TORTS. NATIONAL CRANE CORP. v. OHIO STEEL TUBE CO.: ECONOMIC LOSS IN NEBRASKA

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1 TORTS NATIONAL CRANE CORP. v. OHIO STEEL TUBE CO.: ECONOMIC LOSS IN NEBRASKA NTRODUCTION In National Crane Corp. v. Ohio Steel Tube Co.,' the Nebraska Supreme Court was asked to determine whether damages for economic loss could be recovered under a theory of strict liability in the absence of personal injury or property damage. The court held that such an action could not be maintained; in so doing, however, the court announced a change in the tort law of Nebraska. That is, while prior to this decision the theory of strict liability could only be pled if a product had caused personal injury, 2 as a result of National Crane, property damages can be recovered under strict liability regardless of personal injury. Despite this change, the plaintiff in the case at hand was unable to plead strict liability because the property damage it had suffered was merely damage to the product itself, and in Nebraska, this is classified as an economic loss for which recovery must be had in warranty. 3 This note will address four areas of law presented within the majority and dissenting opinions in National Crane. The first issue treated is the partial overruling of Hawkins Construction Co. v. Matthews Co., Inc.,4 and its impact on Nebraska tort law to the extent that strict liability can now be used to recover for property damage. 5 Next, the complex issue of economic loss and its inability to be claimed under strict liability is discussed. The third issue to be addressed focuses upon the public policy arguments for using tort law as an appropriate theory to grant recovery in this case. Finally, this article will focus on why and how the dissent contends that indemnity should have been allowed to enable National Crane to be compensated for its damages. FACTS AND HOLDINGS National Crane Corporation (National Crane) is a manufacturer of commercial cranes which fulfill various functions from loading and unloading materials to supporting workmen trimming Neb. 782, 332 N.W.2d 39 (1983). 2. Id. at 789, 332 N.W.2d at Id. at 790, 332 N.W.2d at Neb. 546, 209 N.W.2d 673 (1973) Neb. at 789, 332 N.W.2d at

2 CREIGHTON LAW REVIEW [Vol. 17 trees. 6 Ohio Steel Tube Company (Ohio Steel) manufacturers various types of steel tubing, some of which are used in the manufacture of cranes. 7 From July 1970 until May 1975, National Crane bought component steel tubing from Ohio Steel; this tubing was incorporated into the cranes made by the plaintiff. 8 The steel tubing helped to form a tilt cylinder mechanism, a hydraulic device used to raise and lower the plaintiff's cranes. 9 The tubing purchased from the defendant was incorporated into 1,232 cranes manufactured between January 1, 1971 and June 1, The cranes had performed adequately until April of 1973, when the first failure occurred." The defendant claimed that the failure was due to an inadequate material specification. 12 Subsequently, in 1974, three more failures occurred, two of which the defendant traced to an improper weld in the steel tube. 13 In 1975 the defendant investigated these failures, tested other cranes, and concluded that the tubing was not defective. 14 Notwithstanding the defendant's claim of a clean bill of health, in 1976 seven more crane failures resulted, one causing a death.' 5 As a result of these accidents, the plaintiff conducted its own internal investigation to discover the causes for the failures; the subsequent results were inconclusive. 16 Motivated by this lack of findings, the plaintiff employed an outside engineering and testing firm to discover the origin of the failures and to determine possible remedies.' 7 While the investigation continued, four more crane cylinders failed in By May of 1978, the investigation had concluded that the cranes had failed due to improper welding in the tubing supplied by the defendant Ohio Steel.' 9 Based on the engineering investigation report, the plaintiff began a retrofit program to replace all of the affected steel tube cylinders at a total cost of $1,078, Brief for Appellant at 5-6, National Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 332 N.W.2d 39 (1983). 7. Id. at Id. 9. Id. 10. Id. 11. Id. (the first failure was noticed in the tilt cylinder mechanism). 12. Id. 13. Id. 14. Id. at 784, 332 N.W.2d at Id. 16. Id. (the tests were unable to locate the exact reason for the failure). 17. Id. 18. Id. 19. Id. at 785, 332 N.W.2d at Id.

