East River Steamship Corporation v. Transamerica Delaval Inc.

PETITIONER:East River Steamship Corporation
RESPONDENT:Transamerica Delaval Inc.
LOCATION:Southhampton County Circuit Court

DOCKET NO.: 84-1726
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 476 US 858 (1986)
ARGUED: Jan 21, 1986
DECIDED: Jun 16, 1986

ADVOCATES:
Robert Frederick Smith – on behalf of the respondent
Robert Eugene Smith – on behalf of the respondent
Thomas E. Durkin, Jr. – on behalf of the petitioners

Facts of the case

Transamerica Delaval Inc. designed and manufactured propulsion systems for four supertankers. The propulsion systems eventually failed due to design and manufacturing flaws. Only the propulsion systems themselves were damaged – no other part of the ship was damaged, and no one was injured.

East River Steamship and the other companies that had purchased the supertankers sued Transamerica under the negligence and products-liability doctrines of tort law, a branch of law that deals with injuries not covered by contractual agreements. They sought compensation for the cost of repairing the ships as well as for the income they lost while the ships were out of service. The district court, however, granted summary judgment to Transamerica. It held that the injuries were not covered by tort law because only the propulsion systems themselves had been injured, and that the case therefore dealt with the product’s warranty rather than tort law. The Third Circuit Court of Appeals heard the case en banc and affirmed the district court’s decision.

Question

When a product fails as a result of design and manufacturing flaws, damaging only itself and causing only economic harm, can the owner of the product bring suit against the manufacturer under the negligence or products-liability doctrines of tort law?

Warren E. Burger:

Mr. Durkin, I think you may proceed whenever you are ready.

Thomas E. Durkin, Jr.:

Mr. Chief Justice, may it please the Court:

All of the circuits that have addressed most of the questions that are here under consideration indicate agreement on certain aspects.

One, all circuits agree that admiralty law is applicable to this type of claim.

All of the circuits also indicate their full agreement that strict liability in torts is applicable in admiralty cases.

Four of the five responding circuits had enunciated a rule relative to the damages that are pleadable and collectible in a strict liability and tort claimed under admiralty.

One circuit assumes a different posture.

Before I address specifically the question involved, I would most respectfully invite the Court’s attention to two or three, quote, “facts” as set forth in the opinion here under consideration and of the Third Circuit which do not seem to comport with the record upon which those particular findings were made.

And the most grievous, if I may refer to it as such, is the references in the opinion written by Judge Hunter that the one ship involved, the Bay Ridge, never left the dock.

Indulge me for a moment to succinctly outline the differing factors of the first of the three ships and the Bay Ridge.

The episode all started by the problem that was encountered by the Stuyvesant.

At the time the Stuyvesant encountered that particular problem, there was then under construction at a shipyard in Brooklyn the Bay Ridge.

The shipyard that constructed the four of these supertankers was the same.

The supplier of the turbines that were installed in these particular supertankers was also the same.

Now, at the time the Stuyvesant experienced its problem, there was a decision made… The basis for the decision I will review very shortly… that the circumstances required an exchange of the ring that was then at the Bay Ridge, and have it transported for installation into the Stuyvesant.

Thereafter, as far as the Bay Ridge was concerned, there was manufactured a ring different than the original four rings, which newly constructed ring incorporated the recommendations of these plaintiffs’ experts, and that ring was thereafter installed in that Bay Ridge.

It is that plaintiff’s position relative to the Bay Ridge that at the time that Bay Ridge left that shipyard and while it was en route to its destination, the problem encountered by that ship had absolutely nothing whatsoever to do with the manufacture of the ring.

What happened, at the time that properly constructed ring was being installed in that turbine of the Bay Ridge, some of the appurtenances that had to be installed in order for that turbine to be functional, more specifically a guardian stern bow, was installed in reverse and this installation occurred under the supervision of the representatives of Delaval.

As a result of that valve being installed in reverse, improper steam got into that turbine and it was the improper steam that got into that turbine that caused the disintegration of the components of that particular turbine.

At the time of the episode with the Bay Ridge, when that ring was taken out it was thereafter, it being the first ring, it was thereafter installed in the Stuyvesant.

Now, it may be appropriate now to note that the opinion of the Third Circuit, the Third Circuit made mention on page 7, part of it is carried over to page 8 of its opinion, that the plaintiff did not seek to order a new part from Delaval but in lieu of doing that, obtained the ring out of the Bay Ridge.

Byron R. White:

Are you asking us to make some factual determinations in this Court that… don’t we take the facts as we find them in the court of appeals opinion, or not?

Thomas E. Durkin, Jr.:

Well, on the point that I just mentioned, I thought if the fact would be a fact obtainable from the record and the specific circumstance, in the court of appeals opinion… the court of appeals expressly states that it’s making its findings on a hypothesis that that ship never left the pier.

That ship not only left the pier, but that ship was in the middle of the ocean when it encountered this difficulty, when it was in total distress.

And that was never a circumstance–

Byron R. White:

I don’t know that you… I thought we were just going to deal with the questions you raised in the petition for certiorari.

Thomas E. Durkin, Jr.:

–I am, sir, but there are two.

That one has to do with the question of the negligence, and the other has to do with the specific circumstance of the applicability of strict liability and tort.

Now, what is suggested by the question that’s submitted, factually outlined, is this.

May the manufacturer of a turbine, which turbine is to be the power unit of a 225,000 [= DWT] ton tanker, represent to the shipyard that if that manufacturer can supply a turbine to that particular ship so as for that ship to acquire propulsion, and thereafter when that ship is completed and that ship is sold and that ship is chartered, should that charterer as was the fact here, be responsible without redress to collect in damage approximately two million dollars paid by these plaintiffs to this defendant, Delaval, for that defendant then to do that which that defendant was obligated to at the time of the particular initial construction.

