APPEALS COURT HOLDS PRODUCER LIABLE FOR DEFECTIVE SHIP PARTS

In the East River case (476 U.s. 858) of 1986, the Supreme Court formally incorporated shoreside product liability concepts into the general maritime law of the United States.

The case held that when a defective product causes injury only to the product itself, there is no right of recovery against the product manufacturer in tort law under negligence and strict product liability theories. The appropriate avenue of relief would be a contract warranty action.

The court refused to permit purely economic loss – the cost of replacing or repairing the defective product and lost profits – to be recovered in admiralty law unless a defective product damages “other property.” Unfortunately, the Supreme Court simply glossed over what it meant by these words. It gave no guidance as to how one distinguishes the product for which recovery may not be had, from “other property” for which recovery is permitted. Thus, the Supreme Court, in effect, created a legal vacuum.

It is a rule of physics that nature abhors a vacuum. The same is true in law. Recently, the Fifth Circuit Appeals Court in the Nicor case (876 F.2d 501) filled the legal vacuum left by the East River decision and gave its own interpretation to the words “other property.” The case is interesting in that it illustrates how an appeals court can provide its own meaning to unexplained words in a Supreme Court decision. This practice, of course, can result in a multitude of judicial interpreatinos of wha the Supreme Court said or did not say.

The primary purpose of the East River case was to resolve a conflict between the federal circuit courts sitting in admiralty. The conflict was whether injury to a defective product was the type of injury that should be compensated under product liability principles or contract warranty law.

The suit was brought by bare-boat charterers against the manufacturer of defective marine turbines. The shipowner had contracted with the manufacturer to design and supervise the installation of turbines on four 250,000-ton supertankers that were under construction.

Three of the vessels subsequently experienced problems with their high-pressure turbines. The fourth ship sustained damage to its low-pressure turbine because of an installation error. The charterers sued the manufacturer for repair cost and for lost income during the repair periods. Since the contract warranty statute of limitation had expired, the action was brought in tort that had a longer statute of limitation period.

The Supreme Court held that when the only injury involves the failure of the product to function properly, the commercial purchaser suffers a purely economic loss, which is not actionable in tort. The court reasoned that parties with equal bargaining power are free to allocate their risks and liabilities in their sales contracts. Furthermore, manufacturers should be able to limit their liabilites through warranty disclaimers in exchange for lower sales prices.

While the East River case may appear straightforward, the Nicor case indicates that certain unexplained words in the decision might make it a source of future litigation.

The Nicor case seized upon the fact that the Supreme Court’s East River decision prohibited recovery for the failure of a product to function properly unless the defective product damages “other property.” The appeals court in the Nicor case held that a timecharterer of a vessel could recover from a shipbuilder and the marine engine manufacturer for physical damage to its proerty that was subsequently placed aboard the vessel. This property was later damaged as a result of a defect in the original equipment aboard the vessel. Furthermore, the charterer was permitted to recover in tort for economic losses associated with its damaged equipment.

The court reasoned that the charterer’s equipment must be considered “other property,” separate from the product that the manufacturer originally sold to the shipowner. Otherwise, the distinction made in the East River decision between “product” and “other property” would have no meaning. The vacuum created by the Supreme Court in the East River case has now been filed.

It will be interesting if other circuit courts interpret the wors, “other property,” differently in future admiralty cass. If this should happen, the Supreme Court again may be called upon to resolve a conflict between the circuit courts and to give some guidelines for interpreting its East River decision.


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