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By
Daven G. Lowhurst
Thelen Reid Brown Raysman & Steiner LLP
It
has long been the rule in California that the developer
of mass-produced (tract) homes or condominiums can be held
strictly liable for construction defects. Tract housing
has been viewed as a "product" for strict products
liability purposes, and the developer that supplies such
housing has been treated no differently than the manufacturer
or supplier of other mass-produced products. However, there
was uncertainty whether manufacturers of components
installed in tract housing were subject to strict liability
because the state's appellate courts had reached opposite
conclusions.
The
California Supreme Court has resolved the conflict by ruling
that a manufacturer of defective windows installed in a
mass-produced home can be held strictly liable for resulting
physical damage to other parts of the house. In so ruling,
the court examined the interplay between a strict products
liability claim and the bar to recovery imposed by the economic
loss rule. Jimenez v. Superior Court, __ Cal.4th
__, __ Cal.Rptr.2d ___, 2002 DJDAR 13639 (December 5, 2002).
The Ruling
Owners
of tract homes in a development sued for damage to parts
of their homes. They asserted a strict liability claim against
two manufacturers of windows that allegedly damaged stucco,
insulation, framing, drywall, paint, floor coverings and
other parts of their homes. The trial court, on a motion
for summary adjudication, dismissed the strict liability
claim. But, the Court of Appeal reversed, holding that a
manufacturer of a defective component installed in a mass-produced
home can be strictly liable for damage to other parts of
the house.
The
Supreme Court affirmed. It found that the policies underlying
strict liability against manufacturers and suppliers of
complete products apply equally to manufacturers
and suppliers of components installed in mass-produced homes.
The court rejected the manufacturers' argument that strict
liability was not available because the manufacturers supplied
only component parts of mass-produced homes rather than
the completed homes themselves.
The
court then addressed the extent to which a strict liability
recovery could be barred by the economic loss rule. In essence,
the economic loss rule precludes a tort recovery when the
damage is to the defective product itself. In such cases,
the right to compensation is governed by the law of contractual
warranty rather than tort law. Here, the window manufacturers
argued that there could be no tort liability because the
"product" at issue was the entire home and that,
therefore, damage to the other components resulting from
the allegedly defective windows was damage to the product
itself.
The
Supreme Court rejected this argument, explaining that a
manufacturer's duty to prevent property damage does not
end simply because the product has been incorporated into
a larger product. Because the window manufacturers were
not able to rule out the possibility that the windows caused
damage to other parts of the homes, it was error for the
trial court to dismiss the strict liability claim.
The Implications
Jimenez
provides guidance on several important issues but also leaves
several issues unresolved.
First,
the ruling on strict liability means that homeowners suing
a manufacturer for producing a defective component are not
required to prove negligence, i.e., that the damage to their
homes was caused by the defendant's failure to exercise
reasonable care in the design or manufacture of the product.
Rather, they may recover in strict liability by proving
that the product was defective when it left the factory
and that the defect caused the damage.
Second,
the decision is clear that strict liability applies to "the
manufacturers of component parts, here windows, that are
installed in mass-produced homes.…" But what products
or materials will qualify as "component parts"
subject to strict liability is not well-defined in Jimenez.
For now, litigants will have to look to prior decisional
law to assess whether a qualifying "component"
is involved.
Third,
while the court focused on component manufacturers,
the court's discussion of the policies underlying strict
products liability suggests that the same rule will apply
to defendants who supply defective components to
the jobsite, even if they did not manufacture the components.
Fourth,
the fact that a product is shipped in parts and assembled
and installed by others likely will not avoid strict liability
unless the product is substantially changed before it reaches
the user. As the court explained: "The issue is not
whether the product was sold fully assembled or in parts
but rather whether the defect… existed when the windows
left the manufacturers' control."
Fifth,
the court appears to have gone out of its way to limit its
ruling to defective windows that cause damage to other parts
of the home, and little guidance is provided as to what
other housing components are subject to the economic loss
rule. Further, the majority decision expressly left open
the question of "whether defective raw materials
should be treated in the same manner as component parts…"
(although a concurring and dissenting opinion by Justice
Brown questions how raw materials could be excluded from
the court's holding, given the expansive definition of "product").
Further,
having acknowledged that application of the economic loss
rule requires that "we must first determine what the
product at issue is" (since there can be no tort recovery
for damage to the defective product itself), the court offers
little guidance outside the context of windows. Indeed,
the majority decision expressly left open the question of
"whether there may be situations in which the economic
loss rule would bar recovery for damages that a defective
component part causes to other portions of the finished
product of which it is a part."
Having
left this issue open in the majority opinion she authored,
Justice Kennard wrote a concurring opinion to explain her
view that even when one component damages another component
of the same, larger product, tort recovery should be denied
when the defective component has been so "integrated"
into the larger product that the defective component has
lost its "separate identity." Using this analytical
framework, Justice Kennard concludes that "windows
may be regarded as a distinct product for purposes of the
economic loss rule" because they can be readily removed
from one home and installed in another home.
Thus,
tort recoveries in construction or product liability actions
may hinge on what the relevant "product" is determined
to be and whether it has been so integrated into a larger
product that the component has lost its separate identity.
One factor in this analysis may be the ease with which the
component can be removed from the larger product and reinstalled
in another product. This issue is likely to become the focal
point of many tort claims based on defective components
installed in larger products.
In
sum, Jimenez resolves a conflict in the appellate
courts by ruling that strict products liability applies
to defective windows installed in tract housing. It also
affirms the viability of the economic loss rule as a limitation
on tort liability. However, the Supreme Court left many
issues unresolved, virtually ensuring considerable legal
debate to establish the boundaries of both the strict liability
doctrine and the economic loss rule.
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For more information about the issues covered in this report, please contact Daven G. Lowhurst in our San Francisco office at 415-369-7270 or at dglowhurst@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2002 Thelen Reid Brown Raysman & Steiner LLP
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