Thomas E. Durkin, Jr.:

Differently stated, the split in the circuits seems to suggest, according to the Third Circuit, this plaintiff may not collect this type of damage in strict liability in tort, even though the damages that were caused to this particular charterer are without question damages caused by the negligent or improper construction of the turbine at the time of original construction.

There has been much suggested in all opinions relative to this phrase, “economic loss”.

The damages that were sought to be collected here were basically four in nature.

One, those monies paid by these plaintiffs directly to Delaval, an amount just the right side of two million dollars, which monies were paid to Delaval to do to those rings that which the law imposed upon Delaval to do in the first place.

Two–

William H. Rehnquist:

Well, that’s ordinarily a contract measure of damages.

Isn’t that ordinarily a contract measure of damages, what you just talked about?

Thomas E. Durkin, Jr.:

–No, sir.

No, sir.

There is nothing here involving quota contract.

This charterer–

William H. Rehnquist:

But you just described something in terms of a failure to perform, I thought, and that is ordinarily a contract concept.

Thomas E. Durkin, Jr.:

–Let me state it again, sir.

That which this plaintiff paid to that manufacturer, the amount I refer to, roughly two million dollars, was for that manufacturer to give to that charterer a turbine which that manufacturer, not by means of contract but by operation of law was required to supply in the first place.

William H. Rehnquist:

You’ve stated it three times but you haven’t made it any clearer to me.

Thomas E. Durkin, Jr.:

At the time that the turbine was originally manufactured, extra to any contract term, the requirement of that manufacturer was to manufacture a product–

William H. Rehnquist:

Why was it the requirement on the manufacturer?

Thomas E. Durkin, Jr.:

–Sir, I’m sorry?

William H. Rehnquist:

You say there was a requirement on the manufacturer to manufacture in a particular way.

What’s the source of that requirement?

Thomas E. Durkin, Jr.:

Well, the particular turbine was manufactured in New Jersey and the law of new Jersey imposes an obligation upon a manufacturer of a particular commodity, which commodity is thereafter to be introduced into the general course of commerce, a conduct to make that particular turbine reasonably safe.

William H. Rehnquist:

So then, the Admiralty borrows New Jersey law in that respect?

Thomas E. Durkin, Jr.:

Well, I won’t say, sir, that they borrow the New Jersey law.

William H. Rehnquist:

Well, then why did you mention New Jersey law?

Thomas E. Durkin, Jr.:

Only, sir, because you asked me a specific question.

The turbine was manufactured in New Jersey.

William H. Rehnquist:

But certainly, this case was tried in Admiralty, wasn’t it?

Thomas E. Durkin, Jr.:

Yes, sir.

William H. Rehnquist:

Well, then if there is a requirement on the manufacturer to make the turbine this particular way, as you say it is, and you say the source of the requirement is from the New Jersey law, Admiralty must be borrowing New Jersey law, isn’t it?

Thomas E. Durkin, Jr.:

Well, not only New Jersey law.

Thomas E. Durkin, Jr.:

Admiralty has invoked the laws of many land-based authorities on the same question, not solely limited to New Jersey.

New Jersey law comports with many illustrations of the federal court in exercising admiralty jurisdiction, adopting in certain phases of admiralty law, law that’s followed by certain state jurisdictions.

Now, when this plaintiff, this charterer, experienced the circumstance that it experienced, if that charterer was required to expend monies, actual dollar expenditures, two million of which went to the defendant for the work that was required to be done by the defendant on the particular turbines involved, in addition–

John Paul Stevens:

Mr. Durkin, could I interrupt you.

I have sort of the same problem Justice Rehnquist has.

Wasn’t there a general contractor, in effect, involved?

They didn’t deal directly with your client and Delaval, did they?

Thomas E. Durkin, Jr.:

–When you say “they”, sir, I’m not following.

John Paul Stevens:

Your client is the charterer, right?

Thomas E. Durkin, Jr.:

My client, the charterer–

John Paul Stevens:

That ordered a ship built by somebody.

Thomas E. Durkin, Jr.:

–No, sir.

No, sir.

The entity that ordered the ship under contract with the shipyard was an entity totally disassociated from the plaintiff in this case.

John Paul Stevens:

How did the plaintiff get involved, then?

Thomas E. Durkin, Jr.:

The plaintiff in this case thereafter, after a sequence of transfers of title, my clients chartered, bareboat chartered that vessel from the then owner.

And under the term of the charter and during the term of the charter, anything that happens to that ship, I, the charterer, assume the responsibility because I take it in an as-is condition.

When the circumstance occurred involving the Stuyvesant it was the charterer, not anyone else, who had to attend to the repairs and–

John Paul Stevens:

So, the two million dollars you’re talking about is repair cost, not original cost?

Thomas E. Durkin, Jr.:

–Oh, yes, sir.

John Paul Stevens:

I’m sorry, I didn’t understand.

Thomas E. Durkin, Jr.:

Only part of the repair costs that were encountered by the charterer in getting the work done.

In addition to that two million dollars the charterer had to pay more money to the shipyard.

John Paul Stevens:

So, you’re saying you’re a subsequent owner of a ship that was defectively constructed and you say, just like I buy a used car that somebody, when they originally built it, built it improperly, I can sue the person who made the original mistake?

Thomas E. Durkin, Jr.:

If in your hypothesis you suggest that the new car–

John Paul Stevens:

Used car.

Thomas E. Durkin, Jr.:

–Used car was a day or two old, because at the time my charter commenced, my charter commenced the day that ship left that shipyard.

John Paul Stevens:

And your only contractual relationship was with your immediate predecessor in title?

Thomas E. Durkin, Jr.:

Absolutely.

John Paul Stevens:

Not with the shipyard?

Thomas E. Durkin, Jr.:

No, sir.

Thurgood Marshall:

Was this a barebottom?

Thomas E. Durkin, Jr.:

Sir?

Thurgood Marshall:

Barebottom charter?

