NORTHERN POWER & ENG. v. CATERPILLAR TRACTOR

OPINION

CONNOR, Justice.

In this products liability case we are asked to determine whether the superior court erred by characterizing appellant's injury as "economic loss" rather than "property damage." This determination is necessitated by our holding in Morrow v. New Moon Homes, Inc., 548 P.2d 279, 286 (Alaska 1976) that "strict liability in tort ... does not extend to the consumer who suffers only economic loss."

The essential facts are not in dispute. In 1968, appellant, Northern Power & Engineering Corp. [Northern Power] purchased from Northern Commercial Co. [NC] a diesel powered electrical generator designed and manufactured by Caterpillar Tractor Co. [Caterpillar]. On December 13, 1973, the engine failed, resulting in severe damage to the machine but causing no additional injury to persons or property.

In January, 1978, NC filed suit against Northern Power alleging that money was due in the amount of approximately $13,000 for services performed in the repair of the engine. In June, 1978, Northern Power was allowed to join Caterpillar as a third party defendant, alleging causes of action based on "common law" warranty, negligent breach of contract and strict products liability. Northern Power alleged that the damage was caused by failure of the low oil pressure shut down system, which caused the engine to seize when oil pressure dropped to a point insufficient to lubricate the moving parts of the machine. Caterpillar promptly moved for summary judgment.

Following full briefing and oral argument on the issues, the court granted summary judgment on all three causes of action. On the warranty cause of action the court held that, since all contracts for the sale of goods are governed by the Uniform Commercial Code, there can be no implied warranties separate and apart from that code. On the negligence cause of action the court held that a cause of action was stated but that it was barred by the two year statute of limitations applicable to "economic loss" caused by a defective product. AS 09.10.070.1 On the strict liability cause of action the court found that the injury suffered by Northern Power constituted "economic loss" not "property damage" and, therefore, held that damages were not recoverable on a strict liability theory.

Northern Power does not appeal the court's decision on the warranty cause of action. Nor does it dispute that a finding that the injury to the machine was "property damage" is necessary to success on its causes of action for negligence and strict liability. The sole ground upon which it appeals is that the court erred in characterizing the injury to its machine as "economic loss."

I

Ever since the landmark decisions in Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965) and Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965), the case law has been divided on whether economic loss is recoverable in an action for strict products liability.2 This split in judicial thinking is primarily a result of different attitudes as to what area of law should govern.

In Seely, Chief Justice Traynor applied contract principles and concluded that economic loss should remain under the jurisdiction of the law of sales as that law is defined in the Uniform Commercial Code. In essence, the Seely court held that where injury involves only economic loss, as where the product itself fails to function, the purchaser has merely lost the benefit of his bargain. His recovery must therefore rest on warranty, not strict liability in tort.

In contrast, Santor extends strict liability in tort to direct economic loss. Relying on its landmark decision in Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69 (1960), the New Jersey court concluded that consumers are inherently unable to bargain at arms length with manufacturers and, therefore, cannot rely on warranty law to protect their interests. Protection can only be afforded through the creation of a tort remedy.

In Alaska, the matter was put to rest in Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976). In Morrow, the buyers of a mobile home sued the manufacturer for damages resulting from various defects in the product including a defective furnace, cracked windows, a leaky bathroom and a leaky roof. Because plaintiff's cause of action was premised on strict liability in tort, we reviewed the Seely and Santor decisions and concluded that Seely offered the preferable approach.3

One year later, in Cloud v. Kit Manufacturing Co., 563 P.2d 248, 251 n. 7 (Alaska 1977), we unanimously reaffirmed the holding in Morrow. In Cloud, which also involved dissatisfied purchasers of a mobile home, plaintiffs claimed that a polyurethane foam rug padding, which was provided to the Clouds as part of their "mobile home package" and which the Clouds stored in a crawl space beneath their mobile home, ignited, causing the mobile home to catch fire and burn. In reaching the conclusion that the resulting injury constituted "property damage," we attempted to clarify the distinction between property damage and economic loss:

Id. at 251. Footnote 8 of that opinion quotes the following passage from Note, Economic Loss and Products Liability Jurisprudence, 66 Colum.L.Rev. 917, 918 (1966):

Relying on the above language, appellant maintains that the engine failure in this case was a "sudden and calamitous" occurrence. Appellant argues that the circumstances of the present case are analogous to the radiator-caused store fire mentioned in footnote 8, supra, and the flammable padding fire which destroyed the Cloud's mobile home. We disagree.

