OPINION OF THE COURT
ADAMS, Circuit Judge.
In litigation involving an alleged defective product, the tort theory of products
Pennsylvania Glass Sand Corporation (PGS) initiated this diversity action against Caterpillar Tractor to recover damages it incurred as a result of a fire in a front-end loader purchased in 1971 from the manufacturer, Caterpillar.
The loader did not come equipped with a system to suppress or extinguish fires. In addition, the operating instructions were silent regarding the steps or precautions that should be taken in the event a fire occurred in the loader's hydraulic system.
For approximately four years, PGS used the loader daily at its quarry in Mapleton, Pennsylvania, without incident. Throughout this period of heavy use the loader did not evidence any defects of quality or other problems that would render the machine unfit in any way for its intended purpose. On September 20, 1975, however, while the machine was in operation, a fire suddenly broke out in the front portion near the hydraulic lines. The operator hastily evacuated the machine, but neglected to turn off the motor. Consequently, hydraulic fluid continued to fuel the fire, and the conflagration quickly spread. As a result of the fire the loader was severely damaged. PGS incurred expenses of approximately $170,000 for repairing the machine and for securing a temporary replacement. In the course of repairing the loader PGS outfitted it with automatic fire suppression equipment, including instructions to guide operators in the event of fire.
In June, 1979, PGS filed this suit in federal court against Caterpillar, seeking as damages the amount spent on repair and replacement. The complaint advanced theories of negligence and strict tort liability under § 402A of the Restatement (2d) of Torts.
There is no allegation that the defect caused the fire; rather, the theory of PGS is that the faulty design enhanced the injury stemming from the accidental fire. This defective design theory is a recognized basis of recovery in tort law, grounded on the premise that a manufacturer's failure to provide safety devices or other elements of a safe design may create an unreasonable risk of harm within the meaning of § 402A. See, e. g., Heckman v. Federal Press Co., 587 F.2d 612, 617 (3d Cir. 1978). As part of the duty imposed by § 402A to market products free of unreasonably hazardous conditions, a manufacturer may be obligated to take reasonable steps to design and produce a product that will minimize the injuries flowing from unavoidable accidents. See, e. g., Huddell v. Levin, 537 F.2d 726, 735 (3d Cir. 1976); Dawson v. Chrysler Corp., 630 F.2d 950 (3d Cir. 1980), cert. denied, 450 U.S. 959, 101 S.Ct. 1418, 67 L.Ed.2d 383 (1981); Wagner v. International Harvester Co., 611 F.2d 224, 230 (8th Cir. 1979).
Caterpillar moved for summary judgment, asserting that the items for which PGS sought damages — repair and replacement costs — constituted economic loss, and that such loss was not recoverable in tort. In addition, Caterpillar claimed that its liability was limited by the express warranty that had accompanied the loader. The warranty confined the purchaser's remedy to replacement of defective parts, and specifically excluded recovery for economic loss.
The district court granted summary judgment in favor of Caterpillar, reasoning that Pennsylvania courts would follow the evolving majority view that purely economic losses are encompassed within the policy of warranty law and therefore should not be recoverable in tort actions. Thus, the district judge concluded that the plaintiff could not succeed in its claim as a matter of law. Under this approach, it was unnecessary for the court to consider the effect of Caterpillar's warranty in limiting its liability.
In this appeal, PGS urges that the injury it suffered was not economic loss. Rather, PGS maintains that it sustained physical injury to its property occasioned by a catastrophic event. It then contends that Pennsylvania law clearly permits recovery in tort actions for such physical injury.
No court in Pennsylvania has specifically addressed whether accidental injury to the defective product itself should be regarded as an economic loss recoverable only in a contract warranty action. There is, however, dicta from the Pennsylvania Supreme Court that bears on this question. Moreover, decisions from lower Pennsylvania courts have permitted tort recovery in analogous situations, although they do not discuss the contract versus tort implications of such recovery. In the absence of an authoritative pronouncement from the state's highest court, the task of a federal tribunal is to predict how that court would rule. To make this prognostication, we are not inflexibly confined by dicta or by lower state court decisions, although we should look to such statements as indicia of how the state's highest court might decide. See McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 662 (3d Cir. 1980). The policies underlying the applicable legal doctrines, the doctrinal trends indicated by these policies, and the decisions of other courts may also inform our analysis. In addition, we may consult treatises, the Restatement, and the works of scholarly commentators. See, e. g., McKenna, supra; Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp., 626 F.2d 280, 285 (3d Cir. 1980).
