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Jones & Laughlin Steel Corp. v. Johns-Manville Sales Corp.

decided: July 9, 1980.

JONES & LAUGHLIN STEEL CORPORATION, A CORPORATION. APPELLANT
v.
JOHNS-MANVILLE SALES CORPORATION, A CORPORATION, (DEFENDANT AND THIRD-PARTY PLAINTIFF), APPELLANT V. BROWN & KERR, INC., J. M. FOSTER COMPANY, INC., WESTERN CONTRACTING CORPORATION AND S. M. WILSON COMPANY D/B/A HENNEPIN CONTRACTORS V. PULLMAN, INC., (THIRD-PARTY DEFENDANT)



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (C.A. No. 72-0759)

Before Adams, van Dusen and Garth, Circuit Judges.

Author: Adams

Opinion OF THE COURT

This diversity case presents an interesting question regarding the interface between tort law and contract law. Specifically, we are asked to decide inter alia whether, under Illinois law, a purchaser of a product pursuant to a contract may recover damages under tort theories of liability for the failure of the property to perform satisfactorily. The district court, in declining to grant the defendant's motion for judgment notwithstanding the verdict, answered this question in the affirmative. As to this point, we reverse; in all other respects, we affirm the judgment of the district court.

I. FACTS

In the early 1960s, the plaintiff, Jones & Laughlin Steel Corporation, developed plans to build a steel finishing plant on a 6,000 acre tract of land in Hennepin, Illinois. The roof of the building was of particular concern to Jones & Laughlin inasmuch as the size of the roof 1.3 million square feet was extraordinarily large, and the weather in the Hennepin area is harsh winds of high velocities are common and the temperature fluctuation is extreme. Both factors were expected to subject the roof to vigorous, and potentially destructive, wear-and-tear. In addition, it was anticipated that the plant would contain electrical equipment and finished steel products, valued at millions of dollars, that had to be protected from the elements. As a result of these concerns, Jones & Laughlin decided to retain Johns-Manville Sales Corporation, a well-known manufacturer and installer of roofing products, to recommend and supply suitable roofing materials. After being briefed on the design of the roof and informed of the weather conditions in the area surrounding Hennepin, a senior sales representative of Johns-Manville recommended a smooth-surfaced roof with a built-up asbestos felt membrane. The type of roof was chosen for its durability and ease of repair. The sales representative also suggested Fesco Board insulation because it could withstand the uplift caused by extremely high winds, was virtually waterproof, and had outstanding dimensional stability.

Jones & Laughlin reviewed Johns-Manville's recommendations and, on March 7, 1966, decided to include the Johns-Manville roofing system in the architectural plans for the plant. Construction of the roof began on November 14, 1966, and was completed on August 30, 1967. During this period, Johns-Manville supervised the installation work, which was performed by several roofing contractors.

Shortly after the roof was completed, several problems developed. The roof began to blister, wrinkle, and crack. The cracks permitted water to enter the steel mill, which in turn damaged some of the steel products under construction and caused electrical outages as well. Then, in December 1968, portions of the asbestos felt and Fesco Board began to tear away from the deck of the roof. Although the maximum wind speed recorded in the Hennepin area at the time in question was only eighty miles per hour, and the roof was designed to withstand winds in excess of one hundred-twenty miles per hour, fourteen portions of the roof, totaling 93,800 square feet, were blown off between January 1969 and December 1971. The remaining area of the roof continued to blister and crack.

Jones & Laughlin employed Edward T. Schreiber, a roofing consultant, to analyze the causes of the defects that developed in the roof. Schreiber subsequently testified at trial on behalf of Jones & Laughlin. He concluded that Fesco Board was not water resistant, but instead actually absorbed water and became spongy. According to Schreiber, Fesco Board also lacked internal strength and the absorption of moisture caused severe dimensional distortion in the board. He stated further that the glue recommended by Johns-Manville was sensitive to water vapor, which caused the glue to deteriorate and fail. This resulted, Schreiber asserted, in the cracking and tearing away of the roof. Schreiber recommended that the entire roof be removed and replaced. Jones & Laughlin declined to proceed with such a large undertaking, however, and instead repaired and replaced portions of the roof.

On August 7, 1972, Jones & Laughlin filed suit against Johns-Manville in the Court of Common Pleas of Allegheny County, Pennsylvania. The complaint was premised on a number of legal theories: (1) strict tort liability for defects in the roofing products; (2) strict tort liability for the faulty design of the roofing system; (3) strict tort liability for public misrepresentations regarding the roofing products; (4) fraudulent misrepresentation; (5) negligent misrepresentation; (6) negligent performance of an undertaking to render services; (7) breach of express and implied warranties; and (8) breach of contract. On September 14, 1972, Johns-Manville removed the case to the United States District Court for the Western District of Pennsylvania.*fn1

Accompanying its answer, Johns-Manville named as third-party defendants the general contractor, the roofing subcontractor responsible for installation of the roof, and the engineering firm that Jones & Laughlin retained as the architect for the plant. A number of cross-claims were filed among the original parties and the third-party defendants. Inasmuch as the claims involving the third-party defendants are not pertinent to the issues before us, and because the third-party defendants are not parties to these appeals, the cross-claims will not be discussed further.

