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Moorman Mfg. Co. v. Nat'l Tank Co.

OPINION FILED DECEMBER 30, 1980.

MOORMAN MANUFACTURING COMPANY, PLAINTIFF-APPELLANT AND CROSS-APPELLEE,

v.

NATIONAL TANK COMPANY ET AL., DEFENDANTS-APPELLEES AND CROSS-APPELLANTS.



APPEAL from the Circuit Court of Adams County; the Hon. RICHARD F. SCHOLZ, JR., Judge, presiding.

MR. JUSTICE MILLS DELIVERED THE OPINION OF THE COURT:

We hold that recovery may be had for economic loss under the tort theories of strict liability in tort, negligence, and misrepresentation.

FACTS

On July 26, 1978, Moorman Manufacturing Company filed a three-count complaint claiming that National Tank Company, a wholly owned subsidiary of Combustion Engineering, Inc., designed, manufactured and sold various types of storage tanks. In 1966, the defendants manufactured and sold a particular bolted steel grain storage tank to Moorman for use at its feed processing plant in Alpha, Illinois. All three counts alleged that in the last few months of 1976 or the first months of 1977 a crack developed in one of the steel plates on the second ring of the tank.

Count I (sounding in strict liability in tort) alleged that the tank was not reasonably safe due to certain design and manufacturing defects. Count II (the misrepresentation count) asserted that the defendants had made certain representations, which were in fact untrue, in connection with the sale of the tank. Moorman purportedly relied upon these representations to its detriment. Count III accused the defendants of negligently designing the tank.

On October 10, 1978, the defendants filed a motion to dismiss all three counts of the complaint, alleging, inter alia, that the cause of action was barred by section 15 of the Limitations Act (Ill. Rev. Stat. 1979, ch. 83, par. 16). Following a hearing on defendants' motion, plaintiff filed an amendment to the complaint, adding count IV, claiming that it had relied upon an express warranty made by the defendants at the time of the sale.

In all four counts of the complaint, the plaintiff prayed for damages representing loss of use and cost of repairs and reinforcement of the tank.

On May 15, 1979, the defendants filed an amendment to their motion to dismiss. In this amendment, the defendants claimed that the plaintiff sought only economic loss, which is not available under any tort theory. Additionally, the defendants alleged that count IV was barred by the statute of limitations.

On November 1, 1979, the trial court specifically held that the plaintiff could not recover for purely economic losses under the tort theories advanced by the plaintiff, and that the loss of profits or income and the cost of repair to the tank were economic losses only. The court then dismissed the first three counts. As to count IV, the court found it was not barred by the statute of limitations since an express warranty existed which extended to future performance of the tank.

On motion by the defendants, the trial court entered an order pursuant to Supreme Court Rule 308 (73 Ill.2d R. 308), finding that an immediate appeal of its denial of the defendants' motion to dismiss count IV would materially advance the ultimate termination of the litigation. The trial court also found, under Supreme Court Rule 304(a) (73 Ill.2d R. 304(a)), that there was no just reason for delaying enforcement or appeal of its order dismissing the first three counts of the plaintiff's complaint. We granted the appeal, and the appeal was perfected.

On appeal, the plaintiff argues that it should be allowed to recover for economic losses under the tort theories advanced in its complaint. In addition to contesting this issue, defendants assert that the allegations of count IV (express warranty) were insufficient to invoke the future performance exception to the statute of limitations. (Ill. Rev. Stat. 1979, ch. 26, par. 2-725.) The defendants also argue, as an alternative for affirming the trial court's dismissal of the first three counts, that the tort counts were barred by the statute of limitations. Finally, defendants contend that the storage tank in question was not a product and that the doctrine of strict liability in tort was therefore inapplicable.

• 1 The capstone question in this appeal is the issue of "economic loss." We bite the bullet. We hold that the plaintiff may recover for economic losses under the tort theories of strict liability in tort, negligence, misrepresentation. Additionally, the plaintiff's tort actions were not barred by the statute of limitations, and the storage tank was a product. We therefore reverse the trial court's dismissal of the first three counts.

We first address the issue of the recovery of economic loss in tort and then address the applicability of the statute of limitations to all four counts.

I

ECONOMIC LOSS

When a product fails to perform properly, the buyer may incur one or more of three kinds of harm: personal injury, property damage, or economic loss. The term "personal injury" is self-explanatory. Property damage consists of injury to the plaintiff's property other than to the product itself. Economic loss may be either direct or consequential. Direct economic loss occurs when a product damages itself or is unfit for the purpose for which it was sold. Such losses are generally limited to the price of the product. Consequential economic loss consists of an injury extrinsic to the product, such as lost profits or the loss of use of the product. See Note, Manufacturer's Strict Tort Liability to Consumers for Economic Loss, 41 St. John's L. Rev. 401 (1967).

