IN RE WATER MAIN BREAK LITIGATION
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STATE OF MICHIGAN
COURT OF APPEALS
QUEST DIAGNOSTICS, INC.,
FOR PUBLICATION
December 10, 2002
9:00 a.m.
Plaintiff-Appellant,
v
MCI WORLDCOM, INC., MCI WORLDCOM
COMMUNICATIONS, INC., MCI WORLDCOM
NETWORK SERVICES, INC., and CORBY
ENERGY SERVICES, INC.,
No. 227384
Oakland Circuit Court
LC No. 99-016997-CZ
Defendants-Appellees.
WATER MAIN BREAK LITIGATION,
Plaintiff-Appellant,
and
QUEST DIAGNOSTICS,
Plaintiff,
v
MCI WORLDCOM, INC., MCI WORLDCOM
COMMUNICATIONS, INC., MCI WORLDCOM
NETWORK SERVICES, INC., and CORBY
ENERGY SERVICES, INC.,
Defendants-Appellees.
No. 227394
Oakland Circuit Court
LC No. 99-015346-CZ
Updated Copy
February 14, 2003
Before: Markey, P.J., and Talbot and Zahra, JJ.
ZAHRA, J.
-1-
In these consolidated appeals, plaintiffs1 appeal as of right from the trial court's order
granting summary disposition for defendants. We reverse and remand to the extent that these
cases relate to defendant Corby Energy Services, Inc. (Corby).
Facts and Procedure
In June 1999, defendant Corby ruptured a water main while performing underground
work on behalf of defendants MCI WorldCom, Inc., MCI WorldCom Communications, Inc., and
MCI WorldCom Network Services, Inc. (collectively the MCI defendants). Plaintiffs brought
this negligence action, alleging that as a result of the broken water main, they were without
running water for several days, they had to boil their drinking water for several days, and the
business plaintiffs were forced to close or curtail their operations. Plaintiffs also brought a claim
alleging negligence per se based on defendants' failure to obtain a permit authorizing the
excavating work. 2 Defendants moved for summary disposition, arguing that the economic loss
doctrine and public policy considerations precluded any recovery by plaintiffs because plaintiffs
sought purely economic damages. The trial court granted summary disposition for defendants
and these appeals followed.
Oral argument in this case was heard in May 2002. On August 2, 2002, the MCI
defendants filed a notice of bankruptcy in these consolidated appeals. On August 16, 2002, this
Court ordered the administrative closure of the appeals on the ground that further proceedings
were stayed by 11 USC 362 due to the MCI defendants' bankruptcy filing. Plaintiffs filed a
motion for rehearing of the stay order. This Court granted in part the motion for rehearing,
allowing the appeals to proceed only as they relate to defendant Corby.
Analysis
Plaintiffs argue that the trial court erred in granting summary disposition on the basis that
the economic loss doctrine barred plaintiffs' claims. We review de novo a trial court's decision
on a motion for summary disposition. Spiek v Dep't of Transportation, 456 Mich 331, 337; 572
NW2d 201 (1998). Under MCR 2.116(C)(8), a motion for failure to state a claim for which
relief may be granted tests the legal sufficiency of the pleadings. Simko v Blake, 448 Mich 648,
654; 532 NW2d 842 (1995). "All well-pleaded factual allegations are accepted as true and
construed in a light most favorable to the nonmovant." Maiden v Rozwood, 461 Mich 109, 119;
1
In this opinion, "plaintiffs" refers to Quest Diagnostics, Inc., and the Water Main Break
Litigation plaintiffs, a purported class of individuals and businesses, including David Shea, Pam
Carveth, Kim and Mark Aumann, The ½ Off Card Shop, Inc., Pravis Industries, Inc., Cosmetic
Dermatology and Vein Centers of North Oakland County, P.C., and all other "individuals,
proprietorships, partnerships, corporations and other businesses and legal entities in Michigan
that were affected by the damage to the water main in Auburn Hills in June 1999." The Water
Main Break Litigation plaintiffs brought a motion for class certification, but defendants' motion
for summary disposition was granted before the trial court ruled on the issue of class status.