Thomas E. Durkin, Jr.:

Yes, sir.

Thurgood Marshall:

A barebottom charter and a charter of an automobile are two different animals.

Thomas E. Durkin, Jr.:

I’m sorry, sir.

I didn’t get the second part.

Thurgood Marshall:

The barebottom charter and the leasing of an automobile are two different animals.

Thomas E. Durkin, Jr.:

Oh, absolutely.

The lessor in no way… the illustration of the automobile has any right of title.

Under your prior holdings in many, many cases, I as a bareboat charterer for purposes such as these maintain a position for these purposes as if I were the owner.

Now, in order to get Delaval… that’s not the correct way to say it–

John Paul Stevens:

And the owner’s position, the owner would have had a contractual relationship, not with Delaval but with the builder of the boat?

Thomas E. Durkin, Jr.:

–Yes, sir.

John Paul Stevens:

The boat or the ship, pardon me.

Thomas E. Durkin, Jr.:

That is correct.

Now, the owner, GECC, had no damage because GECC through the trust company got from me as the charterer the per diem or the weekly or the monthly amounts that it was required to get under the charter, whether or not the ship was operational or non-operational.

They sustained no damages.

The only one here who sustained the damage was the charterer who had absolutely nothing to do with the building of the ship or the entering into any contract for the acquiring of the turbines or anything else.

Now, in addition to the two million dollars, I say that in round figures, in order to put the ship in a condition for that particular work to be done, the charterer had to pay the shipyards hundreds and hundreds of thousands of dollars on top of that to equip the ship so as for the work that was required to be done on the turbine’s done.

And, sir, the third claim of the damage that comes is the amount that we had to pay to the owner under the term of our charter, and the fourth claim of damage would be that amount that we would be able to collect from our time charterer on our time charter in this case, specific case with Sohio.

Now, there in the fourth–

Byron R. White:

What contractual remedy would you have against the owner from whom you chartered the ship?

Thomas E. Durkin, Jr.:

–None, sir.

Byron R. White:

Because you didn’t bargain for it or something, or what?

Thomas E. Durkin, Jr.:

Well, I’ll give you the exact fact.

In most… I have to say most because my experiences with charters are limited, but I have never yet seen a charter of this type where the term of the charter document itself did not require the time charterer to accept the particular vessel in an as is condition.

Byron R. White:

Well, you just gave up any… you just took the risk that it was, then?

Thomas E. Durkin, Jr.:

The risk as between myself and the owner?

Byron R. White:

Yes.

Thomas E. Durkin, Jr.:

I would think so, but I’m not so sure, even if I didn’t do that, under the facts of this case the owner would assume any of the responsibilities that are imputable to Delaval because that owner bad nothing to do with the particular contract for the acquiring of those turbines.

That was all done with the shipyard, and the shipyard in turn had a contract, which contract was assigned in this particular case to GECC via a trust holding, and it was from that particular entity that the charter was enunciated.

John Paul Stevens:

Could you just clarify one other thing for me?

Thomas E. Durkin, Jr.:

Surely, sir.

John Paul Stevens:

Does the charterer in this situation get a contractual protection from anybody that the ship is seaworthy?

Does anybody give any… when you say, take it in as is condition, they just take the entire risk that something’s wrong with it?

Thomas E. Durkin, Jr.:

No, it isn’t that… there is nothing in the charter, and the charter of course is part of the record, that I can invite your attention to, that would permit the charterer to claim against that owner because of any claimed defect.

I can’t go that far as to say that there wouldn’t be impossible as a matter of law upon that type of a contractual arrangement, that the ship–

John Paul Stevens:

No, I didn’t mean… I’m trying to stay away from legal obligation, just contractual.

You mean the… your client in a situation like this enters into a transaction like this with no contractual protection against the danger that the ship may be full of holes or something like that?

Thomas E. Durkin, Jr.:

–Well, sir, that presupposes that the charterer didn’t conduct the usual full inspections prior to the time–

John Paul Stevens:

But he relies just on the visual inspection of the ship and so forth, and then takes the risk?

Thomas E. Durkin, Jr.:

–No, sir.

It’s not solely on the visual.

These type of inspections are in depth.

John Paul Stevens:

But, I mean, he doesn’t have any contractual protection, that’s what I’m asking, so he has to insure against this risk, is the only thing he can do?

Thomas E. Durkin, Jr.:

Well, it would be almost impossible to even understand what the particular risk that would be the subject of the particular coverage involved.

Here the question is going to hone itself down–

John Paul Stevens:

Did something go wrong with the turbine, might be one risk.

It’s what happened, isn’t it?

I mean, it’s not totally unforeseeable there’d be something wrong with the product?

Thomas E. Durkin, Jr.:

–No, and when you say it’s not unforeseeable, I guess that would also include the manufacturer who represented that if the manufacturer could build turbines to the specification of those new tankers being built.

Now, here’s a circumstance where a subsequent charterer, a subsequent charterer who absolutely, no fault of his, absolutely no fault of his, is required to expend very substantial monies to repair a turbine which by all allegations was improperly manufactured.

Now, according to all of the circuits except the Third, that charterer should not be put in that particular position and that charterer should be able to claim, if his proofs are sufficient to sustain the proofs required in a damage claim.

The Third Circuit says that those particular claims are not collectible because in varying ways they say the turbine doesn’t fit into that classification of unreasonable risk.

Byron R. White:

It wasn’t a safety question and it didn’t threaten persons or property?

Thomas E. Durkin, Jr.:

Yes, sir, and I have yet to ever hear, sir, yet to ever hear one man who’s ever been at sea and had the power unit go out on a ship and thereafter indicate that that wasn’t safety… or an unusual risk involved.

Any time, as was suggested–

Byron R. White:

Even if it were, though, that wouldn’t justify collecting economic loss for the delay or loss of profits?

Thomas E. Durkin, Jr.:

–I’m sorry.

Would you say it again for me, please.

