POAGE ENGINEERS & ASSOCIATES, INC.; CHARLES CLARY; AND CHRIS KELLY v. MONTAPLAST OF NORTH AMERICA, INC., AND GARY SCOTT TBHW: RANGASWAMY & ASSOCIATES, INC., AND THANGAM RANGASWAMY v. MONTAPLAST OF NORTH AMERICA, INC.
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RENDERED: October 29, 1999; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1998-CA-001542-MR
POAGE ENGINEERS & ASSOCIATES, INC.;
CHARLES CLARY; AND CHRIS KELLY
v.
APPELLANTS
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE ROGER CRITTENDEN, JUDGE
ACTION NO. 96-CI-001648
MONTAPLAST OF NORTH AMERICA, INC.,
AND GARY SCOTT
APPELLEES
TBHW:
NO. 1998-CA-001593-MR
RANGASWAMY & ASSOCIATES, INC.,
AND THANGAM RANGASWAMY
v.
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE ROGER CRITTENDEN, JUDGE
ACTION NO. 96-CI-1648
MONTAPLAST OF NORTH AMERICA, INC.
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE:
APPELLANTS
KNOPF, MILLER, AND SCHRODER, JUDGES.
APPELLEE
MILLER, JUDGE:
These appeals spring from Ky. R. Civ. P. (CR)
54.02 orders of the Franklin Circuit Court entered on May 21,
1998, and May 28, 1998.
We reverse and remand.
In 1995, Montaplast of North America, Inc.
(Montaplast), undertook to construct an addition to its
manufacturing facility in Frankfort, Kentucky.
To this end,
Montaplast contracted with Alliance Corporation (Alliance) to
“design” and “build” the addition.
Alliance subcontracted “certain design services in
connection with the foundation work” to Poage Engineers &
Associates, Inc., of which Charles Clary and Chris Kelly
(collectively referred to as “Poage”) are “principals and/or
officers.”
Alliance further subcontracted the steelwork design
and construction to Southeast Steel Company, Inc. (Southeast),
which, in turn, subcontracted its design obligation to Poage.
It
appears at this point, Poage had the responsibility for designing
both the foundation and steelwork.
Montaplast contracted separately with Gary Scott,
a local architect, to provide “project administration services”
for the construction project.
In doing so, Scott contracted with
Rangaswamy & Associates, Inc., and Thangam Rangaswamy
(collectively referred to as “Rangaswamy”) to examine Poage's
design calculations.
Scott paid Rangaswamy, billing the costs
through to Montaplast.
Upon examining Poage's calculations, after work had
commenced, Rangaswamy rejected certain aspects of the design and
of Southeast's and Alliance's work performance in accordance
therewith.
Montaplast, in turn, accused Alliance of being in
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default of the general contract and demanded Alliance rectify the
design and construction.
Pursuant to Montaplast's dictate,
Alliance contracted with Rangaswamy to correct Poage's design.
Southeast modified its steelwork construction accordingly.
Correction of the design and retrofitting of already completed
construction resulted in extra costs to Alliance and Southeast of
approximately $376,000.00.
On November 6, 1996, Alliance and Southeast filed the
instant action in Franklin Circuit Court.
The complaint set
forth a variety of allegations seeking to recover the extra costs
incurred together with lost profits.
Southeast asserted claims
against Montaplast, Scott, Rangaswamy, and Poage.
Alliance
asserted claims against all but Montaplast.
Poage cross-claimed against Montaplast and Gary Scott
seeking indemnity, contribution, and/or apportionment.
Relying
upon the “Economic Loss Doctrine,” on May 21, 1998, the circuit
court dismissed said cross-claim.
Rangaswamy cross-claimed against Montaplast, alone,
alleging “comparative negligence” and seeking “apportionment,
contribution, and/or indemnity.”
On May 28, 1998, again relying
on the Economic Loss Doctrine, the circuit court dismissed
Rangaswamy's cross-claim.
These appeals followed.
Other claims
of Alliance and Southeast remain in the circuit court.
1998-CA-001542-MR
Poage contends that the circuit court committed
reversible error by dismissing its cross-claims against
Montaplast and Scott.
