Sea Land Ser Inc v. Gen Elec Co

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit

1-15-1998

Sea Land Ser Inc v. Gen Elec Co
Precedential or Non-Precedential:

Docket 96-5331

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Filed January 15, 1998

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 96-5331 & 97-5287

SEA-LAND SERVICE, INC.

v.

GENERAL ELECTRIC COMPANY

Sea-Land Service, Inc.
("Sea-Land"),

Appellant.

On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 95-cv-01378)

Argued December 12, 1997

Before: GREENBERG, ROTH, and SEITZ, Circuit Judges

(Opinion Filed: January 15, 1998)

Jeffrey L. Reiner, Esquire (Argued)
Geralyn A. Boccher, Esquire
Reiner & Koles, P.C.
30 Park Place, Suite 301
Morristown, NJ 07960
Attorneys for Appellant
 Nicholas S. Brindisi, Esquire
1200 Route 46 West
Clifton, NJ 07013

Edward C. DeVivo, Esquire (Argued)
Edward Griffith, Esquire
Raymond L. Mariani, Esquire
Dombroff & Gilmore
40 Broad Street
Suite 2000
New York, NY 10004-2382
Attorneys for Appellee

OPINION OF THE COURT

ROTH, Circuit Judge:

Appellant Sea-Land Service, Inc. (Sea-Land) has appealed
the district court's grant of summary judgment in favor of
General Electric Company (GE) on Sea-Land's tort claims in
admiralty for economic loss. The district court dismissed
the case based on the holding of the Supreme Court in East
River Steamship Corp. v. Transamerica Delaval, Inc., 106
S.Ct. 2295 (1986), that under maritime law no claim lies for
either negligence or strict products liability when a
commercial party alleges injury only to a product itself,
resulting in purely economic loss. Id. at 2302.

In this appeal, we must decide 1) whether a defective
part, a connecting rod, that caused damage to its
surrounding engine was separate property from the engine
or was merely a component of the engine; 2) whether East
River bars a tort claim for post-sale duty to warn under a
negligence theory when the damage is purely economic; and
3) whether East River bars a tort claim for negligent repair
when the damage is purely economic. The district court
held 1) that the rod was not separate property from the
engine, within the meaning of East River, and that East
River precluded tort recovery for economic loss as a result
of a product damaging itself; 2) that even when the injury
is only economic, there is a post-sale duty-to-warn claim if
a defendant-manufacturer had actual knowledge that the

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product was defective, but that GE did not have actual
knowledge of the defective part prior to Sea-Land's injury;
and 3) that East River bars a tort claim for negligent repair
when the damage is purely economic.

I. Facts

Sea-Land is a bareboat charterer of many vessels
including the Sea-Land Enterprise. The Enterprise was
constructed in 1980, and Sea-Land purchased it in 1988
from U.S. Lines. The Enterprise has two ship's service
generators, a ship's service turbine generator and a ship's
service diesel generator (SSDG). The Enterprise's SSDG is
powered by a GE diesel engine. The diesel engine is made
up of "life-cycle" parts, which a vessel operator would not
expect to replace, and "renewable" parts, which must be
replaced periodically. In December, 1990, Sea-Land
overhauled the Enterprise's diesel engine, procuring 105 GE
parts including eight GE master connecting rods. On
February 26, 1991, after only 47 hours of operation by the
overhauled diesel engine, it broke down, causing damage to
the engine and the engine casing.

The cause of the failure, as admitted by GE, was one of
the 8 connecting rods. The rod had failed because the
meloniting process, used to harden it, was faulty. GE
replaced all the suspect connecting rods and repaired the
engine free of charge. Coincidentally, on February 8, 1991,
eighteen days before the Enterprise engine failure, a similar
defective connecting rod had caused a diesel engine on the
United States Navy Ship Albert Meyer to break down. It
later occurred that in November 1994 the Enterprise
suffered a further breakdown of the SSDG. Sea-Land
alleges that the 1994 engine failure was at the same
location as GE's 1991 engine block repair and was due to
negligent repair by GE.

