Preservation of Error

Equistar contends that the economic loss rule is an affirmative defense Dresser did not assert and that in any event Dresser did not preserve error as to the economic loss rule. Dresser does not contend that it pled the rule, made any motions referencing the rule, or mentioned the rule in objections to the jury charge. The court of appeals acknowledged that Dresser's pre- and post-trial motions did not mention the rule. Nevertheless, referencing Rocky Mountain Helicopters, Inc. v. Lubbock County Hosp. Dist., 987 S.W.2d 50, 52 (Tex.1998) and Edward D. Jones & Co. v. Fletcher, 975 S.W.2d 539, 543 (Tex. 1998), the court of appeals held that Dresser's no-evidence points in its directed verdict and post-trial motions "necessarily encompassed" the economic loss rule because if no tort claims could be asserted, then Equistar's cause of action accrued at the time of sale and its...