Byron R. White:

What kind of… the Third Circuit said you couldn’t collect economic losses.

Thomas E. Durkin, Jr.:

The Third Circuit held this, that unless there is damage done other than the damage to the turbine or personal injury, no matter what else is involved, in this circuit you cannot maintain this type of action.

Now, the Third Circuit for the first time seems to further restrict the rule that may have been claimed in certain state courts.

Certain state courts seem to indicate, including Sealey in California, that the damage that they require as a condition precedent to maintaining this action is a personal injury to someone other than the plaintiff, or property damage other than to this plaintiff.

The Third Circuit specifically, not only in Judge Hunter’s opinion but also in Judge Becker’s opinion, indicates that it must be the particular plaintiff involved that must add that additional property damage or that personal injury, and as is obvious, any time that you have a–

Byron R. White:

Well, don’t you think the Third Circuit thought it was merely following what the general rule was in situations like this, not just in Admiralty but in other actions?

Thomas E. Durkin, Jr.:

–I can’t really respond–

Byron R. White:

In manufacturer’s liability or product liability cases?

Thomas E. Durkin, Jr.:

–Well, the Third Circuit did say that they were adopting what they perceived to be the majority rule for on-land cases.

Byron R. White:

Right.

Thomas E. Durkin, Jr.:

But one of the things that’s intrinsically–

Byron R. White:

Do you challenge what it thought the general rule was?

Thomas E. Durkin, Jr.:

–Only in this respect, the general rule as I understood it previously–

Byron R. White:

In product liability cases on land.

Thomas E. Durkin, Jr.:

–Only in product liability cases on land, if somebody other than the plaintiff were to be injured as a result of the involved episode or somebody else’s property were to be damaged as a result of the particular episode, under those cases I read them to mean that that would satisfy the condition precedent.

As I read the Third Circuit, the Third Circuit and specifically in Judge Becker’s opinion, he puts in, in italics before, that where plaintiff… that there has to be additional property damage to the plaintiff and additional or personal injury to the plaintiff in order for the condition precedent to be established and maintained.

Byron R. White:

Well, that narrowing is sort of irrelevant to this case, isn’t it?

Thomas E. Durkin, Jr.:

Well, everything is irrelevant to this case factually because there has never been a contention throughout that if the rule of the Third Circuit that the risk is not the test but the occurring of the actual damage is the test, there has never been a contention in this particular case that even with the steam emissions and so forth that there was in fact anybody who sustained personal injury nor was there any particular property damage.

So, if that particular rule of the Third Circuit were to be adopted as the rule with Admiralty, any other fact involved would have no consequence whatsoever.

And if I may, I would reserve the remainder of my time, please.

Warren E. Burger:

Mr. Smith.

Robert Frederick Smith:

Mr. Chief Justice, and may it please the Court:

The issue before the Court is whether under federal maritime law damage to a product caused by a design defect is recoverable in tort.

The product in this case is the main propulsion units for four vessels.

Both the district court and the Third Circuit en banc held that petitioners do not have federal maritime tort claims.

Now, I would like to say at the outset that although the case is within the Court’s federal maritime jurisdiction, essentially in our view it is about a non-functioning product.

It happens to arise in a maritime context but it has no other particular maritime flavor.

What is involved here is an interface between product liability law and contract law, particularly exemplified by the Uniform Commercial Code.

Robert Frederick Smith:

And what we are doing in this case is asking this Court to follow the Third Circuit in adopting as the rule the majority rule in land-based courts.

This type of case has been handled–

Byron R. White:

For both strict liability and negligence?

Robert Frederick Smith:

–Yes, sir.

Byron R. White:

In this kind of a case, like a design defect in a product?

Robert Frederick Smith:

Exactly, Justice White.

We draw no distinction between strict tort liability for negligence and product liability law, that’s correct.

This is exactly the type of tort that appellate courts in both the states and federal appellate courts have dealt with many times.

It is not an unusual matter.

It is a routine matter for them, and what they have held in the overwhelming majority of jurisdictions is that recovery is denied in tort where a product itself simply fails to function properly but is not unsafe.

In these circumstances, they leave the parties to their contractual remedies.

At the commencement of this action there were ten plaintiffs.

In addition to the four petitioners there Sea Train Lines which is a large, substantial corporation, its wholly owned subsidiary, Sea Train Shipbuilding which built the four vessels involved and which contracted to have them built with the respondent, four wholly owned subsidiaries of Sea Train Lines which were the original owners of the four vessels involved.

Respondent had an extensive agreement with Shipbuilding for the design and manufacture of the main propulsion units.

The contract contained an express warranty.

It disclaimed any warranties other than the warranty expressly set forth.

It provided for certain remedies such as repair and replacement.

It expressly excluded liability for consequential damages.

Respondent moved for summary judgment and on the motion asked for dismissal of the breach of contract and the breach of warranty claims on the basis of the statute of limitations and various contractual provisions which limited plaintiff’s remedy, and the disclaimer of warranties other than the warranty that was expressly granted under the contract.

The claims, Sea Train Lines Shipbuilding and the four other Sea Train subsidiaries which are not now before the Court, all were dismissed with prejudice.

In addition, all the contract claims and warranty claims were dismissed with prejudice.

Therefore, we had… the current owners, as you know, are not before the Court, so what we have is that the four petitioners, the present charterers of the vessels, are the only remaining plaintiffs and their claims are exclusively in tort.

All of their contract and warranty claims have been dismissed on the merits and with prejudice.

There are five counts in the complaint that this Court is asked to review.

The first four counts involve a particular component of the main propulsion units for the guide bucket ring, and in each of these counts which relates to a particular vessel, that each of the charterers is a charterer of one of those vessels, the complaint is that there was a malfunction of the guide bucket ring.

On the fifth count one of the owners claims… this is the Bay Ridge which is the ship that’s involved in counts four and five… there was a negligence claim, the only negligence claim before you, and the claim is that the respondent failed to supervise the installation of the stern guardian valve which was installed in reverse.

