January 29, 2016

Admiralty Products Liability and the Economic Loss Doctrine

The economic loss doctrine has many applications. This Practice Point explores just one example of how it can be utilized in certain marine products liability cases to eliminate claims brought under a tort theory of recovery where the only damage alleged to the vessel is economic damage to the vessel itself. This can be significant because the remaining available rights of recovery under contract/warranty may be significantly less favorable than those available under a more expansive tort scheme.

The Adoption of the Economic Loss Doctrine into Admiralty Law
In its seminal decision East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986), the Supreme Court held that “a commercial manufacturer has no duty under either a negligence or strict products liability theory to prevent a product from injuring itself.” In that case, the issue was whether the buyer of a ship could recover on both contract and tort claims against the seller when turbines on the ship malfunctioned, resulting in damage to only the turbines themselves. “East River established that parties in the chain of distribution of a product must rely upon their contractual remedies for economic losses and may not seek such recovery in tort.” Sisson v. Hatteras Yachts, Inc. 1991 U.S. Dist. LEXIS 4020 (1991).

The Vessel Will Generally Be Considered the “Product”
The Sisson Court, in considering the application of the economic loss rule, held that “The finished vessel delivered by the manufacturer is the product, and components of the vessel may not be separated.” See also Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F.2d 925, 928 (5th Cir. 1987), cert. denied, 485 U.S. 1007 (1988); Nicor Supply Ships Associates v. General Motors Corp., 876 F.2d 501, 505 (5th Cir. 1989). “In East River, the vessel owner made the same argument (regarding the vessel as ‘other property’) …The court rejected the shipowner’s argument “Since all but the very simplest of machines have component parts, [a contrary] holding would require a finding of “property damage” in virtually every case where a product damages itself. Such a holding would eliminate the distinction between warranty and strict products liability”” East River at 106. (additional citations omitted). The court in Shipco noted that “Shipco cites no authority in support of its position that a defect in one component of the item sold that causes damage to unrelated components of that item constitutes damage to “other property.” Shipco at 928. The Court went on to note “our own research has uncovered no authority to support this argument. A number of jurisdictions, however, have rejected Shipco’s argument.” Id. (Additional citations omitted.) Ultimately, the issue of whether the damage is to only the vessel or itself or also includes damage to some “other property” is critical in terms of what claims can be eliminated in reliance on the economic loss doctrine.

Under Admiralty Law, the Doctrine Has Been Applied in Both the Commercial and Consumer Context
While the Supreme Court has not weighed in with a final determination, some courts have held that the economic loss doctrine under admiralty law applies in both the commercial (i.e., to commercial ships) and the consumer (i.e., to recreational or pleasure yachts) contexts. For example, in Somerset Marine. Inc. v Forespar Products Corp., 876 F. Supp. 1114 (1994), the Court ruled that the holding from East River also applies in a consumer context involving a pleasure yacht. Alloway v. General Marine Industries, L.P., 695 A.2d 263 (N.J. 1997), involved the sinking of a luxury yacht at the dock following which the purchaser of the yacht filed tort actions against the yacht’s manufacturer. In that case the Supreme Court of New Jersey held that the economic loss doctrine would in fact apply to a consumer transaction. Id.

Conclusion
It is important to keep in mind that the East River doctrine is complex and nuanced with various applications in both the marine context and beyond. When faced with an admiralty products liability action that includes tort claims—under strict liability or negligence—a careful consideration of the application of the economic loss doctrine is warranted where the damages alleged include only economic damages to the vessel/yacht itself.

Jody D. McCormack is a maritime lawyer in San Francisco, California.


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