Opinion
NO. 03-16-00206-CV
02-16-2018
Appellant, United States Steel Corporation // Cross-Appellant, John H. Young, Inc. v. Appellee, John H. Young, Inc. // Cross-Appellee, United States Steel Corporation
FROM THE DISTRICT COURT OF FAYETTE COUNTY, 155TH JUDICIAL DISTRICT
NO. 2010V-094 , HONORABLE JEFF R. STEINHAUSER, JUDGE PRESIDING MEMORANDUM OPINION
Appellee and cross-appellant John H. Young, Inc. ("Young") sued appellant and cross-appellee United States Steel Corporation ("U.S. Steel") for negligence, products liability, deceptive trade practices, breach of contract, and breach of implied and express warranty, all related to Young's purchase from U.S. Steel of seven-inch steel casing used in an oil well. A jury determined that Young and U.S. Steel were each 50% negligent, that U.S. Steel had not engaged in any deceptive trade practices, that the casing had a manufacturing defect that was a producing cause of the failure at the well, and that Young should recover $329,700 to reimburse its costs in removing the damaged casing from the well. Both sides filed various post-verdict motions, including motions to disregard jury findings and for new trial. In its motion to disregard the jury's finding of zero damages for the cost of replacing the damaged casing and the cost of installing remedial casing, Young elected to recover under its manufacturing-defect claim. The trial court signed a judgment in favor of Young, awarding it $329,700 in damages.
Young did not submit jury questions on its claims for design defect, breach of contract, or breach of warranty.
Both U.S. Steel and Young filed notices of appeal. U.S. Steel argues three issues on appeal: that the economic-loss rule bars Young from recovering damages under a tort theory, that there was legally and factually insufficient evidence of a manufacturing defect, and that the trial court erred in not halving the jury's damages award based on the finding that Young was 50% negligent. Young argues in its cross-appeal that the trial court erred in refusing to disregard the jury's awarding of zero damages for the costs of installing remedial five-inch casing. We reverse the trial court's judgment and render judgment in favor of U.S. Steel.
Is Young's recovery barred by the economic-loss rule?
As noted by both parties, the application of the economic-loss rule is a question of law we review de novo. See James J. Flanagan Shipping Corp. v. Del Monte Fresh Produce N.A., Inc., 403 S.W.3d 360, 365 (Tex. App.—Houston [1st Dist.] 2013, no pet.).
The principles known collectively as the "economic-loss rule" act to govern recovery of economic losses in particular areas of the law. Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 415 (Tex. 2011) (quoting Vincent R. Johnson, The Boundary-Line Function of the Economic Loss Rule, 66 Wash. & Lee L. Rev. 523, 534-35 (2009)). The purpose of the rule is to separate the law of torts from the law of contracts—to "delineate between tort and contract claims." LAN/STV v. Martin K. Eby Constr. Co., 435 S.W.3d 234, 239-40 (Tex. 2014) (quoting Johnson, 66 Wash. & Lee L. Rev. at 546). "The economic loss rule applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself." Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 867 (Tex. 2007). "In such cases, recovery is generally limited to remedies grounded in contract (or contract-based statutory remedies), rather than tort." Sharyland Water, 354 S.W.3d at 415; see A&H Props. P'ship v. GPM Eng'g, No. 03-13-00850-CV, 2015 WL 9435974, at *1-2 (Tex. App.—Austin Dec. 23, 2015, no pet.) (mem. op.) ("The economic-loss rule limits the recovery of purely economic damages that are unaccompanied by injury to the plaintiff or its property in actions for negligence," and "[w]hen the doctrine is applicable, a plaintiff cannot maintain a negligence cause of action against a defendant when its damages are only for economic losses caused by the failure to perform a contract.").