And I would just point out as an aside, the record reveals that the Bay Ridge was the fourth ship built.

The same part had been installed properly by Sea Train Shipbuilding in the three prior ships.

In any event, the damage was confined to the main propulsion units themselves in all of these counts, but consisted only of internal deterioration and breakdown.

There was no damage to persons or other property.

Robert Frederick Smith:

There was no unreasonable risk of harm to persons or other property.

And as Mr. Durkin has candidly said, what is sought here is consequential damage in the form of nature of cost and replacement and lost profits from down time, primarily.

Byron R. White:

At least on the negligence side of it, what do you do about Ingram River Equipment, in that case?

Aren’t there some courts of appeals that have looked the other way in this–

Robert Frederick Smith:

Your Honor, we do disagree with Ingram River and Ingram River has permitted recovery in federal maritime law for negligence.

I should say, Your Honor, that the judge there also stated by fiat that he disagreed with the Third Circuit.

Ingram River followed the decision of the Third Circuit.

And without any extensive reasoning, he disagreed with them.

But let me–

Byron R. White:

–How about any other circuits?

Robert Frederick Smith:

–On negligence, Your Honor, I think that there is no other case in point.

Byron R. White:

How about strict liability?

Robert Frederick Smith:

Strict liability, the only case in point is Emerson Diesel in the Ninth Circuit, and Your Honor, I think neither of those cases are ones with which we would agree.

And I would point out that neither one involves an analysis of the–

Byron R. White:

Well, that may be, but they don’t agree with you either.

Robert Frederick Smith:

–They don’t agree with us.

That’s absolutely so.

Your Honor, I could… I don’t want to go off onto either Ingram River or Emerson unless Your Honor wants me to go off onto them.

In the presentation what I intend to do is raise the arguments that I think they themselves in their opinions don’t adequately state, and we believe we have satisfactorily distinguished them in our briefs.

Your Honor, the construction of the Stuyvesant which is the Stuyvesant ship and its events are the seminal events in this case.

The Stuyvesant’s construction was completed in 1977, and I should add that the construction contract which I described before is a 1970 contract.

In December ’77, as the Stuyvesant was entering the port of Valdiz in Alaska, it had a steam escape problem of some dimension.

The problem was solved in the port.

There is no allegation that that steam escape problem led to any damage of any kind.

The Stuyvesant then proceeded to load the oil on the ship and proceeded two days later on its voyage down to the Panama Canal.

On that voyage it experienced a problem with its turbine, and I want to say that I heard in the opening argument a reference to a ship without power being in trouble.

The Stuyvesant was not without power.

The Stuyvesant operated at a substantial amount of power at all times.

What occurred with the Stuyvesant was that it was not able to attain its normal speed.

The record shows that the guide bucket ring and the main propulsion units did not function the way they were supposed to function.

Robert Frederick Smith:

There was a malfunction of the main propulsion unit.

But even as it is suggested on the record that the Stuyvesant encountered high seas and some drifting on this voyage down the West Coast off the Panama Canal Zone, nevertheless it made sufficient headway even in a storm that is described by petitioners as having some severity, it had enough power to weather the storm and it made the voyage successfully and in fact off-loaded its oil at the Panama Canal Zone and then proceeded back without incident to the port of San Francisco.

William H. Rehnquist:

Well, Mr. Smith, is the test there one of risk or one of whether the risk materialized?

Robert Frederick Smith:

Your Honor, I think that the test really is one of risk.

I agree with the test enunciated by the Third Circuit, and as I understand the majority of land-based rule, one could have a risk without the harm occurring.

It is very difficult, I think in most instances, to imagine liability without harm actually occurring but I suppose it would be conceivable under some circumstances that risk alone might give rise to liability.

But, Your Honor, both the district court and the court of appeals for a practical matter have determined that there’s no triable issue as to risk.

They have so held.

So, I really don’t think that that is left in this case.

When the Stuyvesant reached San Francisco an inspection of the engine revealed damage to this guide bucket ring, and it was then replaced as we know with a part from the Brooklyn.

That part did not perform terribly well.

The Stuyvesant resumed operation with it.

There was no further malfunction, but ultimately the guide bucket ring was replaced with a newly designed guide bucket ring.

That was the story of the Stuyvesant, and really it is the only ship which involves much of any incident at all.

As far as the counts two and three of the complaint at concern, they involve the ships which we call the Brooklyn and the Williamsburg.

Both of these ships have been constructed prior to the Stuyvesant.

They were older ships.

They had already seen substantial service at the time that the Stuyvesant encountered the high seas leaving the port of Valdez.

These ships never had a malfunction.

They never had any problem with their engines.

After the Stuyvesant incident, and only because of the Stuyvesant incident, both of these ships had their engines opened in port and there it was discovered that there was a low level of deterioration which one could contend showed that they had the same problem as the Stuyvesant guide bucket ring.

Those guide bucket rings were replaced with newly designed guide bucket rings, ultimately.

Simply nothing happened.

There was simply repair and replacement of the guide bucket rings.

Byron R. White:

At some expense?

Robert Frederick Smith:

At some expense.

But, Your Honor, let me be quick to say that in our view the case is not a case of a question of damage.

It’s a question whether there’s a valid tort claim.

The fourth count, Your Honor, involves the Bay Ridge and again involved an alleged defect in the guide bucket ring.

May it please the Court, the Bay Ridge never left port with a defective guide bucket ring.

Robert Frederick Smith:

It was the last ship built.

Since it was built after the Stuyvesant incident, all that happened was that by the time it left port it had the newly designed guide bucket ring.

Nothing ever happened on the Stuyvesant.

There is simply no allegation concerning the Stuyvesant that could give rise to liability, and that also was so held by both the circuit court.

Byron R. White:

You mean, the Bay Ridge?