3 1984] TORTS The plaintiff sought relief in the District Court for Lancaster County, Nebraska, under three basic theories. 21 The first theory was breach of expressed or implied warranty on the tubing. 22 Next, was a theory based on negligent manufacture of a product known to be dangerous. 23 The final theory was strict liability against the manufacturer of a defective component part. 24 The district court sustained the defendant's demurrer to all three causes of action. 25 The plaintiff then filed an amended petition seeking recovery under the theories of contribution and indemnity, to which the trial court again sustained the defendant's demurrer. 26 At the conclusion of the pleadings, the plaintiff, elected to rely on its original and amended petitions. 27 The district court subsequently dismissed the action. 28 On appeal, the Nebraska Supreme Court affirmed the district court. 29 The court held that a purchaser cannot recover economic losses from a seller manufacturer on a claim based on negligence or strict liability if there first has not been physical harm to persons or property caused by the defective product. 30 BACKGROUND AND ANALYSIS Strict Liability in Nebraska: The Overruling of Hawkins Whenever a cause of action is based on a defective product, three theories of recovery are commonly pleaded: negligence, breach of express or implied warranty and strict liability. 31 In Nebraska, the line of demarcation between tort law and contract law in product liability cases has been distinct. 3 2 In Hawkins Construction Co. v. Matthews Co., Inc.,33 the Nebraska Supreme Court identified the theory under which an action for economic loss could be maintained: If the loss is merely economic, the Uniform Commercial 21. Id. 22. Id. 23. Id. (the court did not address this theory in its opinion). 24. Id. 25. Id. 26. Id. at , 332 N.W.2d at Id. at 786, 332 N.W.2d at Id. 29. Id. at 791, 332 N.W.2d at 44 (finding that the lower court had properly decided all issues). 30. Id. at 790, 332 N.W.2d at See generally W. PROsSER, HANDBOOK OF LAW OF TORTS 96-98, (4th ed. 1971). 32. Note, Property Damage Caused by Defective Products: Strict Tort Recovery, 53 NEB. L REV. 114, (1974) Neb. 546, 209 N.W.2d 643 (1973).

4 CREIGHTON LAW REVIEW [Vol. 17 Code has given the purchaser an ample recourse under the particular provisions and requirements of the Code. Placed broadly, it is the law of sales, and not the law of torts, which protects the buyer's interest in the benefit of his bargain. 34 Such a position on economic loss was endorsed in National Crane when the court stated: "The proper relationship between tort law and the Uniform Commercial Code dictates that a cause of action for 'economic loss' under the facts of the present case be pursued under a warranty or contract theory. '35 In National Crane, however, the plaintiff was unable to plead such a theory because the applicable statute of limitation for contract actions had run. 36 Thus, the plaintiff sought recovery under a theory of strict liability. 3 7 The court allowed the case to proceed on this theory based on its partial overruling of Hawkins Construction Co. v. Matthews Co. Inc.,38 which had held that, in the absence of personal injury, physical damage to property was not recoverable under strict liability. 3 9 In Hawkins, the plaintiff had leased scaffolding which was represented as being able to support a roof deck cement pour. 40 However, while the cement was being poured the scaffolding supporting the roof deck collapsed causing extensive property 34. Id. at 562, 209 N.W.2d at Neb. at 790, 332 N.W.2d at Id. at 785, 332 N.W.2d at 42; See also NEB. REv. STAT (Reissue 1980) provides: Statute of Limitations in contracts for sale. (1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it. (2) A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered. (3) When an action commenced within the time limited by subsection (1) is so terminated as to leave available a remedy by another action for the same breach such other action may be commenced after the expiration of the time limited and within six months after the termination of the first action unless the termination resulted from voluntary discontinuance or from dismissal for failure or neglect to prosecute. (4) This section does not alter the law on tolling of the statute of limitations nor does it apply to causes of action which have accrued before this act becomes effective. Id Neb. at 786, 332 N.W.2d at Neb. 546, 209 N.W.2d 643 (1973). 39. Id. at , 209 N.W.2d at Id. at 550, 209 N.W.2d at 647.