In deciding whether the doctrine is applicable, we consider (1) whether the defendant's duty arose from a contract or whether it was imposed by law and independent of the contract and (2) the nature of the injury, asking whether the loss was only "to the subject of a contract itself." A&H Props., 2015 WL 9435974, at *2 (citing Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 45 (Tex. 1998); Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986)). In this context, "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 the 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.Castle Tex. Prod. Ltd. P'ship v. Long Trusts, 134 S.W.3d 267, 274 (Tex. App.—Tyler 2003, pet. denied) (quoting Thomson v. Espey Huston & Assocs., 899 S.W.2d 415, 421 (Tex. App.—Austin 1995, no writ)); see A&H Props., 2015 WL 9435974, at *1; Goose Creek Consol. Indep. Sch. Dist. v. Jarrar's Plumbing, Inc., 74 S.W.3d 486, 494 (Tex. App.—Texarkana 2002, pet. denied); Bass v. City of Dallas, 34 S.W.3d 1, 9 (Tex. App.—Amarillo 2000, no pet.).
Young argues that the defective casing should be considered as having damaged the well and, therefore, as having caused damage to "other property" so as to move its damages beyond the boundaries of economic losses. It notes that casing is a necessary and, in fact, statutorily required part of an oil and gas well, and argues that "[w]hen casing is damaged and remains downhole, as here, the entire well is damaged" until the casing is removed and replaced and remedial steps are taken to remedy the problem. It contends that if it had been unable to remove and replace the defective portions of casing and reinforce the casing that was left, the well would have been inoperable, and asserts that the fact that it was able to repair the well "does not mean the damage did not occur." U.S. Steel, on the other hand, argues that Young did not show that it suffered any property damage beyond the defective casing, pointing to testimony by Young's representative, T.H. Milstead, who, when asked whether there was "any damage to the well itself," answered, "Not that I'm aware of." He was further asked whether "the only property that was damaged in the course of all of this was the actual casing," and he answered, "Yes." Milstead explained that the result of the failed casing was that the well had no "pressure integrity" and was left dangerously vulnerable to an "influx of oil or gas" until the casing was repaired. Because of the failed casing, Young changed its plans to install a remedial five-inch casing, rather than a less expensive liner, as originally planned.
See Tex. Nat. Res. Code § 91.011(a) (requiring owner or operator of well to encase well "with good and sufficient" casing).
Young points to the supreme court's decision in Sharyland Water Supply as support for its proposition that Young's damages for removing, replacing, and reinforcing the casing are not barred by the economic-loss rule. However, the facts in Sharyland were markedly different than those presented here. Sharyland Water Supply sued after a city-hired contractor installed a new sewer system, resulting in sewer lines running parallel to and across the water main; Sharyland was not involved in the sewer contract. 354 S.W.3d at 410. The court of appeals held that Sharyland had suffered only economic losses and, therefore, could not recover under its negligence claim. Id. at 415. The supreme court explained that it had thus far "applied the economic loss rule only in cases involving defective products or failure to perform a contract" because in such cases, a party's economic losses "were more appropriately addressed through statutory warranty actions or common law breach of contract suits than tort claims." Id. at 418. The court disapproved of the court of appeals' analysis as "both overstat[ing] and oversimplif[ying] the economic loss rule" to essentially say "that you can never recover economic damages for a tort claim," observing that if the negligence claim was barred simply because the sewer was the subject of a contract—one to which Sharyland was not a party—that would mean that "a party could avoid tort liability to the world simply by entering into a contract with one party." Id. at 418-19. The court specifically did not decide whether "purely economic losses may ever be recovered in negligence or strict liability cases" because there was evidence that the water system had been damaged—Sharyland was going to have to either relocate or encase its water lines, and the court stated that "[c]osts of repair necessarily imply that the system was damaged." Id. at 419-20. The court concluded that the economic loss rule "cannot apply to parties without even remote contractual privity, merely because one of those parties had a construction contract with a third party, and when the contracting party causes a loss unrelated to its contract." Id.
Contrary to Young's argument, Sharyland does not bar application of the economic-loss rule here, where there is contractual privity between Young and U.S. Steel and where Young's loss is directly related to and arising from that contract. See id. We do not read Sharyland's statement that "[c]osts of repair necessarily imply that the system was damaged" to mean that, under these particular facts, Young suffered damage to "other property" so as to avoid the economic-loss rule. See id. The facts in Sharyland were different, and its logic therefore does not cleanly apply to this case. We decline to extend its holding to the facts presented by this case, consistent with the economic-loss rule as it has developed in the context of defective products provided under contracts.