We turn at the outset to the only pronouncement by the Pennsylvania Supreme Court on the subject. In Kassab v. Central
PGS relies heavily on the dicta in this footnote to argue that the Pennsylvania Supreme Court would permit a tort recovery in the present case. Kassab was decided at an early stage in § 402A jurisprudence, before courts acquired a fuller appreciation of the proper demarcation between warranty actions and tort cases.
The tort law of products liability has its roots in the contract cause of action for breach of warranty.
Based on these policies, some courts have concluded that injuries that can be classified as economic loss should not be recoverable in tort.
This does not mean, however, that every prayer for relief that seeks the cost of repairing a damaged product entails the type of economic loss traditionally encompassed within warranty law. Commentators and several courts have carefully distinguished economic loss from physical harm or property damage. The line that is drawn usually depends on the nature of the defect and the manner in which the damage occurred. Defects of quality, evidenced by internal deterioration or breakdown, are assigned to the economic loss category, while
The seminal case that recognized and applied this distinction is Seely v. White Motor Co., 63 Cal.2d 9, 403 P.2d 145, 45 Cal.Rptr. 17 (1965). In Seely the owner of a truck sued the manufacturer under a breach of warranty theory, seeking a return of the purchase price and profits lost by virtue of a bouncing defect that rendered the truck unusable in his business of heavy-duty hauling. The plaintiff also sought recovery under § 402A for the costs of repairs incurred when the brakes failed and caused an accident that damaged only the truck. Chief Justice Traynor, writing for the California Supreme Court, distinguished between recovery for the loss of value from a defect in a product, and damage to the product caused by the defect. He declared that the first type of injury constituted economic loss that was recoverable only under warranty law, because the activity complained of essentially involved a breach of representations of quality or suitability.
Courts in most states have followed Seely and have held that economic loss caused by qualitative defects cannot be recovered in a tort action.
Economic loss frequently involves only damage to the defective product itself, with no attendant injury to persons or other property. It is sometimes difficult to classify the situation in which the product alone is damaged as properly falling within the confines of either tort or contract law.
The most comprehensive analysis of this distinction occurs in the case of Cloud v. Kit Mfg. Co., 563 P.2d 248 (Alaska 1977). The Clouds purchased a mobile home that came equipped with polyurethane carpet padding. The padding ignited, and the home caught fire and was severely burned. The court framed the issue as that of the propriety of a strict liability tort claim to redress direct property damage in the absence of personal injuries.
Distinguishing a prior decision
Several principles and trends may be distilled from this analysis of policy and the decisions of other courts. Although strict liability in tort developed out of the law of warranties, the courts of most states have recognized that the principles of warranty law remain the appropriate vehicle to redress a purchaser's disappointed expectations when a defect renders a product inferior or unable adequately to perform its intended function. See note 17, supra. These courts have classified the damages consequent to qualitative defects, such as reduced value, return of purchase price, repair and replacement, or lost profits, as economic loss, and have relegated those who suffer such commercial loss to the remedies of contract law.
On the other hand, almost all courts have adopted the view that the benefit-of-the-bargain approach of warranty law is ill-suited to correct problems of hazardous products that cause physical injury.
In cases such as the present one where only the defective product is damaged, the majority approach is to identify whether a particular injury amounts to economic loss or physical damage. In drawing this distinction, the items for which damages are sought, such as repair costs, are not determinative. Rather, the line between tort and contract must be drawn by analyzing interrelated factors such as the nature of the defect, the type of risk, and the manner in which the injury arose. These factors bear directly on whether the safety-insurance policy of tort law or the expectation-bargain protection policy of warranty law is most applicable to a particular claim.
We now return to Pennsylvania decisions to predict whether that state will extend the dicta in Kassab to allow recovery in tort at least to the extent permitted in Seely and Cloud, or will choose instead to follow the minority approach of treating all claims by purchasers of a damaged product as contract disputes.
The thrust of the dicta in Kassab was that hazardous products which cause damage to themselves are analytically encompassed within the policy of tort law to the same extent as dangerous items that also accidentally maim people or other property.