There is nothing magical about the phrase "sudden and calamitous."4 Our purpose in using that phrase was merely to illustrate those instances in which "property damage" is most likely to be found and, in so doing, to draw the line between those injuries which properly find their remedy in tort and those which are more appropriately governed by contract principles.5

Contract law has been traditionally concerned with the fulfillment of reasonable economic expectations. Tort law, on the other hand, is concerned with the safety of products and the corresponding quantum of care required of a manufacturer.6 By distinguishing between sudden and calamitous injury on the one hand and less dramatic forms of injury on the other, Cloud draws the line between products which simply do not live up to their economic expectations and those which, although they did not break down in a manner which proved hazardous to persons or to other property, could foreseeably have done so. This distinction was explained in a recent Oregon case, Russell v. Ford Motor Co., 281 Or. 587, 575 P.2d 1383, 1386-87 (Or. 1978):

The distinction between dangerous and nondangerous products was at the heart of Fentress v. Van Etta Motors, 157 Cal.App.2d Supp. 863, 323 P.2d 227 (1958), the case from which the "sudden and calamitous" language was originally drawn. There the court framed the issue as follows:

323 P.2d at 228.

We recognized this distinction in Cloud and used it as a basis for distinguishing our opinion in Morrow. In Cloud we said:

563 P.2d at 251.8

We hold, therefore, that when a defective product creates a situation potentially dangerous to persons or other property,9 and loss occurs as a result of that danger, strict liability in tort is an appropriate theory of recovery, even though the damage is confined to the product itself. In order to recover on such a theory plaintiff must show (1) that the loss was a proximate result of the dangerous defect10 and (2) that the loss occurred under the kind of circumstances that made the product a basis for strict liability.11

In the present case, appellant alleges that the engine sustained damage as a result of a defective low oil pressure shutdown mechanism which failed to operate properly after an oil leak occurred. As a result of the engine running without sufficient oil, the engine overheated and seized. There is no evidence in the record that such a defect presented a danger to persons or other property and no evidence of violence, fire, collision with external objects, or other calamity as a result of this failure. The engine apparently just stopped operating.12 Under the guidelines we have enunciated, appellant's loss is, therefore, entirely economic.

Cases cited by appellant do not persuade us otherwise. To the contrary, these cases support our holding. John R. Dudley Construction Co. v. Drott Manufacturing Co., 412 N.Y.S.2d 512, 66 A.D.2d 368 (1979), involved the sudden collapse of a construction crane which caused serious damage to the crane but no damage to persons or other property. In finding that the resulting injury constituted "property damage" the court distinguished Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965) in the following manner:

412 N.Y.S.2d at 515. Likewise, in Gherna v. Ford Motor Co., 246 Cal.App.2d 639, 55 Cal.Rptr. 94 (1966), the injury — spontaneous conflagration of a car — was also of a type potentially hazardous to persons or other property. In both cases, the criteria we have enunciated would have been met and recovery would have been appropriate. For reasons we have already stated, these cases are not analogous to the case at bar.

II

The only remaining question is whether the low oil pressure shutoff mechanism can be considered a component part which, due to defect, damaged another component part, the engine, so as to result in damage to "other" property of the appellant. While we think this proposition may have some validity where the components are sold separately or are provided by different suppliers,13 we find no justification or support for such a rule where both components are provided by one supplier as part of a complete and integrated package.14 Since all but the very simplest of machines have component parts, such a broad 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.

In this case, Northern Power is suing one manufacturer, Caterpillar, who, according to the findings of the trial court, sold the generator to NC "as a package ... [not] as individual component parts." We, therefore, reject this contention.

AFFIRMED.