5 1984] TORTS damage. 41 The case went to the jury under two theories, express warranty and strict liability, from which the jury returned a general verdict for the plaintiff. 42 The supreme court affirmed the trial court's verdict under the theory of expressed warranty, but ruled that the trial court had erred in allowing the issue of strict liability to go to the jury. 43 The majority found that the property damage suffered by the plaintiff was economic loss, and thus, the doctrine of strict tort liability was inappropriate. 44 The question raised by Hawkins was whether damage to property other than the product itself was recoverable under strict liability in tort in the absence of physical injury. 4 5 The concurring opinion by Justice Clinton, 46 and the results of subsequent decisions, indicate that the will of the majority was to deny the use of strict liability in an attempt to recover for property damage only. 47 This position has been overruled by the Nebraska Supreme Court in National Crane. Now, recovery can be obtained under strict liability when physical harm to property results, regardless of a showing of personal injury. 48 This holding is consistent with the position taken by the majority of courts and by 402A of the Restatement (Second) of Torts. 49 Recently, the United States Court of Appeals for the Eighth Circuit interpreted National Crane in the case of Gillette Dairy, Inc. v. Mallard Manufacturing Corp. 50 In that case, the plaintiff had purchased a gravity conveyor system from the defendant to be 41. Id. at 553, 209 N.W.2d at Id. at 559, 209 N.W.2d at Id. at 563, 209 N.W.2d at Id. at , 209 N.W.2d at Note, supra note 32, at Neb. at 570, 209 N.W.2d at See generally 213 Neb. at 789, 332 N.W.2d at For an early interpretation of Hawkins, see an unreported decision, West Nebraska Express, Inc. v. United States Thermo Control Co., No. CV 72-L 148 (D. Neb.) (An interstate shipper of beef tried to sue a refrigeration manufacturer for spoiled meat as a result of a defective refrigeration unit). Also a recent case which discusses Hawkins, is Gillette Dairy, Inc. v. Mallard Mfg. Corp., 707 F.2d 351, (8th Cir. 1983) (Plaintiff sued for damages because of a defective conveyor system) Neb. at 789, 332 N.W.2d at To the extent that Hawkins Constr. Co. v. Matthews Co., Inc., held that strict liability in tort may not be used to recover for physical harm to property only, it is disapproved. To hold otherwise would penalize the fortunate persons who escape personal injury and ignore the specific language of 402 A of the Restatement and a virtual unbroken line of decisions of other courts. Id. (citations omitted). 49. Id. 50. Gillette Dairy, Inc. v. Mallard Mfg. Corp., 707 F.2d 351 (8th Cir. 1983).

6 CREIGHTON LAW REVIEW [Vol. 17 used in moving ice cream. 5 1 The conveyor in question was delivered in March of 1976 and began to fail in October of the same year. The plaintiff replaced the defective conveyor but did not institute a claim against the defendant until May of The threshold question with which the court was presented was whether the statute of limitations for breach of warranty or products liability would apply. 5 3 The court held that the statute of limitations for warranty had to be applied because the plaintiff's claim was one of economic loss, and that in Nebraska such a claim, in the absence of injury to person or property, must come under the U.C.C. 54 Thus, under the breach of warranty four year statute of limitations the plaintiff's claim was time barred. 55 The Eighth Circuit thus interpreted National Crane to mean that Nebraska is now going to allow recovery for economic loss under a theory of strict liability only when such a loss is accompanied by either personal injury or property damage. 56 Economic Loss Economic loss has been defined as "[a]n action brought to recover damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits In applying this theory to strict liability, some jurisdictions do not 51. Id. at 352 (this was actually the second conveyor which the plaintiff had bought, the first was destroyed by fire). 52. Id. at Id. 54. Id. at Id. 56. Id. at 354, where the Eighth Circuit stated: More recently, the Nebraska Supreme Court has removed all doubt, if any existed, as to the distribution between economic loss in contract cases and property damage in products liability cases. In National Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 790 (1983), the court held that the purchaser of a product pursuant to contract cannot recover economic losses from the seller manufacturer on a products liability claim in the absence of physical harm to persons or property caused by the defective product. The court added that "Neb. Rev. Stat (Reissue 1979) defines a product liability action as an action brought 'for or on account of personal injury, death, or property damaged caused by' the product. The statute refers only the physical harm, not to economic loss." Thus, the National Crane cases make clear what is the most current state law definition of a products liability action. Id. (emphasis added and citations omitted). 57. Note, Economic Loss in Products Liability Jurisprudence, 66 CoLuM. L. REv. 917, 918 (1966). For an excellent discussion of economic loss in product liability cases, see Ribstein, Guidelines for Deciding Product Economic Loss Cases, 29 MERCER L. REv. 493 (1978); Comment, The Vexing Problem of the Purely Economic Loss in Products Liability: An Injury in Search ofa Remedy, 4 SETON HALL 145 (1972). For an interesting and brief study of a manufacturer not being liable for an economic loss under

