SAUNDERS & SCHMIELER, P.C.

Recent Developments in the Law

Special Edition - Products Liability

Privity of Contract is required between the parties in order for the Plaintiff to recover economic damages in a breach of warranty claim.

Re: :Case: Beard Plumbing and Heating Inc. v. Thompson Plastics, Inc.; NIBCO, Inc. and Thomas Somerville Company

Subject: Law of Product Liability

Attorney for the Product Manufacturer: Jeffrey R. Schmieler, Esquire and Saunders & Schmieler

Saunders & Schmieler has been successful in establishing a major breakthrough in product liability law. I am pleased to set forth the synopsis of the United States Court of Appeals for the Fourth Circuit, Beard Plumbing and Heating, Inc. v. Thompson Plastics, Incorporated; NIBCO, Inc., which was decided on August 10, 1998. The firm of Saunders & Schmieler represented the interests of Thompson Plastics, a manufacturer of CPVC plumbing components which had been sued by Beard Plumbing, a plumbing subcontractor who had purchased CPVC plumbing fittings manufactured by Thompson and who had installed the fittings in a condominium development in Woodbridge, Virginia. There were no contracts between the manufacturer(s) and the plumbing subcontractor. When the fittings cracked and subsequently leaked after hot water was used in the system, the general contractor required Beard to replace the fittings and repair the damage sustained by the homes. The general contractor sued Beard, which settled for $165,878.93. In addition to that loss, Beard claimed that it was denied compensation for performing change orders on the site, was denied compensation for the costs of repairs to the damaged buildings, was denied the remainder of the contract price, incurred legal fees, and lost revenue due to damage to its business reputation. Beard filed suit alleging both negligence, breach of warranty of fitness for a particular purpose, and breach of implied warranty of merchantability.

The Court affirmed the decision of the United States District Court for the Eastern District of Virginia which had granted summary judgment in favor of the manufacturer(s) in the above-noted matter on the grounds that privity of contract is required to recover economic loss damages under the uniform commercial code as adopted in Virginia, in a cause of action based on a claim of breach of implied warranty of merchantability. The Court adopted as its rationale, the arguments asserted on behalf of Thompson Plastics, in the Appellee Brief filed with the Virginia Supreme Court.

The Court, in performing its analysis of to the issues presented, held that Virginia Code Section 8.2-715 (2) requires the existence of a contract between the parties for recovery of economic loss damages in a breach of warranty case. The Court acknowledged that this issue is one of first impression not only in the Commonwealth of Virginia, but in the entire country.

The court’s opinion represents a landmark case in the law of products liability as it is the first reported case in the country to establish that economic losses cannot be obtained in a case involving breach of warranty under the Uniform Commercial Code in the absence of privity of contract.

The court applied the economic loss rule that had previously been recognized in Virginia in the Sensenbrenner case, holding that absent privity of contract economic losses cannot be recovered in a negligence action and also went on to apply the same principle to establish that privity of contract is also necessary in a claim of breach of warranty for fitness for a particular purpose. Most importantly, the court adopted the final argument asserted on behalf of the assured, Thompson Plastics, Inc., with respect to the Plaintiff’s claim of breach of implied warranty of merchantability recognizing that it is "a much more difficult problem" and held as the first such opinion in the country that economic losses cannot be recovered in a claim of breach of warranty for merchantability in the absence of privity of contract.

This decision has an enormous impact in the law of products liability as it will be applied to prevent liability claims for economic losses against product manufacturers unless a contract exists between the Plaintiff and the Defendant product manufacturer.

Product Liability. In Beard Plumbing and Heating, Inc. v. Thompson Plastics, Incorporated; NIBCO, Inc.

Jeffrey R. Schmieler, Esquire
Law Offices
Saunders & Schmieler
8737 Colesville Road
Suite L-201
Silver Spring, Maryland 20910
(301) 588-7717

Saunders & Schmieler has been successful in establishing a major breakthrough in product liability law. The firm is pleased to set forth a synopsis in the form of a special issue of our recent developments publication of the opinion of the United States Court of Appeals for the Fourth Circuit, namely, Beard Plumbing and Heating, Inc. v. Thompson Plastics, Incorporated; NIBCO, Inc. which was decided on August 10, 1998. The firm of Saunders & Schmieler represented the interests of Thompson Plastics, a manufacturer of CPVC plumbing components.

Beard Plumbing is a corporation based in Virginia that provides plumbing and heating materials and labor. In 1992, Beard was the plumbing subcontractor in a condominium development. Beard used CPVC plumbing fittings manufactured by Thompson or NIBCO in the condominium. The fittings were purchased from two third-party suppliers. There were no contracts between Beard and either Thompson or NIBCO.

The fittings used in the condominium cracked and leaked after hot water was used in the system. The general contractor for the condominium filed suit against Beard and settled for $165,878.93. Beard, in turn, filed suit against Thompson and NIBCO in June of 1995 to recover the alleged losses of settlement costs, compensation for replacing condominium components, compensation for cost of repairs, compensation for the remainder of the contract price, legal fees, and lost revenue due to damaged business reputation. Beard claimed the CPVC fittings that they used, manufactured by Thompson and NIBCO, were defective. The complaint alleged breach of warranty and negligence.