2
On appeal, plaintiffs do not specifically challenge the trial court's dismissal of the claim
alleging negligence per se.
-2-
597 NW2d 817 (1999). Summary disposition under MCR 2.116(C)(8) is proper when a claim is
so clearly unenforceable as a matter of law that no factual development could establish the claim
and justify recovery. Simko, supra.
A large majority of jurisdictions in the United States have adopted some form of a
judicially created limitation on tort actions that seek to recover economic damages resulting from
commercial transactions. This limitation is known as the economic loss doctrine. Mt Lebanon
Personal Care Home, Inc v Hoover Universal, Inc, 276 F3d 845, 848 (CA 6, 2002), citing
Frumer & Friedman, Products Liability, § 13.11[1] (2000). The economic loss doctrine is
derived from the Uniform Commercial Code (UCC). According to White & Summers, Uniform
Commercial Code (Hornbook Series, 4th ed), p 386, "the economic loss doctrine [is] a crude
proxy for the dividing line between what is tort and what is not." The doctrine's basic premise is
that economic losses that relate to commercial transactions are not recoverable in tort. White and
Summers reason:
Putting aside injury to third parties that arises out of conventional tortious
behavior and ignoring personal injury to the buyer, we see no reason why all other
liability arising out of defective goods ought not be under Article 2. By
hypothesis the parties to these suits negotiate with one another. If the buyer does
not protect its own interest adequately, adequate backup protection is given by
Article 2 doctrines such as unconscionability in 2-302, restriction of disclaimers
under 2-316, and limitation on disclaimer of remedy under 2-719. Courts should
be particularly skeptical of business plaintiffs who—having negotiated an
elaborate contract or having signed a form when they wish they had not—claim to
have a right in tort whether the tort theory is negligent misrepresentation, strict
tort, or negligence. [Id., pp 386-387.]
The Michigan Supreme Court formally adopted the economic loss doctrine in Neibarger
v Universal Coop, Inc, 439 Mich 512; 486 NW2d 612 (1992), explaining that
"'[w]here a purchaser's expectations in a sale are frustrated because the product he
bought is not working properly, his remedy is said to be in contract alone, for he
has suffered only "economic" losses.'" This doctrine hinges on a distinction
drawn between transactions involving the sale of goods for commercial purposes
where economic expectations are protected by commercial and contract law, and
those involving the sale of defective products to individual consumers who are
injured in a manner which has traditionally been remedied by resort to the law of
torts. [Id. at 520-521 (citations omitted).][3]
3
The Supreme Court recognized that the term "economic loss" may be a misnomer:
"It would be better to call it a 'commercial loss,' not only because personal
injuries and especially property losses are economic losses, too—they destroy
values which can be and are monetized—but also, and more important, because
(continued…)
-3-
If a commercial purchaser were allowed to sue in tort to recover economic loss, the UCC would
be rendered meaningless and "'contract law would drown in a sea of tort.'" Id. at 528, quoting
East River Steamship Corp v Transamerica Delaval Inc, 476 US 858, 866; 106 S Ct 2295; 90 L
Ed 2d 865 (1986).