As we observed above, the plaintiff's complaint alleges only economic loss — cost of repairs (direct economic loss) and loss of use of the product (consequential economic loss). In dismissing the plaintiff's counts alleging strict liability in tort, negligence, and misrepresentation, the trial court specifically relied upon the Second District's decision in Alfred N. Koplin & Co. v. Chrysler Corp. (1977), 49 Ill. App.3d 194, 364 N.E.2d 100. In that case, the plaintiff alleged negligent manufacture and breach of warranty and sought recovery for its expenses in repairing and replacing air conditioning units manufactured by the defendant. The court said the plaintiff's allegation of solely economic loss placed the case within the "narrow range of situations dividing tort theory from contract theory. * * * The line of demarcation between physical harm and economic loss in our view reflects the line of demarcation between tort theory and contract theory." (49 Ill. App.3d 194, 199, 364 N.E.2d 100, 103-04.) The court then proceeded to discuss cases which have divided on the question of whether economic loss should be recoverable in strict liability in tort absent any personal injury or property damage. Although the only tort count before it was the negligence count, the Koplin court purported to deny recovery for pure economic loss in any kind of tort action. Thus, the court's discussion is dictum as it relates to strict liability in tort and to misrepresentation.

The only other Illinois case facing the issue of recovery for purely economic loss in a tort action appears to be the First District's decision in Rhodes Pharmacal Co. v. Continental Can Co. (1966), 72 Ill. App.2d 362, 219 N.E.2d 726. The plaintiff in Rhodes was a marketer of drugs, cosmetics, and hair beauty products. It sought recovery for damages incurred because aerosol cans manufactured by the defendant had leaked. Without explanation, the court merely stated that the case did not meet the requirements for application of the strict liability in tort doctrine. Since the Rhodes court did not discuss the many policy issues on each side of the question we now face, that opinion is not persuasive, and we do not feel compelled to follow it. Wanderer v. Plainfield Carton Corp. (1976), 40 Ill. App.3d 552, 351 N.E.2d 630.

A

STRICT LIABILITY IN TORT

The debate over whether a cause of action lies in strict liability in tort if the plaintiff is alleging only economic loss began in the mid 1960's. In Santor v. A. & M. Karagheusian, Inc. (1965), 44 N.J. 52, 207 A.2d 305, the court which had led the way in attacking the privity requirement in a breach of warranty action (Henningsen v. Bloomfield Motors, Inc. (1960), 32 N.J. 358, 161 A.2d 69) again broke new ground. The plaintiff in Santor was allowed recovery for loss of the value of carpeting manufactured by the defendants, such loss arising because of unusual indelible lines in the carpeting that became visible soon after installation.

Only a few months after Santor, the California court which had pioneered the strict liability in tort doctrine (Greenman v. Yuba Power Products, Inc. (1963), 59 Cal.2d 57, 377 P.2d 897, 27 Cal.Rptr. 697), came to a conclusion contrary to Santor. In Seely v. White Motor Co. (1965), 63 Cal.2d 9, 403 P.2d 145, 45 Cal.Rptr. 17, the court, in dictum, explained that it would deny recovery under strict liability in tort for economic loss arising from the continuous galloping of a truck manufactured by the defendant.

In the 15 years since Santor and Seely, courts> of other jurisdictions have continued to split on whether purely economic loss is recoverable in a strict liability in tort action. We find the arguments in favor of recovery to be highly persuasive.

In a strict liability in tort action, we are concerned with the condition and quality of the product. (Christopherson v. Hyster Co. (1978), 58 Ill. App.3d 791, 374 N.E.2d 858.) The right of recovery should not depend upon the nature of the injury or the kind of plaintiff. A manufacturer who has failed to supply a product suitable for the purpose for which it was made and sold should be liable to the buyer who has paid the price that the manufacturer has demanded.

The strict liability in tort doctrine was initially used in cases in which a product had caused personal injury to the plaintiff. (Greenman.) The cases following Justice Traynor's dictum in Seely have required the presence of personal injury or property damage before a plaintiff may proceed under the strict liability in tort doctrine. Section 402A of the Restatement (Second) of Torts (1965) incorporates that limitation, providing in part:

"One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property * * *." (Emphasis added.)

