Cooperative Power Association v. Westinghouse Elec. Corp.
1992 N.D. LEXIS 254, 22 U.C.C. Rep. Serv. 2d (West) 685, 493 N.W.2d 661 (1992)
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Rule of Law:
In a commercial transaction, a manufacturer is not liable under tort theories, such as negligence or strict liability, for purely economic loss resulting from a product's component part failing and damaging only the product itself; the buyer's sole remedy lies in contract and warranty law.
Facts:
- Cooperative Power Association (CPA) purchased a 566 MVA generator step-up transformer from Westinghouse Electric Corporation (Westinghouse) for approximately $1,600,000.
- The contract covered both the main transformer unit and its component electrical conductors, called bushings.
- The transformer was delivered in January 1987 and placed in service in November 1987.
- During installation, a CPA technician noted loose caps on two bushings and, per CPA's allegation, was advised by Westinghouse to tighten them with pliers without specific torque instructions.
- In December 1988, an electrical arc occurred in a bushing, which damaged the bushing itself and contaminated the main transformer coils with metal particles.
- The damage was confined to the integrated transformer unit; no other property was damaged and no persons were injured.
- Westinghouse replaced the damaged bushings but refused to pay for the cost of rewinding the transformer coils.
Procedural Posture:
- Cooperative Power Association (CPA) sued Westinghouse Electric Corporation in the United States District Court for the District of North Dakota.
- CPA's complaint included counts for negligence and negligent misrepresentation (tort claims) as well as breach of contract and warranty.
- Westinghouse filed a motion for summary judgment, seeking dismissal of CPA's tort claims on the grounds that CPA's damages were purely economic losses.
- The U.S. District Court certified a question of state law to the Supreme Court of North Dakota to determine if such tort claims were permissible.
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Issue:
May a manufacturer of a machine sold in a commercial transaction be held liable in negligence or strict product liability theory for economic loss caused by the failure of a component part of the machine, which causes direct damage to the machine only?
Opinions:
Majority - Johnson, J.
No. A manufacturer of a machine sold in a commercial transaction may not be held liable in negligence or strict liability for economic loss caused by a failure of a component part of the machine which causes damage to the machine only. The court adopts the rationale of the U.S. Supreme Court in East River Steamship Corp. v. Transamerica Delaval, Inc., which established the 'economic loss doctrine' in admiralty law. The doctrine is grounded in the distinction between the purposes of tort and contract law. Tort law's primary concern is safety and imposing a duty on manufacturers to prevent their products from causing physical harm to people or other property. Contract law, governed by the Uniform Commercial Code (UCC), is designed to protect the expectations of the contracting parties and provide remedies when a product fails to meet those expectations, i.e., when the buyer does not receive the benefit of their bargain. When a product damages only itself, the loss is purely economic—the product has not met the customer's expectations, which is precisely the type of loss that warranty law is designed to address. Allowing tort recovery for such losses would undermine the comprehensive statutory scheme of the UCC and subject manufacturers to indeterminate liability for which the parties could have, and should have, allocated the risk by contract.
Analysis:
This decision formally adopts the economic loss doctrine for commercial transactions in North Dakota, aligning the state with the majority of U.S. jurisdictions. It creates a clear boundary between tort and contract law, forcing sophisticated commercial parties to rely on their negotiated agreements and the Uniform Commercial Code for remedies when a product is defective but causes no personal injury or damage to other property. The ruling emphasizes contractual freedom and risk allocation, preventing buyers from using tort law to circumvent warranty disclaimers or limitations of remedy they agreed to in their contracts. For future cases involving commercial product failures, the dispositive question will be the nature of the damage: if it is confined to the product itself, the claim sounds in contract; if it extends to 'other property' or persons, a tort action may be viable.