Nor do the other cases cited by Young support its argument. In Cressman, for example, an oil-well tubing string failed, resulting in a "sudden dramatic loss of pressure" and causing mud to enter the well formation and "a mixture of fracture fluid, proppant, and mud [to be] mixed with the condensate that flowed from the well." Cressman Tubular Prods. Corp. v. Kurt Wiseman Oil & Gas, Ltd., 322 S.W.3d 453, 456 (Tex. App.—Houston [14th Dist.] 2010, pet. denied). The tubing string continued to fail repeatedly over several years, requiring the well to be cleared of mud and couplings to be replaced. Id. at 456-57. For about a year, a gas lift had to be used to raise the oil out of the well until the entire tubing string was replaced and a second "fracture stimulation" was conducted, allowing the well to produce again; the company maintained its lease during those repairs by producing oil from another well it had leased on the same property. Id. at 456-57. Wiseman sued for breach of warranty, products liability, and deceptive trade practices. Id. at 457. In considering whether the implied-warranty claim sounded in tort and, thus, whether the finding of proportionate responsibility should have been applied, the court held that damage to the well formation and the well bore was damage to real property and a real-estate improvement, respectively, and that "[b]oth are 'property damage'; thus, the exception applicable to implied-warranty claims that result solely in economic damages does not apply here." Id. at 462. In Chapman Custom Homes, the supreme court, while noting that the "economic loss rule generally precludes recovery in tort for economic losses resulting from a party's failure to perform under a contract when the harm consists only of the economic loss of a contractual expectancy," held that when a plumbing subcontractor improperly installed plumbing in a new house, resulting in "extensive damage to the structure," the plumber's duty not to flood or otherwise damage the house was independent of his subcontract to install the plumbing system. Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W.3d 716, 717-19 (Tex. 2014). Here, there was no evidence of damage to the well formation, the well bore, or any other property outside of the casing itself. Instead, Young was able to remove and replace the damaged casing and reinforce the remaining casing with remedial five-inch casing, resulting in a productive well.
In Equistar Chemicals, a compressor part and its replacement both failed, "causing major damage to the compressor, its turbine and adjacent parts of the plant." Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 865 (Tex. 2007). Dresser was found to have waived error as to the application of the economic-loss rule because it did not object to the jury questions, which asked only what it would cost to restore the plant and did not ask the jury to distinguish between damages for torts and damages for breach of implied warranty. Id. at 868. In Bay Rock Operating, after pressure pushed drilling mud into the formation, causing the well to blow out and the rig to burn, the lease's insurance company sued the company hired to design and drill the well for "damages arising from the blowout, including but not limited to 'repair, completion and evaluation of the well, well control, lost gas sales and redrill of the well,'" and our sister court held that "[t]hose types of damages are clearly property damages," meaning that prejudgment interest was available. Bay Rock Operating Co. v. St. Paul Surplus Lines Ins. Co., 298 S.W.3d 216, 221, 230 (Tex. App.—San Antonio 2009, pet. denied). Unlike those cases, there is no evidence here of damage to other parts of the well, any machinery, or the well formation itself. And Parkway held that homeowners could not receive damages for both diminution in the value of their house following a plumbing leak, calculated by comparing the value of the house without flooding to its value after the flooding but before repair, and the repair costs. Parkway Co. v. Woodruff, 901 S.W.2d 434, 441 (Tex. 1995). Consequently, Parkway presented a different question (how to value a home following an event that requires repairs), did not address the economic-loss rule, and is not applicable here.