Robert Frederick Smith:

Excuse me, the Bay Ridge.

Sandra Day O’Connor:

Was the new ring installed on the Bay Ridge the one that was installed in reverse?

Robert Frederick Smith:

No, Your Honor.

I have not been to sea, I would suppose, any more than Your Honor may have been.

The guide bucket rings, as I understand it, are not related to the fifth count.

The fifth count is in a stern guardian valve which is separate and distinct, but part of the main propulsion unit.

They’re both parts of a main propulsion unit.

No one has claimed that the guide bucket ring… excuse me, that the stern guardian valve was defective in any way.

It was simply installed in reverse.

I want to make one further point, if I may, and that is that as far as we’re concerned the Richmond, which is the petitioner involved on the fourth count, simply has no standing.

The record discloses that the guide bucket ring problem occurred in the past during 1978 and the Richmond became the charterer of the vessel on March 15, 1979.

Byron R. White:

But your major issue as you see it, I take it, is whether there is any tort remedy at all in this case or whether there’s either a contract remedy or there’s nothing?

Robert Frederick Smith:

Yes.

Sandra Day O’Connor:

Well, it is arguable, I suppose, that on count five there is a valid negligence claim?

Robert Frederick Smith:

Your Honor, I don’t believe so under the majority land-based rule which was applied by the Third Circuit, and that is that once again the damage that we’re talking about, the cause of the negligent, or the alleged negligent installation, and in our case supervision of the stern guardian valve involved deterioration and breakdown of that valve, of that part, same as the guide bucket ring that deteriorated.

There’s no one tort incident.

There’s no collision.

And in fact, as part of the record there’s the deposition of the former machinery superintendent of the–

Sandra Day O’Connor:

Wouldn’t that be foreseeable, that there’d be some down time to replace it and do the work over?

Robert Frederick Smith:

–Your Honor, as I understand the majority rule, and I think it’s really quite clear on this point, it isn’t the possibility that the damage could occur.

It is the risk and the high potential of risk.

Sandra Day O’Connor:

Well, isn’t it totally foreseeable that if it’s installed in reverse that it will require down time to correct it?

Robert Frederick Smith:

Your Honor, but that’s not the risk that the rule is speaking of.

The rule is seeking to demarcate between contract and tort law and it doesn’t focus on the damage.

It’s the risk… what the rule seeks to demarcate is a high probability of a safety risk, not that there will be damage and losses, but that persons or property other than the product itself will be damaged.

Robert Frederick Smith:

That’s the risk that is talked about.

Sandra Day O’Connor:

It just seems like count five is just an ordinary, garden variety negligence claim.

You install something negligently and it’s entirely foreseeable it will have to be done over again.

Robert Frederick Smith:

Your Honor, I don’t think there is any safety implication to the fifth count.

William H. Rehnquist:

But why should you import this product liability type of limitation into what Justice O’Connor seems to me to rightly describe just as a straight negligence count?

Robert Frederick Smith:

The reason, Your Honor, would be that that is in fact the majority rule on land.

William H. Rehnquist:

Well, does it have anything better to commend it?

Robert Frederick Smith:

Your Honor, I think it does.

I think there are very substantial reasons to commend it.

The fact of the matter is, and I think it’s the reason for the majority rule… I think the majority rule is well based.

There’s a reason for distinguishing between the contract interest to be protected and the tort interest to be protected.

The reason, I think, Your Honor is… and I must say this, is because the contract expressly protects against economic expectations and damaged economic expectations.

The tort is a rule that is implied in law.

The law imposes it on people to protect against safety defects.

But if there’s no safety defect, Your Honor, what we say is that this area should be left to the parties in a private bargaining context.

And, Your Honor, this case exemplifies it in many ways.

To begin with, we were party to an extensive contract and there’s no doubt that all the parties in this case are substantial commercial entities that can protect themselves and bargain for the types of terms and conditions they thought were appropriate.

In this case we were subject to such a bargain, and we made such an agreement back in 1970.

All those contract claims, all those warranty claims, have now been dismissed without prejudice.

We are being asked to function almost as a–

William J. Brennan, Jr.:

Without… I thought you said with prejudice.

Robert Frederick Smith:

–With prejudice.

William J. Brennan, Jr.:

Is that because of the statute of limitations that run?

Robert Frederick Smith:

We had moved on that ground.

What actually happened procedurally is that after the motion had been made on that ground, and on other grounds such as contractual grounds that the warranties expired, what occurred was that the petitioners served their second amended complaint.

It did not contain those claims.

They themselves elected to go forward on the complaint that is now before the Court, which is exclusively a tort claim, and at that time the Court entered the order dismissing all contract and warranty claims as matter of law, with prejudice.

So that, what we say is that contract properly protects the expectations of the party.

Tort properly protects against the risk of harm that might be caused by a product.

And in this particular case there is no risk of harm.

Robert Frederick Smith:

What we’re talking about is the contractual area.

And I want to make one further point, which I think Justice Stevens was asking the counsel for the petitioners about.

The charterers had an opportunity to protect themselves by contract and they entered into an extensive charter agreement, one charter for each of them, which is contained in the record and that charter allocates the very risks that we’re talking about here.

As a matter of fact it requires, if it is true that under the charter the charterers are required to make the repairs to the vessel, but that was a bargained for matter.

It was a matter that was within the realm of contract.

So, there can’t be any credible claim but that the exact claim that is made here could not have been protected as a matter of contract right.

John Paul Stevens:

Would they acquire the right to assert any warranty claims that their predecessors in title could have–

Robert Frederick Smith:

I don’t believe so, Your Honor.

I don’t think there’s anything in the record about it.

John Paul Stevens:

–May I ask one other question.

I understand your argument about, the contractual remedy should cover both the negligence and strict liability claims, but basically it’s the same argument.