Since Neibarger, the economic loss doctrine in Michigan has been applied in the context
of various transactions for goods or products to bar recovery in tort when damages are
recoverable under the Uniform Commercial Code. Sherman v Sea Ray Boats, Inc, 251 Mich
App 41; 649 NW2d 783 (2002) (involving the sale of a boat); MASB-SEG Prop/Cas Pool, Inc v
Metalux, 231 Mich App 393; 586 NW2d 549 (1998) (involving the sale of a light fixture);
Citizens Ins Co v Osmose Wood Preserving, Inc, 231 Mich App 40; 585 NW2d 314 (1998)
(involving the sale of flame-retardant chemicals applied to roofing materials); Huron Tool &
Engineering Co v Precision Consulting Services, Inc, 209 Mich App 365; 532 NW2d 541 (1995)
(involving the sale of a software system); Krupp PM Engineering, Inc v Honeywell, Inc, 209
Mich App 104; 530 NW2d 146 (1995) (involving the sale of a furnace component).4 This Court
has extended the economic loss doctrine beyond commercial transactions involving sophisticated
users to the sale of consumer goods, even when the plaintiff consumer enters into a transaction
with an entity of greater knowledge or bargaining power. Sherman, supra at 47-50 (economic
loss doctrine applied when the individual consumer plaintiff purchased a boat from the defendant
manufacturer).5
(…continued)
tort law is a superfluous and inapt tool for resolving purely commercial disputes.
We have a body of law designed for such disputes. It is called contract law.
Products liability law has evolved into a specialized branch of tort law for use in
cases in which a defective product caused, not the usual commercial loss, but a
personal injury to a consumer or bystander." [Id. at 522, quoting Miller v United
States Steel Corp, 902 F2d 573, 574 (CA 7, 1990).]
4
A majority of jurisdictions limit the economic loss doctrine to those cases in which only the
product itself is damaged or the damage is closely related to the use of that product. See, e.g.,
East River Steamship Corp, supra at 871 (admirality law); Miller, n 3 supra at 574-576
(applying Wisconsin law); Kershaw Co Bd of Ed v United States Gypsum Co, 302 S C 390, 393;
396 SE2d 369 (1990); Clark v Int'l Harvester Co, 99 Idaho 326, 333; 581 P2d 784 (1978).
Michigan's economic loss doctrine is broader than other jurisdictions in that it not only includes
damage to the product itself, but may also include damage to other property when "this damage
was within the contemplation of the parties to the agreement . . . ." Neibarger, supra at 532; see
also Detroit Bd of Ed v Celotex Corp (On Remand), 196 Mich App 694, 703; 493 NW2d 513
(1992).
5
While a small minority of jurisdictions limit the economic loss doctrine to business purchases,
most jurisdictions extend its application to both business and consumer purchases. Mt Lebanon
Personal Care Home, Inc, supra at 848.
-4-
A factor present in all cases in which Michigan courts have applied the economic loss
doctrine is that the parties to the litigation were involved, either directly or indirectly, in a
transaction for goods. For example, in Metalux, supra at 402, this Court focused on the parties
involved and the nature of the product's use in concluding that the economic loss doctrine
applied. Both parties were "sophisticated commercial entities who had the knowledge and
ability to allocate liability in their purchase and sale agreement." Id. Furthermore, the purchase
was for a commercial purpose. Id. This Court concluded that the economic loss doctrine applied
and the plaintiff 's exclusive remedy was provided by the UCC because the consequences of the
product's potential failure were likely to have been contemplated by the parties when they
entered into the agreement for the sale. Id.
This Court has declined to apply the economic loss doctrine where the claim emanates
from a contract for services. See Higgins v Lauritzen, 209 Mich App 266; 530 NW2d 171
(1995).6 This Court has also concluded that the economic loss doctrine does not apply when a
plaintiff could not have anticipated a safety hazard involved in a product through bargaining or
negotiation at the time of the transaction or purchase. Detroit Bd of Ed v Celotex Corp (On
Remand), 196 Mich App 694, 705; 493 NW2d 513 (1992). In Celotex Corp, this Court
determined that the economic loss doctrine did not apply where the plaintiffs sued the defendant
manufacturer of asbestos products that were used in the plaintiffs' school buildings. Id. at 703
705. This Court explained that the economic loss doctrine applied to commercial transactions
where "the parties have the ability to bargain for the terms of sale, including warranties,
disclaimers, and limitation of remedies." Id. at 702. In Celotex Corp, the plaintiffs did not claim
that the products at issue, which contained asbestos, were inferior in quality, deteriorated, or
caused injury to other products, but instead claimed that the products were safety hazards that
created a potential health risk. Id. at 704-705. This Court observed that the economic loss
doctrine was not applicable because the plaintiffs could not have anticipated and bargained over
the hazards of asbestos at the time of the sale. Id. at 705.