The suit was brought to the District Court who granted the motions for summary judgment filed by both Thompson and NIBCO. The District Court judge stated that there was no dispute as to the fact that this was a case of purely economic loss; therefore, recovery based on the grounds of negligence was barred. He continued to state that Beard did not meet the requirements for a breach of warranty claim. Beard's failure to show reliance on the seller's skill and/or judgment, during the purchase of the CPVC components kept the breach of warranty claim from being presented as an applicable issue.

Beard Plumbing filed an appeal asserting three causes of action: (1) negligence sounding in tort, (2) breach of the warranty of fitness for a particular purpose, and (3) breach of implied warranty of merchantability. This appellate issue was presented to the United States Court of Appeals for the Fourth Circuit.

The United States Court of Appeals found the negligence claim asserted by Beard barred by Virginia law. Virginia law stemming from the case Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 374 S.E.2d 58 clearly shows that absent privity of contract, any claim of economic loss can not be recovered in a negligence action. Sensenbrenner re-iterates the fact that tort law is designed to protect the safety of persons and property from injury and the law of contracts seeks to protect bargained-for expectations. Beard claimed that the damages it incurred went beyond purely economic loss. However, the Uniform Commercial Code § 11-5 at 406 defines economic loss to include "loss of profits resulting from failure of the goods to function as warranted" and "loss of business reputation." All Beard's claims addressed bargained-for expectations; whereas none of them would remedy injury to the safety of persons or property. Based on this reasoning and on the fact that Beard's claim was purely economical, the law of contracts provided the sole remedy and tort law was barred. The summary judgment addressing this issue was affirmed.

Summary judgment for the second count which alleged breach of warranty of fitness for a particular purpose was also granted by the United States Court of Appeals. The Supreme Court of Virginia had established that the Virginia Code requires three elements to exist

for a warranty of fitness for a particular purpose to be applicable: "(1) the seller had reason to know the particular purpose for which the buyer required the goods, (2) the seller had reason to know the buyer was relying on the seller's skill or judgment to furnish appropriate goods and (3) the buyer in fact relied upon the seller's skill or judgment." Beard can not satisfy the third element required for this type of breach of warranty claim. There was never any interaction between either NIBCO and/or Thompson and Beard. Beard purchased the merchandise through a third party. Therefore, the District Court's ruling that granted summary judgment concerning this count was affirmed. The final claim dealt with breach of implied warranty of merchantability. Thompson and NIBCO relied on three defenses concerning this count. First, the Defendants claimed that Beard improperly installed the component. However, the Court found that this "misuse defense" did not void the manufacturer's responsibility to produce a merchantable item.

B.F. Goodrich manufactured the resin that Beard used with the plumbing installation. The second defense asserted that B.F. Goodrich's express disclaimers of warranty covered both Thompson and NIBCO since it was included in the installation guide. This defense was unavailing due to the fact that Beard did not attest a problem with the B.F. Goodrich resin. The problem pertained to the plumbing components manufactured by Thompson and NIBCO and was therefore not covered under B.F. Goodrich's disclaimer.

The third defense presented by Thompson and NIBCO claimed that Beard suffered only economic loss and therefore could not recover under the Virginia's Commercial Code. The Code's language concerning damage provisions reads that it will not permit recovery of economic loss for a breach of warranty claim absent privity. There was no case law established to support the defense proffered by Thompson and NIBCO, as this was a case of first impression.

In Richmond, F. & P. R.R. v. Davis Indus., 787 F. Supp. 572 (E.D. Va.1992), the District Court argued that privity was required to recover economic losses in negligence claims. Due to this reasoning, the Court considered it a conceivable idea that the Virginia Supreme Court would additionally require privity in the recovery of economic loss in a breach of warranty claim. Thus, the issue was sent to the Supreme Court of Virginia.

The Virginia Supreme Court concluded that the economic loss damages that were incurred by Beard constituted consequential damages. Section 8.2-715(2)(a) of the Uniform Commercial Code states "any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise;" [Emphasis added]. The language of the section presumes that a contract existed between the parties. Beard's interpretation of this section would require the substitution of the word "sale" where the word "contracting" exists. The Virginia Supreme Court refused to change the wording of the code and concluded that this section requires the existence of a contract between parties for recovery of consequential economic loss regarding a breach of warranty claim.

Section 8.2-318 of the Uniform Commercial Code was also examined. This provision seemingly conflicted with section 8.2-715(2)(a). Section 8.2-318 was a general address regarding the use of privity as a defense when concerning breach of warranty claims. The rules of statutory construction resolved the conflict of these two sections. The rules state that if one section addresses a subject matter in a general form and another section addresses the same subject matter in a specific regard, then the section using the more specific interpretation prevails. Applying this rule to the case as hand, Section 8.2-715(2)(a) prevails. Accordingly, the Virginia Supreme Court decided that privity of contract is required to recover economic loss damages in a cause of action based on a claim of breach of impled warranty of merchantability. The Supreme Court affirmed the decision of the lower court to grant summary judgment in favor of Thompson and NIBCO.

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