7 19841 TORTS require harm to persons or property (other than to the product itself) as a prerequisite to recovery. 58 In contrast, other jurisdictions hold that harm to persons or other property is essential to recovery. 5 9 The divergence between the jurisdictions is demonstrated by the New Jersey case of Santor v. A & M Karagheusia, Inc.,60 which held that economic loss was recoverable without damage to person or property, 61 and the California case of Seely v. White Motor Co.,62 which held that there first must be damage to person or property before there can be recovery for economic loss in tort. 63 In Santor, the plaintiff had purchased carpeting for his home. 64 Shortly after being installed, the carpet began to develop streaks strict liability, see Note, Manufacturer Not Liable for Economic Losses of Consumer Under Theory of Strict Liability, 15 BuFFA o L. REV. 758 (1965). One of the most distinguished articles and cited often in case law is Note, Manufacturers' Liability to Remote Purchasers for "Economic Loss" Damages-Tort or Contract?, 114 U. PA. L. REv. 539 (1966). This article contains a most often quoted definition of economic loss, "[I] s defined as the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold." Id. at 541. The case law on economic loss is extremely numerous. For some of the best and most recent, see R.W. Murray Co. v. Shatterproof Glass Corp., 697 F.2d 818 (8th Cir. 1983) (owner and general contractor brought suit to recover for loss of value against supplier of aluminum framing); Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976) (owner of a mobil home brought suit against manufacturer for loss of benefit of his bargain); Clark v. International Harvester Co., 99 Idaho 326, 581 P.2d 784 (1978) (plaintiff was a farmer and sought economic damages from the manufacturer of a defective tractor); Cova v. Harley Davidson Motor Co., 26 Mich. App. 602, -, 182 N.W.2d 800, (1970) (in this case the court allowed the plaintiff to recover from the manufacturer for a defective golf cart in strict tort liability). This decision is in contrast to Morrow v. New Moon Homes, Inc., 548 P.2d 279, (Alaska 1976) (where the court found that damage alone to a mobil home sounded in contract and not in strict liability). Nebraska, before National Crane, took the approach that economic loss could only be claimed in strict tort liability if there was personal injury. See also Hawkins Constr. Co. v. Matthews Co., Inc., 190 Neb. 546, 209 N.W.2d 643 (1973); Alfred N. Koplin & Co. v. Chrysler Corp., 49 Ill. App. 3d 194, 364 N.E.2d 100 (1977) (the buyer of two air-conditioning units sought to recover economic losses for the repair and replacement of the units from the manufacturer); El Fredo Pizza, Inc. v. Rotoflex Oven Co., 199 Neb. 697, 261 N.W.2d 358 (1978) (plaintiff sued for economic damages for defective pizza oven made by the defendant). 58. Comment, supra note 57, at See generally RESTATEMENT (SECOND) OF TORTS 402 A (1965); Prosser, The Fall of the Citadel Strict Liability to the Consumer, 50 MINN. L REv. 791, (1966); Ribstein, supra note 57, at ; Speidel, Products Liability, Economic Loss and the UCC, 40 TENN. L. REV. 309, (1973); Note, Products Liability: What Type of Loss Will the Doctrine of Strict Liability in Tort Cover? 17 HASTINGS LJ. 385, 391 (1965). 59. See note 62 and accompanying text infra N.J. 52, 207 A.2d 305 (1965). 61. Id. at -, 207 A.2d at Cal. 2d 9, 403 P.2d 145, 45 Cal. Rptr. 17 (1965). 63. Id. at 16-17, 403 P.2d at , 45 Cal. Rptr. at N.J. at -, 207 A.2d at 307.