On the basis of Neibarger and its progeny, we conclude that parties to a transaction for
goods are precluded recovery in tort for economic loss caused by inferior products where: (1) the
parties or others closely related to them had the opportunity to negotiate the terms of the sale of
the good or product causing the injury, and (2) their economic expectations can be satisfied by
contractual remedies. Neibarger, supra at 520-529; Celotex Corp, supra at 702-703; Sullivan
Industries, Inc v Double Seal Glass Co, Inc, 192 Mich App 333, 339-340; 480 NW2d 623
(1991). In the present case, there was not a contract, commercial transaction, or any other kind
of relationship that existed between the parties. Without a contract or transaction, plaintiffs
could not have bargained for any terms of the service or anticipated any risks in defendant
6
As noted in In re Starlink Corn Products Liability Litigation, 212 F Supp 2d 828, 839, n 6 (ND
Ill, 2002), although the economic loss doctrine traditionally applies to cases involving defective
products, the doctrine has expanded in some jurisdictions to include most contractually acquired
services. However, there is considerably less uniformity among jurisdictions, particularly with
respect to the growing number of exceptions courts have carved out, when applied to services.
Id.
-5-
Corby's underground work. Thus, this case does not involve a situation where the parties'
economic expectations have been bargained for and established by agreement. Plaintiffs are
consumers of water who allege that their access to the water supply was interrupted as a result of
defendant Corby's negligence in damaging the water main. Because there is no underlying sale
of goods, transaction, or contract between the parties or others closely related to them, plaintiffs
have no recourse against Corby under commercial or contract law. Utilizing the broadest
interpretation of Michigan's economic loss doctrine, plaintiffs are not limited to remedies in
contract or the UCC, but have a proper remedy in tort.
Defendant Corby's only argument in support of applying the economic loss doctrine is
that the damages sustained by plaintiffs are purely economic. 7 However, a negligence claim
may advance solely on a claim of economic loss. See, e.g., Case v Consumers Power Co, 463
Mich 1; 615 NW2d 17 (2000). In order for the economic loss doctrine to bar recovery in tort,
there must be a transaction that provides an avenue by which the parties are afforded the
opportunity to negotiate to protect their respective interests. The transactions in the present case
are not sufficiently related to plaintiffs' claim to give rise to application of the economic loss
doctrine. We recognize that it may be argued that plaintiffs purchased their water from their
local unit of government and thus there was a transaction for goods that would give rise to
application of the UCC. However, defendant Corby was not in any way related to this
transaction in such a manner that it may be said that Corby was either directly or indirectly
involved in the transaction. Rather, defendant Corby contracted with the MCI defendants to
provide excavating services. In the course of performing their contract, Corby's allegedly
tortious behavior resulted in injury to plaintiffs—third parties unrelated to the Corby-MCI
transaction. This type of claim does not fall within the scope of the UCC and should not be
barred by the economic loss doctrine. See White & Summers, supra, p 386 (expressly
precluding from the economic loss doctrine "injur[ies] to third parties that arise[] out of
conventional tortious behavior . . ."). Given that this case involves only negligence claims and
there is no underlying contract governing the parties' economic expectations, the economic loss
doctrine does not apply.