Sea-Land brought suit against GE to recover for the
losses caused by the two engine failures. In Count I, Sea-
Land alleges that the GE connecting rod was defective and
claims the profits it lost while the ship was inoperable until
the 1991 repairs had been completed. In Count II, Sea-
Land asserts that GE negligently failed to warn Sea-Land of

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a potentially defective connecting rod of which it had
knowledge by virtue of the Albert Meyer engine failure. In
Count IV, Sea-Land contends that GE breached its duty of
care to Sea-Land by negligently performing the 1991 repair.
As a result, Sea-Land claims the cost of repair of the engine
in 1994 and the profits it lost while the ship was once again
inoperable.

On April 26, 1996, the district court granted summary
judgment to GE on Count I, finding that the defective GE
rod was the proximate cause of injury to Sea Land but that
East River barred a tort claim for lost profits. On April 17,
1997, the district court granted summary judgment to GE
on all other counts, including failure to warn and negligent
repair. This consolidated appeal followed.

The district court had jurisdiction over this civil case in
admiralty. 28 U.S.C. S 1333. We have appellate jurisdiction
from final decisions of district courts. 28 U.S.C.S 1291.
Our review of a grant of summary judgment is plenary.
Public Interest Research of N.J. v. Powell Duffryn Terminals,
Inc., 913 F.2d 64, 71 (3d Cir. 1990).

II. Is The Product the Rod Or The Engine

We address first Sea-Land's tort claim for economic loss
due to a dangerously defective part manufactured by GE.
The Supreme Court in East River Steamship Corp. v.
Transamerica Delaval, Inc., 106 S.Ct. 2295 (1986), held
that, under admiralty law, a cause of action in tort does not
lie "when a defective product, purchased in a commercial
transaction malfunctions, injuring only the product itself
and causing purely economic loss." Id. at 2296. Thus, a
"manufacturer in a commercial relationship has no duty
under either a negligence or strict products-liability theory
to prevent a product from injuring itself." Id. at 2302. If
such a product is defective, the purchaser will generally
have a contract claim for breach of warranty.

In the instant case, one of the engine components, a
connecting rod, was defective and damaged other parts of
the engine. The question we must answer is "What is the
product?" If the product, within the meaning of East River,
is "a properly functioning engine," the product only caused

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economic damage, i.e., damage to itself and lost profits. If
the product is the rod, plaintiffs allege that it caused
damage to "other property," i.e., to the engine. Should this
be the case, then under East River a tort claim may lie and
the district court's grant of summary judgment on Count I
in favor of GE was erroneous.

In East River, the defendant manufactured engine
turbines, installed in cargo ships. The turbine (or a
component thereof) failed, causing damage to the turbine
itself. Plaintiff sued in tort for recovery of the cost of repair
and the lost income for the period in which the ship was
out of service. The Court explained the policy
considerations underlying tort and contract liability. Tort
liability protects people from dangerous products. In
particular, the tort theory of products liability arose from a
concern that the public needed more protection from
dangerous products than contracts or warranties could
provide. Id. at 2299-300. The tort concern with safety is
reduced, however, when a product injures only itself, id. at
2302, but does not injure persons or "other" property. The
damages then are only the loss of the value of the product
itself and the profits lost when it cannot be used. In such
a case, because there is no duty to the public in general, it
is not inequitable to limit the remedy between the parties to
what they have bargained for. The parties can agree
between themselves on the limits of their obligations and
liabilities. They can take appropriate steps through contract
provisions and/or insurance to protect themselves from
foreseeable risks. Based on these policy considerations, the
Court concluded that, when a product (the turbine)
damages only itself, there is no tort recovery; only warranty
recovery. Id. at 2303.

The present case differs from East River in that Sea-Land
claims that the connecting rod did not just damage itself, it
damaged other property, i.e., the diesel engine and its
casing. We must determine whether this is a difference with
a significance.