8 CREIGHTON LAW REVIEW [Vol. 17 in color. 65 The distributor who had sold the carpet was no longer in business. Thus, the plaintiff sued the manufacturer for loss of value of the carpet. 66 The defendant-manufacturer raised the defense of lack of privity between itself and the plaintiff, thus, barring recovery under expressed or implied warranty. 67 The court did not allow this defense, citing the New Jersey case of Henningsen v. Bloomfield Motors, Inc.,68 as authority. 69 In Henningsen, the court had found that when a product is inherently dangerous to the life or limb of the ultimate user, privity of contract should be abolished and recovery allowed. 70 The court in Santor expanded this narrow abolishment of privity to apply to a situation where pure economic loss results, even to the product itself, and allowed recovery for the value of the defective carpet. 7 1 The California Supreme Court responded to Santor in Seely v. White Motor Co. 72 Seely involved the purchase of a truck by the plaintiff to be used in his business of heavy-duty hauling. 73 The truck was expressly warranted to be free from material defect or defective workmanship. 7 4 Within a year of purchase, however, the truck was damaged due to a material defect, and the plaintiff suffered lost business profits. 75 The plaintiff filed an action against the defendant alleging two causes of action, breach of expressed warranty and strict liability. 76 Writing for the majority, Chief Justice Traynor upheld the plaintiff's actions for loss of value of the truck and for lost business profits solely under the theory of warranty. 77 Seely thus stands for the proposition that economic loss is not recoverable in strict tort in the absence of personal injury or property damage. 7 8 In reaching this conclusion, the court criticized the holding in Santor which allowed economic loss recovery for a defective carpet in 65. Id. 66. Id. 67. Id. (The trial court on the admission of defective manufacture, found a breach of the warranty and entered judgment for the plaintiff) N.J. 385, 161 A.2d 69 (1960) N.J. at-, 207 A.2d at N.J. at-, 161 A.2d at N.J. at-, 207 A.2d at 308. "And it cannot be said that serious consideration was given to whether a distinction should be made between personal injury claims and loss of bargain claims, i.e., where the breach of the warranty produced total partial destruction or diminution in the value of the article sold." Id Cal. 2d 9, 403 P.2d 145, 45 Cal. Rptr. 17 (1965). 73. Id. at-, 403 P.2d at 147, 45 Cal. Rptr. at Id. at-, 403 P.2d at 148, 45 Cal. Rptr. at Id. at-, 403 P.2d at , 45 Cal. Rptr. at Id. 77. Id. at-, 403 P.2d at , 45 Cal. Rptr. at Id.

9 1984] TORTS strict tort. 79 Chief Justice Traynor stated that such a holding would produce a situation where "[t] he manufacturer would be liable for damages of unknown and unlimited scope... Only if someone had been injured because the rug was unsafe for use would there have been any basis for imposing strict liability in tort." 80 Under each of the approaches outlined above it is important to distinguish between economic loss and property damage. 8 1 One author has stated that "[w] hen the defect causes an accident 'involving some violence or collision with external objects,' the resulting loss is treated as property damage. On the other hand, when the damage to the product results from deterioration, internal breakage or other non-accidental causes, it is treated as economic loss. ' 82 Although this distinction appears to be straightforward, in 79. Id. 80. Id. at-, 403 P.2d at 151,45 Cal. Rptr. at 23. The court basically sees a line of demarcation between warranty and strict tort. Warranty should handle those cases concerning strictly economic loss, whereas, strict liability should handle cases of personal injury or property damage, as Chief Justice Traynor wrote: The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the 'luck' of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He cannot be held for the level of performance of his products in the consumer's business unless he agrees that the product was designed to meet the consumer's demands. A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market. He can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will. Even in actions for negligence, a manufacturer's liability is limited to damages of physical injuries and there is no recovery for economic loss alone. Id. For an excellent discussion contrary to the Seely position of separating contract and tort, see Ribstein, supra note 57, at 496. This article basically claims that both contract and tort are so intertwined that it really can almost be seen as one theory. The article which basically set the foundation for the conflict between contract and tort is Prosser, supra note 58, at 802. Santor has been followed hardly at all with the exception of one Michigan case, Cova v. Harley Davidson Motor Co., 26 Mich. App. 602, 182 N.W.2d 800 (1970) (purchaser of defective golf carts sued the manufacturer for economic losses). The sparse following of Santor is in contrast to the well-articulated position of Seely, which follows the RESTATEMENT (SEcoND) OF TORTS 402 A (1965) and is supported in many state decisions. See, e.g., Clark v. International Harvester Co., 581 P.2d 784, (Alaska 1978); Morrow v. New Moon Homes Inc., 548 P.2d 279, (Alaska 1976); Alfred N. Koplin & Co. v. Chrysler Corp., 49 Ill. App. 3d 194,-, 364 N.E.2d 100, (1977); Ford Motor Co. v. Lenon, 217 Tenn. 400, -, 398 S.W.2d 240, (1966) Neb. at 789, 332 N.W.2d at Note, supra note 57, at 918.