The circuit court concluded that Poage's
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cross-claims were barred by the economic loss doctrine.1
The
economic loss doctrine has its genesis in products liability law
and operates to bar tort recovery for economic loss emanating
from a defective product.
Economic loss has been defined as
“damages for inadequate value, costs of repair and replacement of
the defective product, or consequent loss of profits--without any
claim of personal injury or damage to other property, as well as
the diminution in value of the product because it is inferior in
quality and does not work for the general purposes for which it
was manufactured and sold.”
See Myrtle Beach Pipeline
Corporation v. Emerson Electric Company, 843 F. Supp. 1027, 1049
(D.S.C. 1993).
Economic loss does not include injury to a person
or damage to property other than the product itself.
See Miller
v. United States Steel Corporation, 902 F.2d 573 (7th Cir. 1990).
The doctrine bars products liability actions resting upon strict
liability and negligence to recover purely economic losses.
See
East River Steamship Corp. v. Transamerica Delaval, Inc., 476
U.S. 858, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1986), and Rissler &
McMurry Company v. Sheridan Area Water Supply Joint Powers Board,
Wyo., 929 P.2d 1228 (1996).
In the case at hand, appellees urge this Court to
utilize the economic loss doctrine so as to preclude recovery for
economic loss occurring in a “commercial setting” outside of
1
We note that the terms economic loss doctrine and economic
loss rule are used interchangeably.
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products liability actions.2
It is contended that the equal
bargaining power incident to commercial transactions eliminates
the need for economic loss recovery.
Most importantly, appellees
seek to extend application of the economic loss doctrine beyond
products liability law.
In support thereof, appellees cite to a
plethora of foreign cases.
See National Steel Erection, Inc. v.
J.A. Jones Construction Co., 899 F. Supp. 268 (N.D.W. Va. 1995);
Berschauer/Phillips Construction Co. v. Seattle School District
No. 1, Wash., 881 P.2d 986 (1994); and Blake Construction Co.,
Inc. v. Alley, Va., 353 S.E.2d 724 (1987).
Appellees also cite
this Court to Real Estate Marketing, Inc. v. Franz, Ky., 885
S.W.2d 921 (1994) for the proposition that Kentucky has adopted
the economic loss doctrine in “commercial settings.”
Therein,
the issue presented was “whether homeowners, when they are not
the original purchasers, can assert a viable claim against the
homebuilder for structural defects.”
Id. at 922.
The
homeowners' asserted theories of liability were as follows:
(1) negligence and negligence per se in
failing to comply with various provisions of
the uniform state building code; (2) breach
of implied warranties of merchantability,
fitness for particular purpose, and
habitability; and (3) a statutory cause of
action because “First Lexington failed to
comply with the provisions of KRS 198B, as
well as the Uniform State Building Code,
thereby giving rise to a private action by
plaintiffs against defendant, First
Lexington, for damages against it in
accordance with KRS 198B.130.”
Id. at 923.
2
At oral argument, the parties agreed that the instant
action is not a products liability action.
-5-
In disposing of the negligence and negligence per se
claims, the Supreme Court cited Saylor v. Hall, Ky., 497 S.W.2d
218 (1973) wherein a tort claim for personal injuries was
recognized for negligent construction despite the absence of
privity between tenant and builder.
The archaic requirement of
privity was overcome by reliance upon Restatement (Second) of
Torts §385 (1965), which provides as follows:
One who on behalf of the possessor of land
erects a structure or creates any other
condition thereon is subject to liability to
others upon or outside of the land for
physical harm caused to them by the dangerous
character of the structure or condition after
his work has been accepted by the possessor,
under the same rules as those determining the
liability of one who as manufacturer or
independent contractor makes a chattel for
the use of others. [Emphasis added.]
Under this section, a builder's liability is determined by the
“same rules as those determining the liability” of a
“chattel”/product manufacturer.
The “rules” ascertaining the
liability of a product manufacturer are commonly referred to as
products liability law; therefore, a builder's liability is also
determined in accordance with products liability law.
Applying
the economic loss rule emanating from products liability law, the
Franz court denied remote homeowners the right to recover from
the original builder for structural defects in a house.