The Supreme Court has partially clarified the East River
property/other property dichotomy in Saratoga Fishing Co.
v. J.M. Martinac & Co., 117 S.Ct. 1783 (1997). In Saratoga,
a primary purchaser of a ship had added to it a skiff, a

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fishing net, and spare parts. The vessel, with the added
equipment as a part of it, was subsequently sold to a
secondary purchaser, Saratoga. An engine room fire led to
the sinking of the ship, and a faulty hydraulic system was
determined to be a significant cause of the sinking.
Saratoga sued the manufacturer of the hydraulic system
and the company that built the vessel. The issue was
whether the added equipment was "other property" under
East River so that Saratoga might recover damages for its
destruction. The Court held that the added equipment was
"other property":

When a Manufacturer places an item in the stream of
commerce by selling it to an Initial User, that item is
the "product itself " under East River. Items added to
the product by the Initial User are therefore "other
property," and the Initial User's sale of the product to
a Subsequent User does not change these
characterizations.

Id. at 1786. Accord Nicor Supply Ships Assocs. v. General
Motors Corp., 876 F.2d 501 (5th Cir. 1989) (holding that a
ship charterer, who adds expensive seismic equipment to
the ship, may recover for its loss in a fire caused by a
defective engine).

The manufacturer in Saratoga had argued that"if a
[subsequent purchaser] can recover for damage that a
defectively manufactured product causes to property added
by the [initial user], than a user might recover for damage
a defective component causes the manufactured product,
other than the component itself." Id. at 1788. The Court
explicitly rejected this position, holding that it is not the
various component parts, but the vessel itself as placed in
the stream of commerce by the manufacturer and
distributor that is the "product." Id. citing Shipco 2295, Inc.
v. Avondale Shipyards, Inc., 825 F.2d 925, 928 (5th Cir.
1987). Citing East River, the Court concluded that, because
almost all machines are made up of components, to define
"other property" differently 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."
117 S.Ct. at 1788, quoting 106 S.Ct. at 2300.

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In this expansion of East River, the Court drew a
distinction between components added to a product by a
manufacturer before the product's sale to a user, see, e.g.,
King v. Hilton-Davis, 855 F.2d 1047 (3d Cir. 1988)
(Pennsylvania law), Shipco 2295, Inc. v. Avondale
Shipyards, Inc., 825 F.2d 925 (5th Cir. 1987) (federal
maritime law); Exxon Shipping Co. v. Pacific Resources, Inc.,
835 F.Supp. 1195, 1201 (D. Haw. 1993) (admiralty law)
(dubbing the rule in these cases, the "integrated product"
rule), and those items added by a subsequent user to the
manufactured product, see, e.g., Nicor Supply Ships Assocs.
v. General Motors Corp., 876 F.2d 501 (5th Cir. 1989).
Saratoga 117 S.Ct. at 1788.

This distinction is consistent with the "object of the
bargain" test, applied by this Circuit. King v. Hilton-Davis.
855 F.2d 1047, 1051 (3d Cir. 1988). One looks to the
"object of the bargain" -- the object purchased or bargained
for by the plaintiff, in determining whether additions
constitute "other property." Saratoga, 117 S.Ct. at 1791
(Scalia, J., dissenting) citing King, 855 F.2d at 1051
(character of plaintiff's loss may determine the nature of
available remedies thus when loss is solely the benefit of
the bargain, a contract remedy is sufficient), American
Eagle Ins. Co. v. United Technologies Corp., 48 F.3d 142,
145 (5th Cir. 1995) (Texas law), Shipco, 825 F.2d at 928.
We conclude then that every component that was the
benefit of the bargain should be integrated into the product;
consequently, there is no "other property." However, we
distinguish from the product additional parts that are not
encompassed in the original bargain but are subsequently
acquired. These should not be integrated.

The question here is whether replacement parts should
be integrated into the engine whole or not. In 1980, U.S.
Lines, the prior owner of the Enterprise, contracted for a
fully-functioning diesel engine. The commercial parties were
well aware that a diesel engine contains components that
are renewable, i.e., that must be replaced within the life of
the engine. Thus, the benefit of U.S. Lines' bargain in 1980
was a fully-functioning engine, but with the knowledge that
certain parts would have to be replaced after a certain time.
In 1988, when Sea-Land purchased the ship, the product it

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purchased was the same -- a functioning engine containing
certain parts that would have to be replaced. See Saratoga,
117 S.Ct. at 1788 (holding that a subsequent purchase
does not change the nature of the original product).

