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06/19/97 TRANS STATE AIRLINES v. PRATT & WHITNEY

June 19, 1997

TRANS STATE AIRLINES, APPELLEE,
v.
PRATT & WHITNEY CANADA, INC., APPELLANT.



Chief Justice Freeman delivered the opinion of the court. Justice Heiple, concurring in part and dissenting in part. Justice Harrison, also concurring in part and dissenting in part. Justice McMORROW joins in this partial concurrence and partial dissent.

The opinion of the court was delivered by: Freeman

CHIEF JUSTICE FREEMAN delivered the opinion of the court:

This cause is before us on questions of Illinois law certified by the United States Court of Appeals for the Seventh Circuit. 145 Ill. 2d R. 20. The certified questions are as follows: (1) "For purposes of the economic loss doctrine, as developed by the Illinois Supreme Court in Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 61 Ill. Dec. 746, 435 N.E.2d 443 (1982) [and its progeny], does Illinois recognize a 'sudden and calamitous occurrence' exception to the doctrine under which recovery in tort is possible for injury to the single product?" (2) "Can a product and one of its component parts ever constitute two separate products[?]" and (3) "Did the airframe and the engine that failed in this case constitute a single product or two distinct products?"

For the reasons which follow, we answer question number one in the negative and question number two in the affirmative. Concerning question number three, we conclude that the engine and airframe in this case constitute a single product.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff, Trans States Airlines, is a common carrier providing scheduled air service to the public. Defendant, Pratt & Whitney Canada, is a manufacturer of gas turbine engines for use on commercial aircraft.

In 1988 defendant manufactured the Pratt & Whitney PW120 engine bearing the serial number 120656. Defendant sold the engine new to Societe Nationale Industrielle Aerospatiale, Usine de Toulouse, Service de Comptabilte (Aerospatiale), a large French aircraft manufacturer, under a written sales contract that included an express warranty clause. The engine was sold with its own operating and maintenance manuals prepared by defendant. Aerospatiale incorporated the engine into one of its ATR 42-300 airplanes, N425TE, which it then sold to McDonnell Douglas Finance Corporation (MDFC), passing defendant's warranty through to MDFC. MDFC then leased the plane to a company called GPA ATR Inc. (GPA), which in turn subleased the plane to plaintiff in this cause. The engine was warranted separate and apart from the Aerospatiale airframe warranty.

Although the engine had passed through a number of hands between plaintiff and defendant, the engine warranty ran directly to plaintiff. It appeared as section 4(a) of the sales contract between defendant and Aerospatiale and provided for repair or replacement of the engine for a defect discovered within the first 90 days or 150 flight hours of operation, whichever occurred first.

Section 4(d) of the sales contract made this express warranty the "Buyer's" exclusive remedy, in lieu of any implied warranties and "any obligation, liability, right, claim, or remedy in contract or tort, whether or not arising from Seller's negligence, actual or imputed." A subsequent warranty and service agreement modified the express warranty, extending it to 1,000 flight hours, 1,000 flights, or six months, whichever occurred last.

The sublease agreement was solely between plaintiff and GPA. Pursuant to its terms, at the end of the lease term, plaintiff was obligated to return the aircraft with two engines. The agreement further provided that, upon return of the aircraft, the engines need not be the original engines which had been installed on the airframe. As per the agreement, a Pratt & Whitney PW120 engine certified for use on an ATR 42-300 was interchangeable with any other Pratt & Whitney PW120 engine.

On July 17, 1991, aircraft ATR 42-300, N425TE, being operated by plaintiff as flight 7128, experienced an overload failure of the left engine, serial number 120656, and an in-flight fire while on approach to landing at Greater Peoria Airport in Peoria, Illinois. After executing an emergency landing, the passengers were evacuated onto the runway, and the fire was extinguished by attending ground crew. Two of the passengers suffered minor personal injury.

The post-accident investigation revealed that the engine failed after some of its interturbine duct bolts loosened and fractured in flight. Bolt fragments hit the engine's power turbine blades, damaging the blades and causing an imbalance overload of the power turbine rotor. The resulting fire damaged both the engine and the body of the aircraft.

