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Howrey LLP
The 7th U.S. Circuit Court of Appeals has held that under Illinois law the economic loss rule precludes recovery on negligence claims by a manufacturer whose food products were contaminated by subcontractors' construction defects and recovery on duty-to-warn claims by the manufacturer against suppliers of the construction products that caused the contamination. American United Logistics, Inc., v. Catellus Development Corp., 319 F.3d 921 (7th Cir. 2003).
The case arose from contamination of snack food owned by Nabisco, Inc. that was stored in a newly constructed warehouse. Nabisco contracted with American United Logistics (AUL) for warehouse space to store Nabisco's bakery products. The contract required that poisonous, dangerous and foul-smelling chemicals be kept in a separate part of the warehouse. To obtain the needed space, an AUL affiliate leased a warehouse from Catellus Development Corp. The warehouse was under construction when the AUL affiliate and Catellus contracted. Catellus was told that the space had to be suitable for food storage.
Catellus' general contractor, Krusinski Construction, subcontracted with Brandoniso Construction Corp. to finish the concrete floor of the warehouse. The subcontract required that a specified finishing product safe for food storage be used. Instead, the subcontractor used a product that contained aromatic hydrocarbons, which have an odor. Upon discovering the mistake, the general contractor, Krusinski, subcontracted with another company, Artlow Systems, to strip off the offending finishing product but failed to specify what stripping agent should be used. As a result, a stripping agent that also contained aromatic hydrocarbons was used.
Unaware of this, Nabisco moved its snack food into the warehouse when construction was completed. Within a month, Nabisco learned from customers that snack food stored in the warehouse had been contaminated with a foul odor. Although the contamination posed no health risk, it left the snacks unfit for sale. The contamination was caused by residues of the aromatic hydrocarbons.
Nabisco sought $30 million for the value of contaminated snacks and for other losses. Nabisco sued AUL, its affiliate, the general contractor, the floor finishing subcontractor and the stripping subcontractor for negligence. It sued the suppliers of the finishing and stripping products for breach of their duty to warn of the effect of their products on food wrapped in polypropylene. The U.S. District Court dismissed Nabisco's claims, and the 7th Circuit affirmed.
The court began its analysis by reviewing the economic loss rule under Illinois law. The economic loss rule denies a party the right to pursue a tort remedy when the loss or harm is rooted in contractual or commercial expectations. Normally, contract law provides the remedy. Similarly, recovery in tort for disappointed commercial expectations based on implied duties and implied warranties between non-contracting partners also is barred by the economic loss rule. Thus, to recover in tort, the injured party must show harm above and beyond the party's contractual or commercial expectations. Or, the party must qualify for one of the three exceptions to the economic loss rule recognized by Illinois law. Here, the only exception advanced was that the property damage was caused by a sudden, calamitous or dangerous occurrence.
The 7th Circuit found that the injuries suffered by Nabisco were within its contractual expectations because its contract with AUL expressly provided that poisonous, dangerous or foul-smelling chemicals be kept in a separate part of the warehouse. Thus, the damages were contemplated in the contract and did not extend above and beyond the parties' commercial expectations. Accordingly, the claim was barred.
Nabisco's negligence claims against the AUL subsidiary, Catellus, the general contractor and the subcontractors also were rejected by the court. Those claims were based on an implied warranty against latent defects and sought economic damages for disappointed commercial expectations. The court held that the claims were a matter of contract law, not tort law, and were, therefore, barred.
Nabisco, however, argued that the damages were caused by a sudden, calamitous or dangerous occurrence and thus were excepted from the economic loss rule. It asserted that the snacks were contaminated immediately upon storage in the warehouse. The 7th Circuit rejected the argument. For the exception to apply to a loss from contamination, the court held, the contaminated product must have been rendered inherently and unreasonably dangerous. That was not what happened here. The aromatic hydrocarbons in the floor finishing and stripping products did not contaminate the snack foods in a way that posed a health risk to consumers. It only rendered them inedible. Consequently, the Court held that this exception did not apply, leaving Nabisco's negligence claims barred by the economic loss rule.
The court also held that the economic loss rule barred Nabisco's duty-to-warn claim against the manufacturers of the finishing and sealing products. Those claims, too, were based on disappointed commercial expectations, a matter of contract law, not tort law, and were barred, the court held.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2004 Howrey LLP
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