Opinion ID: 435124
Heading Depth: 2
Heading Rank: 1

Heading: The Shipowners' Claims

Text: 11 Caterpillar first argues that the district court erred in determining that tort law, rather than the law of contracts, governs the shipowners' claims for lost profits. The core of its contention is that tort law does not extend to situations where no physical damage has occurred and the only damages claimed are for economic loss due to a product's failure to perform as expected. The defendant argues that in such a setting recovery is limited to those remedies provided by warranty, and here the warranty limited recovery to repair costs. 12 Caterpillar is correct that, as a general rule, courts have denied recovery for negligence where no physical damage has occurred. See Prosser, Law of Torts Sec. 101, p. 665 (4th ed. 1971) and authorities cited therein. In the products liability context where privity exists between the plaintiff-buyer and defendant-seller, the rule's primary purpose is to preserve the operation of warranties where the plaintiff's claim is loss of bargain. Prosser, id. at 666-67; cf. Union Oil Co. v. Oppen, 501 F.2d 558, 564-65 (9th Cir.1974); Jig the Third Company v. Puritan Marine Insurance Underwriters Corporation, 519 F.2d 171, 179, 181 (5th Cir.1975), (Gee, J., dissenting) cert. denied, 424 U.S. 954, 96 S.Ct. 1429, 47 L.Ed.2d 360 (1976). Those courts adhering to the general rule thus view the disappointment of commercial expectations as a matter properly left to the law of sales governing the negotiations and agreements of the parties. This approach also has led to the denial of recovery where the only physical damage is to the product itself. See Jig the Third, 519 F.2d at 180-81 (Gee, J., dissenting). 13 This circuit has rejected, at least in the maritime context, such a rigid separation of the law of sales and the law of torts. In Jig the Third, the former Fifth Circuit 5 held that unless a warranty expressly disclaims liability for negligence, the plaintiff may recover his damages although the only physical damage is to the product itself: 14 We do not read the Uniform Commercial Code as a categorical imperative exiling or outlawing the law of negligence between contracting parties. While there may be no magic words which are necessary to grant absolution for negligence, we have in this contract no plausible syllabization for such grace .... Limiting contractual language and limitless liability predicated upon negligence can coexist in situations such as this one, and this duality can only be foresworn by language which will bear no interpretation other than that the seller shall not be held responsible for his own negligent wrongdoing. 15 519 F.2d at 178-79. The majority thus concluded that although a warranty may preclude recovery for negligence, such a preclusion must clearly be made a part of the bargain. 16 Relying on Jig the Third, the district court here allowed recovery for negligence because [t]here is nothing in Caterpillar's warning that can be fairly construed as exempting it from liability for negligence. The defendant argues, however, that the district court's reliance on Jig the Third was misplaced because in that case physical damage had occurred, albeit only to the product itself. 6 17 We find the defendant's proposed distinction unpersuasive. First, as noted above, the rationale for the rule not allowing recovery where only pecuniary loss is claimed is fundamentally the same for not allowing recovery where only the product is damaged: the performance of the product--whether it explodes or fails to function--is conceptualized as part of the bargain and thus properly covered by the law of sales. The court in Jig the Third, however, explicitly rejected this approach. 7 18 Second, the argument for finding that a warranty was not intended to preclude a negligence action is even more compelling here than in Jig the Third. In Jig the Third, the plaintiff's claim was premised on the negligent design and manufacturing of the product and thus was closely related to the quality of the product and the plaintiff's expectations of how the product would perform. Here, however, the gravamen of the plaintiffs' complaint is that the defendant failed to properly warn of defects that it discovered after the engine was already on the market. Whatever the merits of adopting a rule that views defects in a product as part of the parties' bargain and thus within the law of sales, it is much less tenable to presume that the buyer has bargained away the manufacturer's obligation to warn of defects that later come to the manufacturer's attention. A duty to warn of a product's defects of which the seller becomes aware goes not to the quality of the product that the buyer expects from the bargain, but to the type of conduct which tort law governs as a matter of social and public policy. See Prosser, Sec. 92, p. 613; Jig the Third, 519 F.2d at 179, 181 (Gee, J., dissenting). To hold otherwise would impermissibly allow a manufacturer who is aware that it has a defective product on the market to hide behind its warranty while the buyer unknowingly uses it. 19 We thus conclude that the district court did not err in finding that a negligent failure to warn of a defect, at least where the manufacturer is aware of the defect and the warranty does not expressly disclaim negligence, forms a basis for a negligence action under maritime tort law 8 even though no physical damage has occurred.