On March 6, 1992, plaintiff filed a three-count amended complaint against defendant in the District Court for the Northern District of Illinois. The complaint alleged claims based on (1) negligence, (2) breach of warranty, and (3) strict liability, all arising out of the defect in the engine which resulted in the in-flight fire. Plaintiff prayed for damages to cover the costs of repair of the engine and the airframe, lost revenues from cancelled flights and recovery of settlement fees paid to passengers on their personal injury claims against plaintiff.

Asserting the economic loss doctrine as a bar to plaintiff's tort claims, defendant moved for summary judgment. Defendant's motion was allowed in part and denied in part. See Trans States Airlines v. Pratt & Whitney Canada, Inc., 836 F. Supp. 541 (N.D. Ill. 1993). Plaintiff subsequently motioned the court to reconsider the earlier ruling denying tort recovery of lost revenue and engine repair costs. Upon reconsideration, the court held that plaintiffs in Illinois may recover purely economic losses, including lost revenue and engine repair costs, if plaintiffs proved that (1) the product failed suddenly and calamitously, and (2) that the failure caused at least some economic losses. See Trans States Airlines v. Pratt & Whitney Canada, Inc., 875 F. Supp. 522 (N.D. Ill. 1995).

The case was subsequently set for trial. Prior to commencement of trial, however, the parties requested that the district court certify for interlocutory review the question whether defendant's gas turbine engine and the Aerospatiale airframe were an integrated unit of the plaintiff's airplane under the economic loss doctrine as set forth in the United States Supreme Court's opinion in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 90 L. Ed. 2d 865, 106 S. Ct. 2295 (1986). The question was then certified to the Seventh Circuit Court of Appeals (28 U.S.C. ยง 1292(b) (1994)), and that court agreed to accept the appeal. See Trans States Airlines v. Pratt & Whitney Canada, Inc., 86 F.3d 725, 729 (7th Cir. 1996).

The court of appeals found that the scope of Illinois' economic loss doctrine was determinative of plaintiff's contract and tort claims. The court perceived, however, that there was a need for the Illinois Supreme Court to authoritatively decide issues concerning the distinction between property damage and economic loss. Accordingly, the court of appeals certified three questions to this court. See Trans States Airlines v. Pratt & Whitney Canada, Inc., 86 F.3d 725 (7th Cir. 1996).

Certification of Questions of State Law

Our Rule 20 permits the United States Court of Appeals for the Seventh Circuit to certify a question of Illinois law to the Supreme Court of Illinois, which question may be controlling in an action pending before the Court of Appeals and upon which no controlling Illinois authority exists. 145 Ill. 2d R. 20.

ARGUMENT(S)

This court's 1982 opinion in Moorman continues to generate questions concerning the scope of the economic loss doctrine. Our answers to the Seventh Circuit's certified questions will further define the parameters and operation of the doctrine in Illinois.

As an initial matter, we note that defendant's assertion that Illinois does not recognize a sudden and calamitous occurrence as an exception to the economic loss doctrine is only partially correct. In Moorman, this court adopted the following definition of economic loss: " 'damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits-without any claim of personal injury or damage to other property.' " (Emphasis added.) Moorman, 91 Ill. 2d at 82, quoting Note, Economic Loss in Products Liability Jurisprudence, 66 Colum. L. Rev. 917, 918 (1966). Recently, in In re Chicago Flood Litigation, which like this case was presented to us with certified questions on the parameters of Moorman, we made clear that Illinois recognizes three exceptions to Moorman 's economic loss rule: (1) where the plaintiff sustains damage, i.e., personal injury or property damage, resulting from a sudden or dangerous occurrence; (2) where the plaintiff's damages are proximately caused by a defendant's intentional, false representation; and (3) where the plaintiff's damages are proximately caused by a negligent misrepresentation by a defendant in the business of supplying information for the guidance of others in their business transactions. In re Chicago Flood Litigation, 176 Ill. 2d 179, 1997 Ill. LEXIS 23, 223 Ill. Dec. 532, 680 N.E.2d 265, Nos. 80460, 80535 cons., slip op. at 3-4 (February 20, 1997), citing Moorman, 91 Ill. 2d at 86-89; see also In re Illinois Bell Station Litigation, 161 Ill. 2d 233, 240, 204 Ill. Dec. 216, 641 N.E.2d 440 (1994). "The event, by itself, does not constitute an exception to the economic loss rule. Rather, the exception is composed of a sudden, dangerous, or calamitous event coupled with personal injury or property damage." In re Chicago Flood Litigation, 176 Ill. 2d at 200.