In States in which section 402A governs actions in strict liability in tort, courts> have construed "physical harm" as requiring either personal injury or property damage before a plaintiff may proceed. (Fredonia Broad-casting Co. v. RCA Corp. (5th Cir. 1973), 481 F.2d 781; Hiigel v. General Motors Corp. (Colo. 1975), 544 P.2d 983; Nobility Homes of Texas, Inc. v. Shivers (Tex. 1977), 557 S.W.2d 77.) We do not regard section 402A as a barrier to recovery in Illinois for economic loss under the doctrine of strict liability in tort. When our supreme court adopted that doctrine in Suvada v. White Motor Co. (1965), 32 Ill.2d 612, 210 N.E.2d 182, it based its result upon views expressed by courts> in other jurisdictions and by various commentators. That court has subsequently observed that Suvada and section 402A coincide (Genaust v. Illinois Power Co. (1976), 62 Ill.2d 456, 343 N.E.2d 465) and has sometimes relied heavily upon that provision. (Cunningham v. MacNeal Memorial Hospital (1970), 47 Ill.2d 443, 266 N.E.2d 897.) But, the court has never declared section 402A to be the source or the statement of our strict liability in tort doctrine. In fact, in Crowe v. Public Building Com. (1978), 74 Ill.2d 10, 383 N.E.2d 951, the court refused to be bound by the word "seller" in section 402A and applied the strict liability in tort doctrine to a lessor/defendant. We, as did the court in Crowe, decline to be bound by the language the Restatement drafters chose to use. We agree with the Crowe decision's approach of fulfilling the policy behind section 402A without being bound by its precise language.

In products liability actions in which the plaintiff has suffered either personal injury or property damage, courts> have generally also allowed recovery for economic losses. (See generally Suvada; 141 South Main, Inc. v. Magic Fingers, Inc. (1977), 49 Ill. App.3d 724, 364 N.E.2d 605; Hales v. Green Colonial, Inc. (8th Cir. 1974), 490 F.2d 1015.) To deny recovery for economic loss under strict liability in tort when there is no accompanying personal injury or property damage is an arbitrary distinction leading to opposite results in cases that are virtually indistinguishable. In the instant case, had the plaintiff alleged that a mere bushel of corn had been destroyed by rain water leaking into the tank through the crack, then it would have suffered property damage sufficient to allow recovery of economic loss. Likewise, if an individual had cut his finger while inspecting the crack in the tank, he would have suffered a personal injury allowing recovery for all types of harm.

Justice Peters' dissent in Seely pointed to the arbitrary line the majority was drawing. In his example, a traveling salesman who breaks his leg in a car accident caused by a defect in the car can recover, among other things, for economic loss in the form of lost income during his convalescence. But if that same defect merely causes the car to break down without injuring him or damaging his property, then strict liability in tort offers him no relief. We think that a distinction based on such fortuities as these examples suggest is not grounded upon defensible principles.

The Seely court justified incongruous results by suggesting that personal injury is more devastating to a plaintiff than mere economic loss so that the availability of the strict liability in tort remedy may properly be made contingent upon injury to the plaintiff. (See also Price v. Gatlin (1965), 241 Ore. 315, 405 P.2d 502 (concurring opinion).) But a personal injury is not necessarily a more overwhelming misfortune to a plaintiff than is an economic loss. Surely a custom farmer who buys a new tractor and then goes bankrupt because it will not run during his working season is more seriously harmed than a farmer who is incapacitated for two days from a personal injury caused by the same faulty tractor. A party suffering economic ruin and knocking feebly at the poorhouse door should not be denied the protection of the law simply because he was "fortunate" enough to escape physical injury.

Perhaps in realization of the harshness of the rules which have developed in this area, courts> have broadened the property damage exception to encompass certain cases which, in the strictest sense, involve only economic loss. (Note, Products Liability: Expanding the Property Damage Exception in Pure Economic Loss Cases, 54 Chi.-Kent L. Rev. 963 (1973).) For example, in Cloud v. Kit Manufacturing Co. (Alas. 1977), 563 P.2d 248, the Alaska Supreme Court allowed recovery under strict liability in tort for a mobile home that had caught fire and burned, allegedly because of a design defect which made it highly flammable. In so holding, the court distinguished a prior decision wherein it denied recovery in strict liability in tort to a plaintiff whose mobile home became uninhabitable a few months after purchase because of a multitude of defects. (Morrow v. New Moon Homes, Inc. (Alas. 1976), 548 P.2d 279.) We see no value in trying to draw a line between gradual deterioration (economic loss) and a sudden and calamitous event (property damage), and we fail to see a valid or reasoned distinction supporting the different results in Morrow and Cloud. Regardless of how the loss was occasioned, in each case the plaintiff sought economic loss — i.e., the value of the defective mobile home.