But I’m not quite sure I understand fully your answer to your opponent’s argument that the power failure on an ocean-going vessel, almost by hypothesis, could create a serious risk of harm or at least enough to withstand summary judgment motion.

Robert Frederick Smith:

Well, I’m glad Your Honor asked that question.

I thought I had responded.

There was not a total power failure, Your Honor.

John Paul Stevens:

Well, I understand that, but was not there a risk… if we’re talking about risk rather than actual events, would not a manufacturing defect of this kind create a substantial risk of a total power failure which in turn might create the risk of a navigation hazard?

Robert Frederick Smith:

I don’t think so, with the immediacy, Your Honor, that tort law implicates.

There are cases involving… the most innocuous type of product can be dangerous in some contexts, and the courts don’t permit plaintiffs by conjuring up what might happen to make a claim in tort.

And there are a substantial number of cases which we cite in our briefs involving engines, including airplane engines, and the courts have found that unless there’s some sort of immediate, very very concrete and severe risk of harm, that you’re not stating a case–

Byron R. White:

Let’s assume there is this kind of a risk, or there is an actual damage to the person or the property so that this so-called precondition is satisfied.

What can you recover then?

Robert Frederick Smith:

–Your Honor, if there’s a tort claim, we’re not arguing against it.

We’re not claiming that the type of damages that are sought here could not be claimed in a tort action.

What we say is that the petitioners don’t have a tort claim.

Byron R. White:

Do you think if somebody had been hurt by this defective design–

Robert Frederick Smith:

Yes.

Byron R. White:

–then you think all of these damages could have been recovered?

Robert Frederick Smith:

Your Honor, that would be for a trial.

The discovery in the case–

Byron R. White:

Well, I’m just asking you.

Robert Frederick Smith:

–As a kind of damage in tort?

I doubt that even then, it could be recovered.

Some of them seem to me not to follow up with tort theory at all.

They seem to me to follow from breach of contract.

Byron R. White:

What about loss of profits, and things like that?

Robert Frederick Smith:

It would be extremely difficult, it seems to me, to recover it in court, certainly debatable.

Byron R. White:

So, it may not make any difference what kind of an action this is, with respect to the recoverability of some of these damages?

Robert Frederick Smith:

I beg your pardon.

Byron R. White:

It may not make any difference what kind of action it is.

Some of these damages may not be–

Robert Frederick Smith:

Your Honor is quite right.

I would not concede the recoverability of any of the damages specified, just as a matter of tort law.

But I do want to reiterate that in our view–

Byron R. White:

–You just don’t want to have to litigate it?

Robert Frederick Smith:

–Yes, Your Honor.

William J. Brennan, Jr.:

That’s a very apt and fair comment.

Robert Frederick Smith:

I did want to mention one fact as well that I think is very important, about the tort aspect and the incorporation into admiralty of the majority rule.

The majority rule, both in terms of strict tort and negligence, was incorporated into admiralty in a series of cases where the reason they were incorporated in was that the federal court, sitting as maritime courts, felt they were the better rule.

That’s the reason they were incorporated into admiralty to begin with, so it seems to us only logical that starting with that premise, if those rules were incorporated in because they were in fact the widespread rules in the state, the version that is the majority rule ought to be incorporated along with them and not a disfavored rule.

On that, I want to point out to the Court that the leading case against us in the state courts has traditionally been the Santor case decided by the Supreme Court of New Jersey.

That has been the most aggressive case asserting that there can be liability when a product just is defective in quality.

It involved, in fact, a defective rug that didn’t harm anybody.

It had waves in it that shouldn’t have been in the rug.

The Supreme Court of New Jersey–

Byron R. White:

What case is this?

Robert Frederick Smith:

–Santor, S-a-n-t-o-r.

William J. Brennan, Jr.:

How long ago was that?

Robert Frederick Smith:

It’s a fairly ancient case.

William J. Brennan, Jr.:

Ancient as I am?

Robert Frederick Smith:

1965.

Robert Frederick Smith:

But may I say, Your Honor, that in a decision this year, not in ’86 but in ’85, a full 20 years later, the Court has undercut Santor explicitly in Spring Motors which we cite in our brief, and has said that at least as between large commercial entities, claims involving defective products which don’t present a safety problem, they’re quality defects, should not give rise to tort liability.

And the Court is very explicit in its language, and as a matter of fact they say very succinctly in a quote that I think summarizes our position very well, they say, quote,

“underlying the UCC policy is the principle, the parties should be free to make contracts of their choice including contracts disclaiming liability for breach of warranty. “

“Once they reach such an agreement, society has an interest in seeing that the agreement is fulfilled. “

“Consequently the UCC is the more appropriate vehicle for resolving commercial disputes arising out of business transactions between persons in a distributive chain. “

That’s precisely what we have here.

We have the distributive chain.

There are contracts between every link in the chain.

Everybody in the chain had an opportunity to bargain.

We say it would be unfair for us as a matter of tort law.

The contract that we entered into was a 1970 contract.

Quite a few many years later, to be held to a standard of guaranteeing that product when there’s no safety implication but the argument is that the product was qualitatively defective.

Indeed, I would say that if the majority land-based rule isn’t used, it’s difficult to see where the function of tort law, or I should say where the function of contract law would really function in this area.

It seems to me that it would be tantamount to saying that the product manufacturer is a guarantor of this product.

There’s another point that I want to make that I think also supports the view that the majority land-based rule should be used, and that is that in fact on the contract side, the Uniform Commercial Code which is what we’re talking about predominantly on the contract side, has been adopted in 49 of the states and even in the 50th it has been adopted in rather substantial part.

This is an opportunity for the Court to determine the federal maritime law would be uniform with land-based law and I would point out that there’s basically no difference between ship engines and car engines.

In many cases you have the same manufacturers of both kinds of engines.

In many cases the same engines are used in both applications.

