Monday, December 27, 2004
Economic Loss Rule No Bar to Recovery for Fraud, S.C. Rules
By KENNETH OFGANG, Staff Writer/Appellate Courts
The economic loss rule, which often bars tort actions between a buyer and seller of goods, does not apply to a claim that one of the parties committed fraud or intentional misrepresentation in the performance of the contract, the state Supreme Court has ruled.
In a 6-1 decision, the justices Thursday reversed a January 2003 ruling by Div. Three of this district’s Court of Appeal, which applied the economic loss rule in throwing out a $6 million punitive damage award in favor of a helicopter manufacturer against a company found to have sold it defective parts.
Yesterday’s decision sends the case back to Div. Three, which did uphold the plaintiff’s $1.5 million compensatory damage award for breach of contract and breach of warranty, to decide issues left unresolved by last year’s ruling.
The contract at issue was for the purchase of sprag clutches made by Formsprag, a division of the defendant Dana Corporation. The sprag clutch is a safety device that allows the rotor blades to continue turning if the helicopter loses power during flight, thus enabling the pilot to maintain control and land safely.
The plaintiff, Robinson Helicopter Company, which purchased nearly 4,000 of the clutches over a 12-year period, complained in 1998 that an unusually high number of clutches manufactured between July 1996 and October 1997 had failed.
It was then that it learned, according to trial testimony, that Dana had changed the hardness level used in its manufacturing process during that period.
While there were no claims that defective clutches had caused accident or injury, Robinson was forced by U.S. and British aviation authorities to recall all of the clutches ground to the higher level of hardness—nearly 1,000—at a cost, the company said, of more than $1.5 million.
Dana disclaimed liability, contending that the problems were due to Robinson’s inadequate designs, which Dana said placed too much stress on the clutch assemblies.
But the Los Angeles Superior Court jury, after a nine-day trial, concluded that Dana not only breached its contract and warranty, it misrepresented or concealed the fact that it had changed the manufacturing process.
In reversing the punitive damage award, the Court of Appeal held that Los Angeles Superior Court Judge Jean Matusinka should not have allowed the tort theory to go to the jury.
The panel said recovery in tort was barred by the economic loss rule, which, Justice Walter Croskey explained, “precludes a recovery in tort where the sale of a defective product has resulted in no property damage or bodily injury, but only economic loss to the buyer of that product.”
‘Dispositive Fraudulent Conduct’
But Justice Janice Rogers Brown, writing for the high court, said Robinson had, contrary to the conclusion of the Court of Appeal, proven “dispositive fraudulent conduct” independent of the breach of contract—continuing to provide written certificates to Robinson with each delivery, falsely asserting that the clutches had been manufactured in conformance with Robinson’s written specifications.
Brown rejected the argument that limiting the buyer to a contract remedy under such circumstances would be consistent with public policy encouraging commercial transactions with predictable results.
“No rational party would enter into a contract anticipating that they are or will be lied to,” the justice wrote. “...Dana’s argument therefore proposes to increase the certainty in contractual relationships by encouraging fraudulent conduct at the expense of an innocent party. No public policy supports such an outcome.”
The opinion was joined by Chief Justice Ronald M. George and Justices Joyce L. Kennard, Marvin Baxter, Ming Chin, and Carlos Moreno.
The lone dissenter, Justice Kathryn M. Werdegar, argued that while a result that punishes a wrongdoer “is undeniably appealing,” there were “sound reasons” to apply the economic loss rule to claims such as Robinson’s.
Dana’s falsehoods, Werdegar insisted, did not constitute an independent tort because they related solely to the performance of the contract.
“Of course, rare is the commercial contract that does not involve ongoing statements by the parties relating to their performance,” the jurist wrote. “In all such cases, under the majority’s rule, it is now possible to plead a fraud claim.”
Werdegar warned of dire consequences.
“Dana’s conduct should be sanctioned, and it has been,” she wrote. “But to allow tort recovery for bad faith denial of a breach that led only to economic damages is to prescribe a cure worse than the disease. Today’s decision greatly enhances the ease with which every breach of contract claim can don tort clothes. I fear that in doing so, it opens a Pandora’s box better left sealed.”
The case was argued in the Supreme Court by Edwin V. Woodsome Jr. of Orrick, Herrington & Sutcliffe’s Los Angeles office for Dana Corporation and Edward J. Horowitz of Pacific Palisades for Robinson Helicopter.
The case is Robinson Helicopter Company Inc. v. Dana Corporation, 04 S.O.S. 6705.
Copyright 2004, Metropolitan News Company