The loss
was viewed as economic, representing a mere diminution in value.
The court intimated, however, that it would have looked favorably
upon the homeowners' claim had their alleged damages emanated
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from a “damaging event” or “destructive occurrence.”3
Franz, 885
S.W.2d at 926.
To properly interpret Franz, we believe it incumbent
that Restatement (Second) of Torts §385 and its connoted
application of products liability law be recognized. In assessing
liability of the builder in Franz, the Supreme Court utilized
“the same rules” as those relating to liability of a product
manufacturer.
Indeed, the Supreme Court cited to Dealers
Transport Company, Inc. v. Battery Distributing Company, Ky., 402
S.W.2d 441 (1966) which adopted Restatement (Second) of Torts
§402A (1965) in its holding.4 Id. at 926.
Simply stated, we
3
Some jurisdictions recognize an exception to the economic
loss doctrine as in the case of a sudden accident, violent
occurrence, or sudden calamitous event. 63B Am. Jur. 2d Products
Liability §§ 1917-1928 (1997).
4
Section 402A provides as follows:
Special Liability of Seller of Product for
Physical Harm to User or Consumer
(1) One who sells any product in
condition unreasonably dangerous
or to his property is subject to
for physical harm thereby caused
ultimate user or consumer, or to
property, if
a defective
to the user
liability
to the
his
(a) the seller is engaged in the business
of selling such a product, and
(b) it is expected to and does reach the
user or consumer without substantial change
in the condition in which it is sold.
(2) The rule stated in Subsection (1) applies
although
(a) the seller has exercised all possible
care in the preparation and sale of his
product, and
(continued...)
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think Franz is properly interpreted as adopting the economic loss
rule relative to products liability law with a “destructive
occurrence” or “damaging event” exception.
Finally, we do not view the facts of Franz as involving
a commercial setting:
[Franz] is also easily distinguishable from
cases that traditionally merit the
application of the economic loss rule, in
that it does not involve a transaction
between a commercial buyer and seller.
[Emphasis added.]
Bowling Green Municipal Utilities v. Thomasson Lumber Co., 902
F.Supp. 134, 138 n.2 (W.D. Ky. 1995).
Upon the whole, we reject
appellant's contention that Franz adopts the economic loss
doctrine in a commercial setting outside of products liability.
While we recognize that other jurisdictions have
expanded the economic loss doctrine beyond the products liability
arena, we decline to do so.
We view the economic loss doctrine
as a judicial attempt to restrict the scope of products
liability.
We are simply unwilling to expand the economic loss
doctrine beyond its genesis in products liability law.
If the
economic loss doctrine is to be so monumentally expanded, we
believe it better left to our Supreme Court.
In sum, we are of
the opinion that the economic loss doctrine does not bar Poage's
cross-claims against Montaplast and that the circuit court erred
by dismissing same.
1998-CA-001593-MR
4
(...continued)
(b) the user or consumer has not bought the
product from or entered into any
contractual relation with the seller.
-8-
For the reasons set forth above, we likewise believe
that Rangaswamy's cross-claims against Montaplast are not barred
by the economic loss doctrine and that summary judgment was
inappropriate.
See CR 56; Steelvest, Inc. v. Scansteel Service
Center, Inc., Ky., 807 S.W.2d 476 (1991).
For the foregoing
reasons, the orders of the Franklin Circuit Court are reversed,
and this cause is remanded on both appeals for proceedings
consistent with this opinion.
ALL CONCUR.
BRIEF AND ORAL ARGUMENT FOR
APPELLANTS POAGE, CLARY, AND
KELLY:
J. Patrick Sullivan P.S.C.
Lexington, KY
BRIEF AND ORAL ARGUMENT FOR
APPELLANTS RANGASWAMY:
Robert M. Brooks
Louisville, KY
BRIEF FOR APPELLEES MONTAPLAST
AND GARY SCOTT:
Bruce F. Clark
Anne E. Gorham
Lexington, KY
ORAL ARGUMENT FOR APPELLEES
MONTAPLAST AND GARY SCOTT:
Anne E. Gorham
Lexington, KY
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