Recent decisions by lower courts in Pennsylvania, and by this Court sitting in diversity, appear to implement this distinction. One such case is Cornell Drilling Co. v. Ford Motor Co., 241 Pa.Super. 129, 359 A.2d 822 (1976), which dealt with an occurrence similar to the accident that PGS suffered in the present case. In Cornell Drilling the commercial plaintiff purchased a truck from the defendant, and after a few days of use the truck caught fire while unoccupied. Since no individual was injured, plaintiff sought recovery under § 402A only for the property damage to the defective truck. Without discussing the question of economic loss, the court allowed a tort recovery for the physical harm to the truck. The absence of any scrutiny devoted to the economic loss issue is not surprising, inasmuch as tort actions to recover for the consequences of defects that pose a fire hazard are commonplace. In Cornell Drilling the court relied on MacDougall v. Ford Motor Co., 214 Pa.Super. 384, 257 A.2d 676 (1969). MacDougall upheld a verdict for the plaintiff in a § 402A action, awarding recovery for damage to a defective automobile. The car's steering mechanism had failed while plaintiff was driving on the highway, but fortunately only the car was damaged. Once again, the court appeared to regard a tort recovery for damage to the defective product as nothing extraordinary.
This Court had occasion to consider how Pennsylvania law would balance "the competing gravitational pulls of the U.C.C. and
Although a direct resolution of the issue presented in the case at hand was not necessary to the decision in Posttape, implicit in that opinion is a recognition of the difference between claims for economic loss and for physical damage to the defective product. In addition, the opinion alluded to the policy distinctions that make the U.C.C. the proper vehicle for redressing losses occasioned by impairment of quality, and make § 402A the superior device for rectifying the consequences of dangerously defective products. Id. at 755.
The decision in Posttape is therefore consistent with the demarcation between tort law and contract principles adopted in Seely and Cloud, and suggested by Dean Prosser and other commentators. To the extent the Pennsylvania Supreme Court would treat Posttape as a relevant precedent along with the decisions in other jurisdictions, Posttape underscores our conclusion that Pennsylvania would classify damage to a defective product resulting from an unreasonably dangerous condition as physical injury compensable under § 402A.
Turning to the circumstances alleged by PGS, we must decide whether Pennsylvania courts would consider the claimed damage to the loader as economic loss or physical harm.
Caterpillar argues that the injury amounts to economic loss because only the defective product was harmed and damages are sought solely for the costs of repair and temporary replacement. They cite the portion of this Court's definition of economic loss in Jones & Laughlin, supra, where we mentioned "damages for inadequate value, costs of repair and replacement of the defective product." 626 F.2d at 284. Jones & Laughlin, however, is distinguishable, since it involved a defect of quality and suitability.
As we discussed previously,
In contrast, the complaint does not appear to implicate the policies of warranty law. Significantly, PGS has not alleged that the loader was of poor quality or was otherwise unfit to perform its job. To the contrary, PGS asserts that the machine operated without incident for several years. Thus, PGS does not seek to protect its expectation interests in the equipment's suitability or to secure the benefit of its bargain for a front-end loader. It received the workable loader that it sought; however, the machine allegedly turned out to contain a hazardous defect. The law does not require purchasers to bargain for a safe product, because the manufacturer has a legally imposed duty to provide such an item.
For the foregoing reasons, it would appear that Pennsylvania law would not treat the damage in this case as economic loss recoverable solely in a warranty action. Rather, we believe that Pennsylvania courts would regard the injury stemming from the allegedly hazardous defect in the loader as the sort of physical injury to property compensable under tort law.
Caterpillar counters that to permit a tort recovery in this case would be to undermine the U.C.C. To substantiate their claim that the U.C.C. should govern, Caterpillar points out that the parties are equally powerful commercial entities that entered into a transaction at arm's length. Any suggestion that commercial purchasers of hazardously defective products must resort exclusively to U.C.C. remedies and are barred from recovery in the realm of tort law is at odds with the policies underlying tort and contract principles. As discussed above, contract law is largely inapposite to the problem of hazardous defects, because purchasers are not expected to bargain for a safe product — they have a right to such a purchase correlative to the manufacturer's duty to provide safe equipment. Moreover, Pennsylvania law disapproves of technical or rigid distinctions between contract cases and tort cases. See, e. g., Hahn v. Atlantic Richfield Co., 625 F.2d 1095 (3d Cir. 1980); Kassab v. Central Soya, 432 Pa. 217, 246 A.2d 848 (1968). Accordingly, a differentiation between the cases that must be brought under the U.C.C. and those that may proceed in tort, based on the nature of the plaintiff, would not comport with the tenor of Pennsylvania decisions.