10 CREIGHTON LAW REVIEW [Vol. 17 actual application it can become quite difficult to discern. 83 The property damage-economic loss distinction has been discussed in recent decisions of the Supreme Court of Alaska. 84 In Cloud v. Kit Manufacturing Co. 85 the plaintiff had bought a mobil home, under which he had stored padding supplied by the defendant. 86 Also under the mobil home was an electric device used to keep pipes from freezing. This device set the padding and the home ablaze, resulting in total destruction of the mobil home and the property contained within. 87 The court held that the plaintiff's loss was direct property damage, stating that "[t] he damage to the product, the trailer package, was the result of a sudden and calamitous occurrence, the fire. Accordingly, we hold that the damage to the product in this case was direct property damage." 88 The court thus held that strict liability was applicable. 89 The facts in Cloud were distinguished from the facts of another Alaska decision, Morrow v. New Moon Homes, Inc. 90 In Morrow, the plaintiffs had purchased a mobil home subsequently described as a "lemon." 91 As time passed the petitioners experienced, among other things, a leaking roof, a defective furnace and constant electrical problems. 92 By the time the action was filed, the home had deteriorated to a point of being uninhabitable. 93 The court held that the loss suffered by the plaintiffs was purely economic, and thus not actionable under strict liability. 94 The Alaska Supreme Court distinguished its decision in Cloud from the decision in Morrow by commenting that the harm suffered in Morrow was a loss of benefit of the bargain, and thus economic loss; 95 whereas, the loss in Cloud was damage to property that resulted from a sudden, calamitous event, and therefore prop- 83. Cloud v. Kit Mfg. Co., 563 P.2d 248, 251 (Alaska 1977). 84. Id. See also Northern Pwr. & Engineering v. Caterpillar Tractor, 623 P.2d 324 (Alaska 1981); Morrow v. New Moon Homes, Inc., 548 P.2d 279 (Alaska 1976) P.2d 248 (Alaska 1977). 86. Id. at Id. (The fire destroyed the entire mobil home and all of their personal possessions). 88. Id. at Id. at Id. at 251; see 548 P.2d 279 (Alaska 1976) P.2d at Id. (The home continually suffered from one defect after another until it was uninhabitable). 93. Id. 94. Id. at 286. "Thus we hold that the theory of strict liability in tort which we recognized in Clary does not extend to the consumer who suffers only economic loss because of defective goods." Id. (footnote omitted) P.2d at 251.

11 19841 TORTS erty damage. 96 Other recent cases considering this issue have adhered to a rule concerning property damage similar to the one announced in National Crane: property damage sufficient to support application of strict liability occurs "at least where the damage occurred as a result of a sudden, violent event and not as a result of an inherent defect that reduced the property's value without inflicting physical harm to the product." 97 Yet in another Alaska decision, Northern Power & Engineering v. Caterpillar Tractor, 98 which is analogous to National Crane, the appellant purchased a power generator which later failed during operation. 99 The machine was badly damaged, but there was no personal injury or property damage. 100 The court found that the engine failed due to an inherent defect in the machine and not the result of a sudden or calamitous event.' 0 ' The court held, however, that when a defective product presents a situation where it is potentially dangerous to persons or property, other than itself, then strict liability in tort is appropriate Northern Power thus introduces the element of possible danger to persons or other property as a criterion to be considered in deciding whether to grant recovery under a theory of strict liability. 0 3 If this additional criterion is applied to the facts of National Crane, a forceful argument can be made that strict liability should have been imposed, because danger to persons or property was not only possible, but did in fact occur. 104 Taken further, it can be ar- 96. Id Neb. at 789, 332 N.W.2d at 43. See generally Gibson v. Reliable Chevrolet, Inc., 608 S.W.2d 471, 474 (Mo. 1980) (plaintiff sought damages as a result of a defective temperature gauge causing the destruction of an engine); Russell v. Ford Motor Co., 281 Or. 587, 575 P.2d 1383, 1384 (1978) (injury to truck as a result of a defective weld in an axle housing); Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 81 (Tex. 1977) (purchaser of a mobil home asked for damages because the home was defective) P.2d 324 (Alaska 1981). 99. Id. at Id Id. at Id. The court stated: We hold, therefore, that when a defective product creates a situation potentially dangerous to persons or other property, and loss occurs as a result of that danger, strict liability in tort is an appropriate theory of recovery, even though the damage is confined to the product itself. In order to recover on such a theory, plaintiff must show (1) that the loss was a proximate result of the dangerous defect and (2) that the loss occurred under the kind of circumstances that made the product a basis for strict liability. Id Id Neb. at 784, 332 N.W.2d at 41.