Defendant Corby's reliance on Rinaldo's Constr Corp v Michigan Bell Tel Co, 454 Mich
65; 559 NW2d 647 (1997), and Mieras v DeBona, 452 Mich 278; 550 NW2d 202 (1996), to
support summary disposition in this case is misplaced. Corby cites a portion of Mieras in which
7
We reject plaintiffs' assertion that they have also alleged personal injury. As stated by the trial
court in its opinion granting summary disposition:
[T]he plaintiffs in the Water Main Break file alleged only that "[e]ven
after water service is restored, residents and businesses will be forced to boil city
water to avoid becoming sick from bacteria and other contaminants which
infected the water as a result of Defendants' damage to the water main."
However, this is not an allegation of an injury. It is only an allegation of what
steps may have to be taken to avoid injury. The balance of Plaintiffs' allegations
are not for personal injury or property damage.
-6-
Justice Boyle quoted from an Oregon case: "Standing alone, without a duty to plaintiff derived
from defendant's contractual undertaking, plaintiff 's tort claim would confront the rule that one
ordinarily is not liable for negligently causing a stranger's purely economic loss without injuring
his person or property." Id. at 300 (Boyle, J.), quoting Hale v Groce, 304 Or 281, 283-284; 744
P2d 1289 (1987). That quote must be considered in context. The issue in Mieras, was whether a
beneficiary named in a will may pursue a tort action against the attorney who drafted the will.
The majority determined that an intended will beneficiary may enforce an attorney's contractual
duty to his testator client to include the beneficiary in the will and that the same contract creates
a legal duty of care to the intended beneficiary based on that party's status as a third-party
beneficiary under the will. Mieras, supra at 299-302 (Boyle, J.). Accordingly, the majority held
that "beneficiaries named in a will may bring a tort-based cause of action against the attorney
who drafted the will for negligent breach of the standard of care owed to the beneficiary by
nature of the beneficiary's third-party beneficiary status." Id. at 308 (Boyle, J.). As discussed, in
the present case there was no contractual relationship between the parties. Thus, the Court's
reasoning in Mieras with respect to whether tort damages could be recovered on the basis of the
defendant's failure to perform his contractual duties is inapplicable.
Likewise, the holding in Rinaldo's Constr Corp is not directly applicable to this case.
That case held that for the purpose of determining whether an alleged failure to perform under a
contract supports an action in tort, the threshold inquiry is whether the plaintiff alleges a
violation of a legal duty separate and distinct from the contractual obligation. Rinaldo's Constr
Corp, supra at 83-84; see Sherman, supra at 48. Again, in the present case there was no contract
between the litigants or entities closely related to them. Further, plaintiffs' tort claim is not based
on the failure to perform a contract. Thus, this Court's discussion in Rinaldo's Constr Corp,
supra at 84-85, regarding recovery of economic loss in the context of whether a separate, distinct
duty arises during the performance of a contract, is not dispositive of this case.
Our conclusion that the economic loss doctrine does not apply in this case is not altered
by prior cases in which this Court "expressly rejected the argument that the economic loss
doctrine does not apply in the absence of privity of contract." Citizens Ins Co, supra at 45,8
citing Freeman v DEC Int'l, Inc, 212 Mich App 34; 536 NW2d 815 (1995),9 and Sullivan,
8
In Citizens Ins Co, the builders of a restaurant installed wood trusses and a plywood roof
decking that had been treated for flame retardancy with chemicals manufactured by the
defendant. Id. at 41-42. A subcontractor had treated the wood materials according to
instructions provided by the defendant. Id. at 42. The plaintiff, an insurer holding the
subrogated rights of the restaurant owner, alleged that the materials treated with the defendant's
chemicals deteriorated and collapsed, causing damage to the restaurant. Id. Although there was
no privity of contract between the parties, an underlying contract existed between the restaurant
owner (the commercial consumer) and the builder of the restaurant, who had hired the
subcontractor to treat the roofing materials with the defendant's chemicals. Id. In the present
case, on the other hand, there is no underlying contract that governed plaintiffs' economic
expectations.