Sea-Land asserts, however, that upon its 1990 purchase
of the connecting rod, it already owned the engine as pre-
existing property, purchased in 1988. The 1990 property,
the rod, caused damage to the 1988 property, the engine,
and thus East River does not bar tort recovery. To support
this position, Sea-Land depends on a single district court
case, Lease Navajo, Inc. v. Cap Aviation, Inc., 760 F.Supp.
455, 459 (E.D. Pa. 1991) (holding that component part
procured to be installed during overhaul of plaintiff's
engine was separate property from plaintiff 's engine).
Under Sea-Land's reading of the "benefit of the bargain"
analysis, it bargained in 1988 for a properly functioning
engine, and it got it. In 1990, it bargained for a properly
functioning connecting rod. It didn't get it. Each bargain
was a separate transaction, relating to separate property.
The fact that GE happened to be the manufacturer of these
two products is irrelevant. Thus, Sea-Land asserts that the
district court's conclusion that the "essential object of the
bargain was for a functional GE engine," April 29, 1996
opinion at 12-13, was erroneous.

Sea-Land has not convinced us, however, that there is
any rational reason to deviate from the integrated product
rule simply because the defective component happens to be
a replacement part instead of the part originally supplied
with the product. The law is clear that if a commercial
party purchases all of the components at one time,
regardless of who assembles them, they are integrated into
one product. Saratoga, 117 S.Ct. at 1788. Since all
commercial parties are aware that replacement parts will be
necessary, the integrated product should encompass those
replacement parts when they are installed in the engine.
See Exxon, 835 F.Supp. at 1201 (rejecting the distinction
between a separately purchased replacement part and the
originally supplied components as irrelevant to determining
whether "other property" has been damaged).

Sea-Land would, however, have us believe that the
difference in timing is dispositive. Sea-Land asserts that,

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even though component parts may be integrated into the
end, bargained-for product, as the propeller and rudder
components were integrated into the completed vessel in
Shipco, 825 F.2d at 928-29, the later addition of
replacement parts is a new product.

We disagree. It is a common commercial practice for the
parties to a transaction to contemplate the integration of
replacement parts subsequent to a purchase. In the instant
case, it was expected that all the replacement parts would
be eventually have to be integrated into the engine. The GE
connecting rod was purchased to be installed and to
become integrated with the GE engine. It is a component of
that engine; it has no use to Sea-Land otherwise. Moreover,
in purchasing and installing replacement parts, the parties
can, as with the original purchase, negotiate the terms of
the sale and of any warranties.

Sea-Land, nevertheless, interprets the "object of the
bargain" test under a contract-based paradigm -- because
the engine and the rod were purchased in separate
contractual transactions (each with its own potential
warranty), they should be treated as separate property. For
purposes of contract law, and consequently a breach of
warranty claim, Sea-Land is correct -- the engine and the
rod are separate property, each subject to the terms of its
respective contract. However, the use of separate contracts
as an indicator of "other property" for purposes of invoking
tort law, has been rejected by the Supreme Court. East
River, 106 S.Ct. at 2300 (explaining that a single integrated
machine can have many components, implicitly each
procured in separate transactions); Saratoga, 117 S.Ct. at
1788 (citing Shipco with approval); see also, American Home
Assur. Co. v. Major Tool & Mach., Inc., 767 F.2d 446, 448
(8th Cir. 1995) (entire turbine was "single product
fabricated under a series of subcontracts"); Exxon, 835
F.Supp. at 1201 ( "spare and replacement parts may . . . be
part of the `object of the bargain' regardless of whether or
not they are purchased under the same contract").

Additionally, the harm that Sea-Land seeks to recover --
economic loss -- is the exact type of injury that East River
explains should be the subject of a contract-based warranty
suit, not a tort suit. 106 S.Ct. at 2300. Tort law is intended

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to compensate individuals where the harm goes beyond
failed expectations into personal and other property injury.
Id. The timing of the purchase of the component part may
be relevant, but it is not dispositive.

For all these reasons, we agree with the district court
that tort law is not applicable as a basis here to recover for
damage to the diesel engine. We will affirm the district
court's holding that there was no damage to "other
property." Id. at 2302.