12 CREIGHTON LAW REVIEW [Vol. 17 gued that it should not make any difference whether the product was damaged as a result of a sudden accident or by a material defect. The important fact is that the product caused harm and the manufacturer is better able to assume responsibility for insuring distribution of the risk When this stage of the argument is reached, the practitioner finds himself back into the continuing controversy concerning the appropriate roles of contract law and tort law. 0 6 In this vein, two arguments can be made which would conceivably entitle the plaintiff in National Crane to recover; they are both advanced in the dissenting opinion and are discussed below. Tort Law and Public Policy The dissenting opinion, written by Justice Boslaugh, first attacks the problem in National Crane from a public policy standpoint The dissent premises its argument on the consequences of the majority's decision which requires injury to a third person or his property before an action in strict liability arises To require personal injury or property damage arguably strikes at the core values and rationales supporting strict liability in tort, and emasculates the theory's effectiveness The theory of strict product liability was designed to provide: (1) consumer protection and compensation; (2) risk distribution; and (3) deterrence of defective manufacture. 110 Each of these objectives is discussed below. Consumer protection as the underlying rationale for strict liability can be traced back through a long line of California Supreme Court decisions, starting with Escola v. Coca Cola Bottling Co. I" 105. Ribstein, supra note 57, at ; Note, Comparative Contribution and Strict Tort Liability: A Proposed Reconciliation, 13 CREIGHTON L. REV. 889, 894 (1980) Id. For a detailed and theoretical discussion on the relationship between tort law and contract law, the best article is probably Prosser, supra note 58, at Neb. at 791, 332 N.W.2d at Id Id. See Note, supra note 105, at Neb. at 791, 332 N.W.2d at Cal. 2d 453, 150 P.2d 436 (1944). In this case, the plaintiff was a waitress who was injured when a bottle of Coke broke in her hand. The case is really more important based on a concurring opinion by Justice Traynor. In this opinion, he cites MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E (1916) as authority for recognizing that "a manufacturer incurs an absolute liability when an article that he has placed on the market, knowing that it is to be used without inspection, proves to have a defect that causes injury to human beings." Id. at -, 150 P.2d at 440. This position of Justice Traynor was not well-expanded until his decision in Greenman v. Yuba Power Prods., Inc., 59 Cal. 2d 57, 377 P.2d 897, , 27 Cal. Rptr.

13 1984] TORTS In that case, Justice Traynor stated that "[i] t is to the public interest to discourage the marketing of products having defects that are a menace to the public The rationale behind consumer protection is that the manufacturer is really in the best position to protect against the harm that a product may cause. 113 In most cases, the consumer does not have the skill or ability to properly investigate, inspect or maintain many of the products on today's commercial markets." 4 Consumer protection seeks to put the responsibility for defective products on the manufacturer, the party that can best handle the problem, and not the helpless injured consumer. 115 In Nebraska, the supreme court has relied on this approach to strict liability. 1 6 Another tenent of strict liability is risk distribution among consumers. 117 Risk distribution is based primarily on a spreading theory where each consumer of a product pays, within the purchase price, for his and other's protection against harm from the product." 8 It is essentially "maximizing the number of persons bearing a loss in order to minimize its impact on each individual. ' 9 Also, risk distribution seeks to fulfill the equitable principles of strict liability by placing responsibility with the manufacturer of the defective product. 120 Finally, strict liability is justified as a deterrent measure to prevent manufacturers from producing defective merchandise. 12 ' This theory was expressed in Hall v. E. I. Dupont De Nemours & 697, (1962). For additional cases showing this consumer protection trend in California, see Vandermark v. Ford Motor Co., 61 Cal. 2d 256, 391 P.2d 168, 37 Cal. Rptr. 896 (1964) (court held that manufacturer could not rely on its retailer to prevent liability); Elmore v. American Motors Corp., 70 Cal. 2d 578, 451 P.2d 84, 89, 75 Cal. Rptr. 652, 657 (1969) (court held that a bystander could recover under strict tort) Cal. 2d at -, 150 P.2d at Note, Comparative Fault and Strict Products Liability: Are They Compatible? 5 PEPPERDInE L. REv. 501, 503 (1978) Id Id. at See Note, infra note 118, at Note, supra note 113, at Note, Strict Tort Liability in Nebraska: Recent Developments in Perspective, 12 CREIGHON L. REV. 370, 376 (1978) Franklin, Tort Liability for Hepatitis: An Analysis and a Proposal, 24 STAN. L. REv. 439, 463 (1972) Note, Products Liability, Comparative Negligence, and the Allocation of Damages Among Multiple Defendants, 50 S. CAl. L. REv. 73, 76 (1976). See also Jensvold, A Modern Approach to Loss Allocation Among Tortfeasors in Products Liability Cases, 58 Mum. L REv. 723, (1974) See Note, supra note 118, at 376.