The Third Circuit itself said, and I’m quoting them on this point,

“The charterers have not offered and we do not discern any persuasive difference between an action which seeks recovery for a defective ship engine and an action which seeks recovery for a defective car engine. “

“In both cases the law seeks to leave the parties to their bargain, while at the same time protecting consumers of both ships and cars from hazardous defects in the engines. “

And we believe that there is no persuasive rule for a different rule on land and sea.

Warren E. Burger:

What about the fact a big, over the road truck or any other land vehicle has a defective engine and it just stops, no great risk except the driver or the people on it might get cold, but when you have a vessel at sea and the moving power stops, aren’t you exposed to a great deal of different and greater hazard, the ship that’s wallowing around with no steerage?

Robert Frederick Smith:

Your Honor, I think that every case of a claim of tort, one is going to have to look at the facts very closely.

Warren E. Burger:

No, look at those facts.

The ship is out at sea and the engine stops and of course–

Robert Frederick Smith:

Your Honor, I think it depends upon what… first of all, let me immediately say that that’s not our case.

I can’t say too frequently that the power… all that happened in our case, and with only one of the four engines, we’re talking about, is that it failed to attain full power.

It attained very substantial power because it powered right through whatever storm it reached.

The second question that Your Honor raises, which I regard as a hypothetical question, as to whether or not a ship bereft of any power on the seas, one would wish to know what seas they were in, whether or not there were tugs available to them.

Robert Frederick Smith:

Yes, there is some risk.

The question would have to rely upon the facts as to exactly how great a risk there is.

But your point you’re making is, that is not this case?

Not this case, and it has been so determined not to be this case, Your Honor, by the Third Circuit en banc and the district court.

John Paul Stevens:

–You say we apply the same rule for ship engines and automobile and truck engines.

What about airplane engines?

Robert Frederick Smith:

I would say the same with airplane engines.

I didn’t mean to confine the engines to land and sea.

I think in all three instances, Your Honor… and I think it has the desirable effect that the manufacturers have some idea what their standard of liability is, their purchasers know, and that whole area is left to contractual bargaining, particularly as between large commercial entities.

It really seems to me that this is a matter that’s better left to the area of contract law rather than tort law.

Rarely have I seen a more confusing case.

Robert Frederick Smith:

There’s one further consideration that I wanted to state, and that’s frequently as a basis, the product tort liability law, the courts have said the manufacturer has a greater ability to distribute the risk.

I think once again that as between large commercial entities, that rationale doesn’t really operate.

I think as between large commercial entities, they both have the ability to insure or to otherwise spread the risk to their customers in the form of higher prices.

That rationale simply makes no sense here.

And as a matter of fact, I would suggest that in many cases, actually the large commercial user of the product is in better shape to distribute the risk to the manufacturer.

It knows the particular use to which the product will be used.

It knows the particular voyages that will be undertaken.

It knows the particular hazards to which it intends to subject the product.

So, I think that that rationale doesn’t hold up here at all.

We urge the Court to adopt the majority land-based rule.

We believe that at least as between large commercial entities, the user of a defective product who is complaining about the quality of the product below, should be left to his complaint in contract law and not tort law.

Commercial entities similarly situated should be left to their contractual remedies, those they can bargain for in the commercial context.

We say that unless safety is implicated, the tort principle simply shouldn’t interfere with their contract.

We ask the Court to confirm that petitioners do not have Federal Maritime Court claims, and we ask that the judgment of the United States Court of Appeals for the Third Circuit, dismissing this action, be affirmed.

Warren E. Burger:

Do you have anything further, Mr. Durkin?

Thomas E. Durkin, Jr.:

Very briefly, sir.

In response to the questions that Justice O’Connor asked of my adversary, no matter what else we may disagree on, both of us fully agree that at the time that that Bay Ridge left that shipyard, that ring was 1OO percent good.

There was nothing wrong with that ring at all.

When that turbine was being installed, not under any strict liability in tort or anything else, there is a valve that’s required to be installed to govern the input of steam to that particular turbine.

Thomas E. Durkin, Jr.:

That valve was put in negligently.

It was put in, in reverse.

When that ship had traveled almost to Chile, because of that valve being put in wrong the turbine malfunctioned.

Our claim on that Bay Ridge couldn’t be more addressed to a straight negligence cause of action if we tried.

And the only damages that we’re claiming there are the damages that are permitted under any rule when that negligence is established.

And the second, and hopefully the last point, with Justice Rehnquist, we’re taking a position throughout that the rule that should govern is the rule of the risk.

As long as the Third Circuit drafted a rule other than that, there is no way that we could rebel against the granting of a summary judgment.

What the circumstance or the applicability of that risk is, of course is a factual question, or record of which is never in the shape it should be at this particular posture.

If the Third Circuit’s rule in rejecting the risk theory is that there must be the actual, then concededly there is positively not fact issue in this case.

There wasn’t any injury, and there wasn’t any additional damage.

But if the risk rule is to be adopted and applied in admiralty, then we respectfully request that the matter be remanded for a plenary hearing or fact determinations consistent with that participation.

Byron R. White:

It sounds to me like you would not follow the land based rule?

Thomas E. Durkin, Jr.:

Land based rule, as to the question of risk, sir?

Byron R. White:

Yes.

Thomas E. Durkin, Jr.:

No, no–

Byron R. White:

That there’s some special risk factor in admiralty?

Thomas E. Durkin, Jr.:

–No.

What I would like, to state it affirmatively, what I would like to do is to follow the same rule that the Fifth, Eighth, Ninth and Eleventh Circuits have followed, both as to the question as to the liability and the question of the damage, one of which was decided subsequent to the Third Circuit, the other three of which, and others were legion and there was some question as to whether or not it was restricted to fishing vessels.

But this which we are expostulating here today has been imbedded in maritime and admiralty law for a considerable period of time.

Thank you.

Warren E. Burger:

Thank you, counsel.

The case is submitted.

The honorable Court is now adjourned until tomorrow at 10 o’clock.