"[A] party states a tort claim when the duty allegedly breached is independent of the contractual undertaking and the harm suffered is not merely the economic loss of a contractual benefit." Id. at 719. In the case at hand, Young asserted and the jury agreed that the seven-inch casing provided by U.S. Steel was defective. The jury decided that Young expended about $330,000 in fishing out the damaged casing and zero in costs to replace the damaged casing or to install the five-inch remedial casing. Young did not seek to submit jury questions on its claims for breach of contract or breach of warranty, choosing to proceed on its claim for manufacturing defect. Even assuming that the jury erred in determining that Young did not incur damages related to the remedial casing, this case simply does not present any evidence of damages beyond the repair and replacement costs associated with the defective casing. We conclude that the costs associated with removing, replacing, and reinforcing the defective casing are economic losses. See Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77, 78 n.1 (Tex. 1977) (in addition to damages based on "insufficient product value," "[d]irect economic loss also may be measured by costs of replacement and repair" (quoting Note, Economic Loss in Products Liability Jurisprudence, 66 Colum.L.Rev. 917, 918 (1966))); A&H Props., 2015 WL 9435974, at *1 (economic loss includes costs of repairing or replacing defective product); Castle Tex. Prod., 134 S.W.3d at 274 (same); Thomson, 899 S.W.2d at 421 (same).
We are further persuaded of that conclusion by the fact that the casing was a necessary component of the well as a whole, as noted by Young itself, and by cases discussing the application of the economic-loss rule when a component part of a larger system is defective. See Lopez v. Huron, 490 S.W.3d 517, 522-25 (Tex. App.—San Antonio 2016, no pet.) (considering cases addressing "what is and is not considered 'other property'" and concluding that food damaged by defective plastic bags was economic loss); Pugh v. General Terrazzo Supplies, Inc., 243 S.W.3d 84, 92 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) ("In regard to application of the economic loss doctrine to losses arising out of a defective product when there is no occurrence of 'personal injury' or damage to 'other property,' Texas courts have rejected the argument that damage to a finished product caused by a defective component part constitutes damage to 'other property,' so as to permit tort recovery for damage to the finished product."); Zurich Am. Ins. Co. v. Hughes, Watters & Askanase, L.L.P., No. 11-05-00044-CV, 2006 WL 1914689, at *3 (Tex. App.—Eastland July 13, 2006, pet. denied) (mem. op.) ("[P]roperty damage cannot consist merely of damage to an intangible asset or increased operational costs. Instead, some physical destruction of tangible property must occur."); see also East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 867-68 (1986) (under admiralty law, plaintiff cannot recover under tort when defective component only damages unit into which it was integrated; "the injury suffered—the failure of the product to function properly—is the essence of a warranty action, through which a contracting party can seek to recoup the benefit of its bargain"). We cannot conclude that the need to repair or replace the casing component should be viewed as damage to "other property."
Although Young proceeded under a tort theory at trial, the subject matter of this dispute is the defective nature of the casing provided by U.S. Steel under its contract with Young, and the damages Young incurred flowed from that contract. See, e.g., Levco Constr., Inc. v. Whole Foods Mkt. Rocky Mountain/Sw. L.P., ___ S.W.3d ___, No. 01-15-00620-CV, 2017 WL 3429939, at *13 (Tex. App.—Houston [1st Dist.] Aug. 10, 2017, no pet.) ("The subject matter of the dispute—the accuracy of the Contract Documents and remedy for expenses or delays caused by deficiencies in the Contract Documents—is addressed in the parties' contracts. This indicates that Levco's claims are barred by the economic loss rule."). Therefore, Young suffered no damage beyond economic losses, and it is barred by from recovering under a tort theory of liability. See A&H Props., 2015 WL 9435974, at *2-3. We sustain U.S. Steel's first issue on appeal.
We need not address U.S. Steel's other two appellate issues, which it raised as alternative arguments in the event we overruled its first issue.
Conclusion
Because the economic-loss rule bars Young from recovering on a tort claim against U.S. Steel, the trial court should have granted U.S. Steel's motion for entry of judgment in its favor. Young is barred by that rule from recovery even if the jury erred in its determination of zero damages related to the installation of the five-inch remedial casing, and thus we resolve Young's cross-appeal against it. We reverse the trial court's judgment and render judgment that Young should take nothing in its claims against U.S. Steel.
/s/_________
Cindy Olson Bourland, Justice Before Chief Justice Rose, Justices Field and Bourland Reversed and Rendered Filed: February 16, 2018