9
In Freeman, the plaintiff dairy farmers purchased an electric milking system that had parts
manufactured by the defendant. Id. at 35. The plaintiffs sued the defendant after discovering
(continued…)
-7-
supra.10 In each of the cases where the economic loss doctrine was applied absent privity of
contract, the defendant was a supplier of a product, the plaintiff was the consumer of that
product, and the economic losses emanated from the failure of the product to meet the
expectations of the product consumer. In each case, there was a contract or commercial
transaction that governed the plaintiff 's economic expectations.
Thus, while this Court has applied the economic loss doctrine to bar tort claims against
parties who were suppliers of components of goods purchased by the plaintiffs, there is no
support for applying the doctrine in the absence of a transaction between the parties or others
closely related to them, whereby the allocation of risks could be negotiated. Here, there was no
transaction between the parties that is used as the basis of plaintiffs' claims. Accordingly, there
is no basis for applying the economic loss doctrine in this case to bar plaintiffs' tort claim, and
we refuse to extend this judge-made doctrine to these circumstances.
We also decline to consider at this time defendant Corby's alternative argument for
dismissal that is based on public policy grounds. According to Corby, plaintiffs' negligence
claim is barred by a policy against "mass tort claims" by potentially thousands of plaintiffs
proceeding solely on allegations of economic damages. Corby cites several cases from other
jurisdictions in making its public policy argument. Significantly, the trial court in this case did
not rule on the Water Main Break Litigation plaintiffs' motion for class certification. The court
determined the issue was moot after it ruled that plaintiffs' claims were barred by the economic
loss doctrine. Under these circumstances, Corby's assertion that this case involves a mass tort
claim with the potential for disproportionate economic exposure is speculative. Given that the
number of plaintiffs in this case is defined by the pleadings below, we are not inclined to
(…continued)
that a decline in milk production was attributable to stray voltage from the milking system. Id.
This Court explained that, regardless of privity of contract, the UCC applies when the plaintiff is
a commercial buyer suing a manufacturer of goods for economic losses. Id. at 38. This Court
then held that the plaintiffs' claims were barred by the UCC statute of limitations. Id. at 38-39.
As in Citizens Ins Co, supra, the parties in Freeman were not in privity of contract, but the
plaintiffs' expectations were governed by an underlying contract between the plaintiffs and the
seller of the milking system. The parties had the opportunity to negotiate the terms of the
purchase and their economic expectations could be satisfied by contractual remedies.
10
Sullivan is another case where this Court held that the plaintiff 's claims were limited by the
UCC where the plaintiff 's expectations were governed by a commercial transaction. In Sullivan,
one of the defendants, a sealant manufacturer, supplied sealant to the other defendant, a glass
part supplier, who, in turn, supplied glass parts to the plaintiff manufacturer for making doors
and windows. Sullivan, supra at 336-337. The plaintiff brought claims based on tort and
contract against the defendants after the glass parts turned out to be defective. Id. at 337-338.
This Court held that the absence of privity between the sealant manufacturer defendant and the
plaintiff did not preclude application of the economic loss doctrine and that the plaintiff 's tort
claims against the sealant manufacturer defendant were barred. Id. at 344-345. Once again, this
Court found the economic loss doctrine to be applicable in a case where privity was not present,
but a contract for goods existed, which governed the underlying transaction.
-8-
speculate regarding the proper policy in the event a class is certified or the number of plaintiffs is
significantly increased.11
Reversed and remanded. We do not retain jurisdiction.
/s/ Brian K. Zahra
/s/ Jane E. Markey
/s/ Michael J. Talbot
11
Plaintiffs' argument regarding tortious ejectment was not preserved for our review because it
was not raised and addressed below. Thus, we decline to address it. Fast Air, Inc v Knight, 235
Mich App 541, 549; 599 NW2d 489 (1999). Moreover, given our conclusion that the trial court
erred in granting summary disposition to defendants on the basis of the economic loss doctrine,
we need not consider plaintiffs' additional argument that their claims fit a "danger exception" to
the economic loss doctrine.
-9-
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