The questions posed to us today involve construal of the first of the Moorman exceptions-the personal injury or property damage exception.

Damage to the Product Itself

The first question presented for our consideration is whether there can be tort recovery when the damage caused by a defective product is confined to the product itself. Phrased differently, the question is simply whether damage to the product itself constitutes economic loss or Moorman property damage.

Generally speaking, a defective product can cause three types of injury: personal injury, property damage, and economic loss. Personal injury is, of course, self-explanatory. In Illinois, property damage has been understood to include either damage to the defective product itself, or damage to other property. See Vaughn v. General Motors Corp., 102 Ill. 2d 431, 80 Ill. Dec. 743, 466 N.E.2d 195 (1984) (applying Moorman to permit tort recovery for damage to the product itself). We have not, since our decision in Vaughn and the Supreme Court's later decision in East River, however, addressed with particularity whether the sudden and calamitous occurrence/property damage exception continues to apply to cover damage to the product itself.

To answer the first of the certified questions, we necessarily begin our analysis at the beginning-with a review of the analysis and holdings in Moorman. In Moorman, the plaintiff purchased a grain storage tank from the manufacturer, National Tank. After several years, a crack appeared in one of the tank's steel plates. The plaintiff brought suit on a variety of claims, including strict liability in tort and negligence. The plaintiff sought damages representing the cost of repairs and loss of use of the tank.

Relying on Justice Traynor's analysis in Seely v. White Motor Co., 63 Cal. 2d 9, 403 P.2d 145, 45 Cal. Rptr. 17 (1965), this court noted the distinction between strict liability in tort and warranty rules. The court found that plaintiff's complaint was not that the tank was unreasonably dangerous, but that it had failed to live up to the plaintiff's expectations. As such, the court concluded that the plaintiff sought to recover the benefit of its bargain, an interest protected not by tort law but by contract law.

The plaintiff, asserting that recovery for economic loss was not being sought, argued that he should be permitted tort recovery because a "product defect existed [in the tank] that posed an 'extreme threat to life and limb, and to property of plaintiff and others, a defect which resulted in a sudden and violent ripping of plaintiff's tank.'" Moorman, 91 Ill. 2d at 82.

In response to the plaintiff's tort claim, this court noted its agreement with the rationale expressed in Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165 (3d Cir. 1981), which allowed tort recovery for damages arising out of a sudden and dangerous occurrence which posed a serious risk and damaged the product itself, a front end loader. The Moorman court, however, distinguished Pennsylvania Glass, finding that the damage to the tanks (Moorman), unlike the damage to the front end loader (Pennsylvania Glass), was not the type of sudden and dangerous occurrence best served by the policy of tort law. Moorman, 91 Ill. 2d at 85.

The court in Moorman held that where only the defective product is damaged, economic losses caused by the qualitative defects falling under the ambit of a purchaser's disappointed expectations cannot be recovered under a strict liability theory. By its holding, Moorman firmly established that plaintiffs suffering purely economic losses from defective products may not avoid the regulatory scheme of the Uniform Commercial Code by suing in tort. Note, The Problem of Economic Damages: Reconceptualizing the Moorman Doctrine, 1991 U. Ill. L. Rev. 1169, 1180-81. More than that, however, Moorman 's reliance on Pennsylvania Glass set the stage for the allowance of tort recovery for sudden and calamitous occurrences which cause damage to the product itself. See C. Chapman & T. Hoffman, Product Liability in Illinois VIII-1 (1993); D. Bland & R. Watson, Property Damage Caused by Defective Products: What Losses are Recoverable?, 9 Wm. Mitchell L. Rev. 1, 10-11, n.52 (1983).

A few short years after Moorman, this court decided Vaughn, which purports to be a direct application of Moorman 's sudden and calamitous occurrence/property damage exception. Before considering Vaughn, however, we pause to more ...


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