III. Duty To Warn

We next address the question whether Sea-Land can
make a claim in negligence against GE on the basis of a
post-sale duty to warn of a defective product. In McConnell
v. Caterpillar Tractor Co., 646 F.Supp. 1520 (D.N.J. 1986),
a district court attempted to carve out such an exception to
East River. Plaintiffs in McConnell suffered economic loss:
lost profits and damage to their engine because of a
defective engine crankshaft. They asserted not that
defendants negligently manufactured the crankshaft but
that "defendants negligently failed to warn of a known
defect in the crankshaft." Id. at 1526. The district court in
the instant case endorsed this exception to East River and
held that there may be tort liability for post-sale failure to
warn, even if the damage is only economic, when the seller
has actual knowledge of the defect. The district court
granted summary judgment in favor of GE because it found
that GE did not have actual knowledge of the defect. We
disagree with the reasoning of the district court, but we will
affirm the grant of summary judgment on this claim.

The Court in East River enunciated an unconditional bar
of all tort recovery for economic loss arising out of a
defective product.

We . . . hold that a manufacturer in a commercial
relationship has no duty under either a negligence or
strict product-liability theory to prevent a product from
injuring itself.

East River, 106 S.Ct. at 2302. The Court further explained,
"whether stated in negligence or strict liability, no products

10
liability claim lies in admiralty when the only injury claimed
is economic loss." East River, 106 S.Ct at 2304.

As we have set out in Section II above, the reason for this
rule is that the parties to such a bargain can set the terms
of their expectations through negotiations, contract
provisions, price adjustments, and insurance. If either
party deems it advisable to require warning of a known
defect in order to protect the product, that party can
negotiate for such a provision or can protect against a
defect through insurance. The rule in East River is directly
applicable.

In rejecting this duty to warn claim, we are not, however,
discounting the duty of a manufacturer to warn of a defect
in order to protect the persons using the product or the
public in general. We agree that we, as a society, should
attempt to provide every incentive for a manufacturer with
knowledge that a defective product is on the market to
warn its customers. If the damage, resulting from a defect
is other than mere economic loss, East River leaves intact
all tort-based theories of recovery including, but not limited
to, duty to warn.

Where, however, damage from a defect is only to the
product itself and is only economic, there is no tort
recovery. The policy of economic loss is better adjusted by
contract rules than by tort principles. This conclusion is as
true for strict liability and negligence cases as it is for
failure to warn cases. Thus, a manufacturer may be
culpable of a failure to warn, but if the damage is solely to
the product itself and is solely economic, there is no tort
recovery. See East River, 106 S.Ct. at 2300. Accordingly, we
reject the holding in McConnell. We will, however, for the
reasons stated above affirm the district court's granting of
summary judgment to GE on the duty to warn claim.

IV. Negligent Repair

We address, third and finally, Sea-Land's claim for
negligent repair of the damaged engine. Following failure of
the connecting rod, GE repaired the damaged engine. In
November 1994, the engine failed again. The failure was
found to be at the location of the 1991 engine block repair.

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Sea-Land asserts that GE negligently performed the repair
and thus breached a duty of care. The damage Sea-Land
suffered in 1994 was once again solely economic.

Sea-Land attempts to distinguish its negligent repair case
from East River, by arguing that GE was not acting as a
"manufacturer" and did not supply a "product" which
injured itself. We are not persuaded. GE repaired the
engine free of charge in 1991 because of the defect in the
replacement connecting rod. The district court dismissed
the negligent repair claim because the sole damages alleged
were economic. It held that, pursuant to East River, "no
products-liability claim lies in admiralty when the only
injury claimed is economic loss." April 17, 1997 opinion at
13, citing East River, 106 S.Ct. at 2304. The district court
found that plaintiff's remedy lay in contract, not tort. For
the reasons we expressed in Sections II and III above, we
agree. Despite any negligence or culpability on the part of
a manufacturer, where damage is only to the product itself
and where the only loss is economic, there is no basis for
tort recovery. The parties must seek their remedy under
contract and warranty law.

V.

For the foregoing reasons, we will affirm the judgment of
the district court.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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