Efforts to distinguish between property damage and economic loss have sometimes resulted in absurd and unprincipled line drawing and inconsistent results. For example, the harm coming from a faulty herbicide was characterized as economic loss (lost profits from crops) in Eli Lilly & Co. v. Casey (Tex. Civ. App. 1971), 472 S.W.2d 598, but as property damage to crops in Monsanto Co. v. Thrasher (Tex. Civ. App. 1971), 463 S.W.2d 25, and in Geigy Chemical Corp. v. Hall (Tex. Civ. App. 1969), 449 S.W.2d 115. See also Iancono v. Anderson Concrete Corp. (1975), 42 Ohio St.2d 88, 326 N.E.2d 267, wherein the court said the plaintiff had incurred property damage when his concrete driveway developed small holes, apparently from the defective nature of the concrete. Under that analysis, it would be difficult to find any distinction between property damage and a direct economic loss.

A further complication arising from efforts to define when property damage has occurred is the question of ingredients or component parts causing damage to the larger product. In Hiigel v. General Motors Corp. (Colo. 1975), 544 P.2d 983, the plaintiff sought recovery in strict liability in tort after defective wheel lugs on his mobile home had sheared off, resulting in damage to the chassis. The plaintiff was able to recover for the business losses caused by the breakdown, the rationale being that the plaintiff had incurred property damage. Although the Hiigel court's result is commendable, we do not choose to engage in the fiction that a person buying a product has purchased a huge collection of separate products in the form of component parts. We believe it is more realistic to treat a plaintiff as having bought what he intended to buy — a single product. If some part of this product malfunctions to the detriment of the product's value, then the plaintiff should be able to recover without having to make questionable assertions that he has incurred property damage. See Note, Products Liability: Expanding the Property Damage Exception in Pure Economic Loss Cases, 54 Chi.-Kent L. Rev. 963 (1978).

In sum, we reject out of hand the hollow distinction that would allow a buyer to recover the value of an air conditioner in strict liability in tort if it has damaged his premises by leaking (Admiral Oasis Hotel Corp. v. Home Gas Industries, Inc. (1965), 68 Ill. App.2d 297, 216 N.E.2d 282 (a negligence case)), but deny recovery if the air conditioner has failed to cool the premises (Koplin). The manner in which a product's failure to perform happens to manifest itself should not be the decisive factor in determining whether a plaintiff has stated a cause of action in strict liability in tort. See Ribstein, Guidelines for Deciding Product Economic Loss Cases, 29 Mercer L. Rev. 493 (1978).

When a manufacturer has placed a faulty product into the stream of commerce and the buyer has paid the price demanded, the manufacturer who has reaped a profit is the most appropriate party to bear the loss. Illinois courts> have espoused this rationale for the strict liability in tort doctrine. (Suvada; Evans v. Control Products Corp. (1979), 73 Ill. App.3d 681, 392 N.E.2d 239; Johnson v. Marshall & Huschart Machinery Co. (1978), 66 Ill. App.3d 766, 384 N.E.2d 141.) We agree with the courts> that say this rationale is just as strong in economic loss cases as it is in cases involving personal injury or property damage. (See Santor; Cova v. Harley Davidson Motor Co. (1970), 26 Mich. App. 602, 182 N.W.2d 800; City of LaCrosse v. Schubert, Schroeder & Associates, Inc. (1976), 72 Wis.2d 38, 240 N.W.2d 124.) The manufacturer of a faulty product is in the position to spread the cost of that fault to other buyers or to insure against such cost. Of course, a manufacturer may put into the stream of commerce so many faulty products that it can no longer obtain insurance or must price its goods too high to compete in the marketplace. We cannot, however, see any evil in a rule of law that compels a manufacturer in one way or another to refrain from putting worthless goods onto the market.

In his dissent in Seely, Justice Peters suggested the adoption of a consumer-oriented approach whereby only consumers would be able to recover for economic losses in strict liability in tort. One basis for this distinction is the assumption that business purchasers would have cost-spreading abilities. Although concededly some buyers who are in business have the capability of distributing to their customers the cost of a product's failure, we are not persuaded that such buyers should be denied access to the strict liability in tort doctrine. We do not think it would be wise to require our trial courts> — at the beginning of all economic loss cases — to determine whether the buyer has a business of adequate size to justify leaving on it the burden of passing to its customers the cost of a faulty product. It is the manufacturer who first introduces the item to the marketplace and who is in the best position to see that it is properly designed and constructed. It seems to us that fundamental logic and horseback sense, as well as justice, dictate that the maximum cost-spreading ability exists at the source of the loss — the manufacturer. The law has degenerated to the level of abject absurdity when it implicitly condones the design, production and distribution of worthless goods.

We are not fearful, as Justice Traynor was in Seely, that allowing this kind of suit would subject manufacturers to damages of unknown and unlimited proportions. We would expect that most cases would deal with consumer items — buyers seeking the replacement cost of a "lemon." In most cases, consequential economic losses (such as lost profits) will not occur with consumer buyers. Thus, ...


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