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.
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.
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."
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.
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
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.
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.
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.
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.
We hold, therefore, that when a defective product creates a situation potentially dangerous to persons or other property,
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.
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.
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,
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.
Note, Recovery of Direct Economic Loss: The Unanswered Questions of Ohio Products Liability Law, 27 Case W.Res.L.Rev. 683, 688 n. 38 (1977).
Appellant also maintains that the shutoff mechanism created an unreasonable risk of harm to the engine itself. We need not consider this point because our holding assumes the risk of harm is to persons or other property. See Russell v. Ford Motor Co., 281 Or. 587, 575 P.2d 1383, 1386 n. 5 (1978). To the extent that appellant maintains that the engine and the shutdown mechanism are separate component parts, we reject that contention here. See discussion, Part II, infra.