On June 30, 1976, Johns-Manville moved for summary judgment. The district court concluded that the case was governed by Illinois law and granted partial summary judgment in favor of Johns-Manville on the claims asserted by Jones & Laughlin based on express and implied warranties.*fn2 The court held that the contract between Jones & Laughlin and Johns-Manville was not for a "sale of goods" within the meaning of § 2-106 of the Uniform Commercial Code (UCC), Ill.Rev.Stat. ch. 26 § 2-106 (1973), and that consequently there was no authority for Jones & Laughlin's warranty claims. In the alternative the court went on to hold that, even if the UCC did apply, Jones & Laughlin's warranty claims were time-barred. Johns-Manville's motion for summary judgment with respect to the remaining claims was denied.*fn3

Trial before a jury commenced on November 27, 1978. At the close of the testimony, the district court denied a motion by Johns-Manville for a directed verdict on the tort claims. Johns-Manville had argued that, under Illinois law, a supplier of a product may not be held liable under tort principles for damages incurred as a result of the failure of the product to perform satisfactorily. Prior to the submission to the jury of the liability phase of the case, Jones & Laughlin withdrew its claim based on fraudulent misrepresentation.

In response to a series of special interrogatories, the jury found Johns-Manville liable on four of the remaining tort theories: (1) strict liability for defects in the roofing products; (2) strict liability for defects in the design of the roof; (3) strict liability for public misrepresentations regarding the roofing products; and (4) negligent performance of an undertaking to render services. In respect to one portion of the roof the valleys the jury attributed the injuries solely to the design defects and to Johns-Manville's negligence. No deterioration of the valleys was found to have been caused by the defective products or by Johns-Manville's public misrepresentations. The jury absolved Johns-Manville of liability for negligent misrepresentation and found that there was no breach of contract. In addition, the jury found Jones & Laughlin contributorily negligent in causing the injuries to the roof. In sum, the jury premised liability solely on Jones & Laughlin's tort claims, which were in turn predicated on strict liability, and rejected any contractual basis for recovery.

Trial then resumed on the question of damages. Jones & Laughlin claimed that it had expended over $1.7 million for repairs and would be required to spend between $2.9 million and.$3.2 million to repair and replace defective portions of the roof. The company did not seek damages for any injuries that may have occurred to its steel products, electrical equipment, or any property other than the roof itself. Because the damage to the valleys of the roof was found to have been caused only as a result of the design defects and Johns-Manville's negligence, the jury was instructed to make separate findings regarding the cost of valley repairs. The jury set the cost of the valley repairs at $625,000, and returned a verdict in favor of Jones & Laughlin in the total amount of $2 million.

Following entry of judgment by the district court, Johns-Manville moved for judgment notwithstanding the verdict and, alternatively, for a new trial. The district court denied both motions. Johns-Manville filed a timely appeal on February 5, 1979, and on February 16, 1979, Jones & Laughlin filed a timely cross-appeal.*fn4

II. DISCUSSION

A. Choice of Law

A federal district court sitting pursuant to diversity jurisdiction must apply the choice of law rules of the state in which it is located.*fn5 Following Pennsylvania's "interest analysis/significant contacts" choice of law test,*fn6 the district court here concluded that a Pennsylvania state court would look to the law of Illinois for resolution of the substantive legal questions of this case. Inasmuch as the parties do not contest the choice of Illinois law, and because Illinois has both substantial interest in and close contact with the transactions at issue, we have no occasion to address the district court's decision in this regard.*fn7 Accordingly, our consideration of the substantive questions presented by these appeals will be guided by the law of Illinois.

B. Johns-Manville's Appeal

As it did in the district court, Johns-Manville urges here that there is no cause of action under Illinois tort law against the seller of a product for the failure of the product to perform as it was expected, as distinguished from injuries to persons or other property caused by a defect in the product. In support of this position, Johns-Manville relies primarily on two cases decided by the intermediate appellate courts of Illinois.

In Rhodes Pharmacal Co. v. Continental Can Co., 72 Ill.App.2d 362, 219 N.E.2d 726 (1966), the plaintiff sued an aerosol can manufacturer for damages that resulted from the leakage of cans in which the plaintiff's product was packaged. The appellate court concluded that liability could be based on the existence of an implied warranty of fitness, but held that the plaintiff had no cause of action for strict tort liability. The court stated simply "we are not persuaded that the doctrine of "strict tort liability' should be applied here." Id. at 368, 219 N.E.2d at 730.

More recently, in Alfred N. Koplin & Co. v. Chrysler Corp., 49 Ill.App.3d 194, 7 Ill.Dec. 113, 364 N.E.2d 100 (1977), the court extensively considered the justifications underlying the refusal to impose tort liability on a product manufacturer for the failure of its product to perform satisfactorily. The plaintiff had purchased two air conditioning units manufactured by Chrysler. When the units failed to work correctly, suit was brought against Chrysler for the costs of repairing and replacing the units. The jury found that (1) Chrysler had given the plaintiff an express warranty; (2) Chrysler negligently manufactured the products; and (3) the plaintiff was not contributorily negligent. After reviewing the record, the court concluded that Chrysler had expressly disclaimed any warranties of merchantability or fitness. It therefore reversed the verdict for the plaintiff based on the contract claim and turned to the question whether Illinois tort law provided a basis for recovery. Id. at 197, 7 Ill.Dec. at 116, 364 N.E.2d at 101-02. The court asserted that "this case falls within the narrow range of situations dividing tort theory from contract theory. This is so because the loss suffered by plaintiff in this case was "economic' loss . . . ." Id. at 199, 7 Ill.Dec. at 116, 364 N.E.2d at 103. "Economic loss" was defined by the court 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.' " Id. (quoting Note, Economic Loss in Products Liability Jurisprudence, 66 Colum.L.Rev. 917, 918) (emphasis added).*fn8 "The line of demarcation between physical harm and economic loss," the court declared, "reflects the ...


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