Product Liability Law in Construction and The Case of the Insolvent Manufacturer

Construction projects involve a great deal of products in the form of materials, equipment and other components cropped into the finish.  Those products may be part of a lien claim, at issue in a breach of contract or warranty claim, or an element of damages.  Those products may also throw construction lawyers into the unfamiliar world of product liability tort law and related specialized statutes.  This article is a case study in the complexity and challenges construction lawyers face with tort-based products liability claims in construction. 

A series of nearly identical lawsuits involving an allegedly defective fiberboard insulation material illustrated a quirk of Texas law at the crossroad of product liability and proportionate responsibility.  Working in tandem, the two statutes might prevent a claimant from recovering damages in a product liability suit when the manufacturer is insolvent or it is beyond the court’s jurisdiction.

While this discussion pivots off of Texas Product Liability and tort statutes, Texas is not the only state to enact law that provides for innocent seller indemnification. Oklahoma’s Product Liability statute, Title 12 of Oklahoma Civil Procedure Code, similarly mandates that a product manufacturer shall indemnify and hold harmless a seller against loss arising out of product liability action. Alabama’s Civil Practice Code also restricts product liability action against sellers. As of 2021, 26 states across the country have adopted some adaptation of an innocent seller statute.

Factual Background

The fiberboard product in these lawsuits was manufactured from bagasse, the fibrous material that remains after the mechanical extraction of sugar cane juice.  The 4’×8’ fiberboards were used as roof insulation.  Each roof consisted of a deck of corrugated metal panels overlaid with a built-up roof.  The latter consisted of a layer of staggered fiberboards overlaid with overlapping layers of fiberglass felts soaked in asphalt and covered with gravel.  Building owners alleged that the fiberboards shrank and curled after installation, and that they emitted a corrosive compound that corroded the metal decks.

The alleged shrinking and curling of the fiberboards purportedly stressed and tore the felts at the fiberboard laps (i.e., the edges), creating “split lines” and “ridges” that tracked the fiberboard laps, measuring up to tens of feet in length, and were supposedly the source of countless water leaks into the buildings.  Owners also alleged that the fiberboard corroded the metal decks, even after just a few years of service.  The corrosion would vary significantly in intensity.  Completely corroded areas of metal decking coexisted with pristine surfaces a few feet away.  Compounding the issue, the alleged corrosion remained hidden beneath the built-up roof and its presence could only be ascertained by coring the built-up roof or tearing it off.

The Construction Contractual Chain and The Parties

In these lawsuits, the building owner (the “Owner”) had a contract with a general contractor (“GC”) for the construction of the entire building.  The GC, in turn, had a subcontract with a roofing subcontractor (the “Roofer”) that installed the built-up roof.  The roofing subcontractor purchased the fiberboard and the membrane materials from a construction material supplier (the “Supplier”), who purchased the fiberboard from an apparent manufacturer (the “AM”), who purchased it from the real manufacturer (the “Manufacturer”).  See Chart 1.

The Owner alleged breach of contract and breach of express warranty claims against the GC and the Roofer, and negligence and product liability claims against the Roofer, the AM, and, in some cases, the Supplier.  The tort claims survived summary judgment challenges based on the economic loss rule because even though Texas law bars negligence and product liability claims when the injury is confined to the object of the contract, it arguably allows these claims when the injury is outside a subcontract. The Owner also filed a product liability claim against the Manufacturer in early lawsuits, but these claims soon ceased after the Manufacturer sought bankruptcy protection.

Chart 1.  Construction contractual chain

1. Building Owner
2. General Contractor (“GC”)
   
3. Roofing Subcontractor (“Roofer”)
   
4. Fiberboard Supplier
   
5. Fiberboard Apparent Mfr. (“AM”)
   
6. Fiberboard Manufacturer

Texas’s Product Liability Statute

Under Texas’s Product Liability statute, Chapter 82 of the Texas Civil Practice & Remedies Code, a product manufacturer must indemnify and hold harmless an innocent seller in a product liability suit.  The innocent seller is not liable to the plaintiff unless the manufacturer is insolvent or not subject to the jurisdiction of the court.  The statute defines the seller as “a person who is engaged in the business of distributing or otherwise placing, for any commercial purpose, in the stream of commerce for use or consumption a product or any component part thereof.”  Trivially, this definition encompasses apparent manufacturers, i.e., persons that sell the product under its brand name, and suppliers.  Texas courts have held that a subcontractor that installs the product is a seller, but not a general contractor.

The Manufacturer in these lawsuits had been liquidated, and the Owner sued the AM, the Supplier (in some instances) and the Roofer that installed the built-up roof.  Therefore, the Owner’s recovery under the tort claims depended on its ability to recover from these two or three parties.

Under Texas law, an apparent manufacturer does not stand in the shoes of the insolvent manufacturer.  Liability under Chapter 82 does not percolate down the distribution chain if the manufacturer is insolvent.  Instead, it is apportioned among the sellers of the product.  This apportionment is governed by Chapter 33 of the Civil Practice & Remedies Code (Proportionate Responsibility).  Under this statute, the trier of fact apportions responsibility for a tort claim among the claimant, the defendants, parties that have settled, and responsible third parties.  Under Chapter 33, a responsible third party is a non-party to the lawsuit that is designated by a defendant as somehow responsible for the injury that forms the basis of the claims.  For example, in a three-car accident, the defendant might designate the unknown driver who fled the scene as a responsible third party.  A claimant cannot recover from a responsible third party, and a finding of liability may not be used against the responsible third party in any other proceeding.

As noted, Chapter 82 protects claimants from insolvent or out-of-state manufacturers by shifting the latters’ liability to the sellers.  But, this designation does not prevent these sellers from pointing the finger back at the manufacturer by designating it as a responsible third party.  Because a claimant cannot recover from a responsible third party, the implication is that Chapter 33 can defeat Chapter 82—at least to the extent that the jury apportions liability to the absentee manufacturer.  In these lawsuits, the defendants designated the Manufacturer as a responsible third party.  Even if the Owner prevailed, it would have recovered nothing in a Pyrrhic victory if the jury found that the Manufacturer was responsible for the defective fiberboard.  This outcome, if upheld, would clearly defeat the intent of § 82.003(a)(7).  It would also be inconsistent with the original Texas contribution statute wherein solvent defendants cover for their insolvent peers.

Be that as it may, at least one federal district court has held that Chapter 33’s responsible third party assignation trumps § 82.003(a)(7).  As explained elsewhere, the court in King of Fans, LP

reasoned that § 82.003 was “a defensive device” and not an “apportionment-of-responsibility” scheme, as is Chapter 33.  The court also noted that Chapter 33 specifically excepted a “seller eligible for indemnity under [Chapter 82],” but not an insolvent manufacturer or one beyond the court’s jurisdiction.  This statutory provision implied that the Texas Legislature knew of the two chapters’ interaction and saw no need to list other exceptions.  Another federal district court dealing with the same issue noted that Chapter 33 had been amended in 2003 to remove language that required RTPs to be subject to the court’s jurisdiction.

Significantly, these two federal district court decisions (King of Fans, LP and Dhaliwal) do not cite to state authorities, and no state appellate court has opined on this issue.

None of these lawsuits made it to trial and this interplay of Texas Civil Practice & Remedies Code Chapters 33 and 82 was not tested in these cases.  Nonetheless, it remains an issue of concern for plaintiffs who hold claims against manufacturers that are insolvent or beyond the court’s jurisdiction.