We therefore conclude that the Pennsylvania courts would reject the minority rule
Caterpillar's final contention is that the warranty that accompanied the loader defines the exclusive remedy available to the purchaser, and therefore shelters it from the tort liability that PGS seeks to impose.
In Keystone Aeronautics Corp. v. R. J. Enstrom Corp., 499 F.2d 146 (3d Cir. 1974), this Court held that the law of Pennsylvania permits parties contractually to disclaim responsibility for any potential liability under § 402A, but they must expressly spell out their intention to do so. We declared in Posttape v. Eastman Kodak, 537 F.2d 751
Since the type of damages that PGS seeks may be recovered in a tort action under Pennsylvania law, the award of summary judgment to Caterpillar was improper. PGS should be afforded an opportunity to prove the elements of its tort cause of action for defective design. The question of the effect of the Caterpillar warranty on tort liability must also be explored by the factfinder. The judgment of the district court will therefore be vacated, and the matter remanded for action consistent with this opinion.
Pennsylvania adopted this provision in Webb v. Zern, 422 Pa. 424, 220 A.2d 853 (1966).
Whether Pennsylvania would adopt Seely or Santor, however, is not dispositive in the present case, because of our conclusion that even under the more restrictive liability rule in Seely, the damages that PGS seeks may be recovered in tort. See Part V infra.
Id. at 918 (footnotes omitted).
Pennsylvania courts have not yet had the occasion to define what constitutes "economic loss." There is reason to believe, however, that the state's courts would follow the definition promulgated by the commentators — a definition almost universally adhered to by other courts. See, e. g., Jones & Laughlin Corp. v. Johns-Manville Sales Corp., 626 F.2d 280 (3d Cir. 1980).
W. Prosser, Law of Torts § 101, at 665 (4th ed. 1971) (footnotes omitted) (emphasis added).
45 Cal.Rptr. at 23, 403 P.2d at 151.
Cases following the approach set forth in Santor, supra, fn. 12, permitting tort recovery for economic loss include: Mead Corp. v. Allendale Mut. Ins. Co., 465 F.Supp. 355 (N.D.Ohio 1979) (Ohio law; strict liability); Berg v. General Motors Corp., 87 Wn.2d 584, 555 P.2d 818 (1976) (strict liability); City of La Crosse v. Schubert, Schroeder & Assoc., Inc., 72 Wis.2d 38, 240 N.W.2d 124 (1976) (strict liability); Iacono v. Anderson Concrete Corp., 42 Ohio St.2d 88, 326 N.E.2d 267 (1975) (strict liability); Cova v. Harley Davidson Motor Co., 26 Mich.App. 602, 182 N.W.2d 800 (1970) (strict liability).
See also Long v. Jim Letts Oldsmobile, Inc., 135 Ga.App. 293, 217 S.E.2d 602 (1975) (buyer may not recover reduced value of car that "ran hot" in tort action); Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976) (defects made trailer unsuitable as home; court disallows tort recovery); Two Rivers Co. v. Curtiss Breeding Svc., 624 F.2d 1242 (5th Cir. 1980) (Texas law).
There are also two analogous decisions denying tort recovery for property damage: Nebraska has a unique version of strict tort liability, allowing recovery solely for injuries "to human beings rightfully using that product." Hawkins Construction Co. v. Matthews Co., 190 Neb. 546, 209 N.W.2d 643 (1973). A federal district court, without explanation, interpreted South Carolina law to preclude application of § 402A to the defective product itself. Cooley v. Salopian Indus., Ltd., 383 F.Supp. 1114 (D.S.C.1974).
On the other hand, cases following the Seely-Cloud approach to physical injury include: Suvada v. White Motor Co., 32 Ill.2d 612, 210 N.E.2d 182 (1965); Weber v. Fidelity & Cas. Ins. Co., 259 La. 599, 250 So.2d 754 (1971); State Stove Mfg. Co. v. Hodges, 189 So.2d 113 (Miss.1966), cert. denied, 386 U.S. 912, 87 S.Ct. 860, 17 L.Ed.2d 784 (1967); Rosenau v. City of New Brunswick, 51 N.J. 130, 238 A.2d 169 (1968) (follows the aspect of Seely dealing with physical harm to property, noting that economic loss issue presented in Santor was not implicated); Mike Bajalia, Inc. v. Amos Construction Co., 142 Ga.App. 225, 235 S.E.2d 664 (1st Div. 1977).