14 CREIGHTON LAW REVIEW [Vol. 17 Co.,122 where a New York federal court stated: "A rigorous rule of liability with enhanced possibilities of large recoveries is an 'incentive' to maximize safe design or a 'deterence' to dangerous design, manufacture and distribution. 123 The theory of strict liability as a deterrent has been questioned, however, by some commentators who argue that negligence could be used and, in fact, was used long before strict liability's birth. 24 It might be noted that although the dissent in National Crane advocated a public policy argument, the plaintiff in this case was was not a consumer in the traditional sense Rather, the parties to National Crane were a manufacturer of a product, who was suing the manufacturer of a component part.1 26 Thus, the question becomes whether the underlying rationale of strict liability was designed to protect a manufacturer suing another manufacturer who had produced a defective part. This question can be answered by examining liability under the theories of indemnity or contribution. 127 Indemnity Perhaps the best justification which the dissent advances for reversing the district court's dismissal of the plaintiff's complaint is that the appellant was entitled to recover the expenses of the retrofit program under a theory of indemnity or contribution. 128 Contribution is concerned with allocating the cost of harm between tortfeasors, normally according to the proportionate share of harm which they caused. 29 On the other hand, indemnity is an all or nothing proposition where one tortfeasor has paid the injured party, and seeks reimbursement from the tortfeasor who caused the harm. 130 In Nebraska, the Supreme Court distinguished indemnity and contribution in Tober v. Hampton: 13 1 "[T]he word 'indemnity' as used in connection with law relating to tort-feasors F. Supp. 353 (E.D.N.Y. 1972) (the plaintiff claimed that the defendant had manufactured defective blasting caps) Id. at See Note, supra note 118, at 372. For an example of a manufacturer being held liable for a negligently made product, see MacPherson v. Buick Motor Co., 217 N.Y. 382, -, 111 N.E. 1050, 1055 (1916) Neb. at , 332 N.W.2d at Id. at 783, 332 N.W.2d at Comment, Comparative Causation, Indemnity, and the Allocation of Losses Between Joint Tortfeasors in Product Liability Cases, 10 ST. MARY's W. 587, (1979) Neb. at 797, 332 N.W.2d at Note, supra note 105, at Id Neb. 858, 136 N.W.2d 194 (1965).

15 1984] TORTS means a shifting of the entire loss, while the word 'contribution' means the sharing of the loss. ' ' 132 Based upon the facts of National Crane, it appears clear that National Crane was asking the trial court for indemnity, not contribution, because it asked to be reimbursed for the entire cost of the retrofit program For the purposes of this article, therefore, the appellant will be treated as having asked for indemnity and not contribution. In Tober v. Hampton, the plaintiff was a property owner who brought an action to recover from the defendant for damage done to his property due to a gas explosion The court elaborated on the distinction which must be drawn in an indemnity situation between two tortfeasors.1 35 The court stated that the indemniteetortfeasor is only technically or constructively at fault, and the indemnitor-tortfeasor is ultimately the responsible party In National Crane, Ohio Steel was the responsible party as manufacturer of a defective part. 37 The right of National Crane to be indemnified by Ohio Steel had to be implied because of the absence of a contractual covenant of indemnity. 38 Basically, implied indemnity develops when the indemnitee becomes liable to an in Id. at 871, 136 N.W.2d at 203. See also RESTATEMENT (SECOND) OF TORTS 886 B (1979): Indemnity Between Tortfeasors (1) If two persons are liable in tort to a third person for the same harm and one of them discharges the liability of both, he is entitled to indemnity from the other if the other would be unjustly enriched at his expense by the discharge of the liability. (2) Instances in which indemnity is granted under this principle include the following. (a) The indemnitee was liable only vicariously for the conduct of the indemnitor; (b) The indemnitee acted pursuant to directions of the indemnitor and reasonably believed the directions to be lawful; (c) The indemnitee was induced to act by a misrepresentation on the part of the indemnitor, upon which he justifiably relied; (d) The indemnitor supplied a defective chattel or performed defective work upon lands or buildings as a result of which both were liable to the third person, and the indemnitee innocently or negligently failed to discover the defect; (e) The indemnitor created a dangerous condition of land or chattels as a result of which both were liable to the third person, and the (f) indemnitee innocently or negligently failed to discover the defect; The indemnitor was under a duty to the indemnitee to protect him against the liability to the third person. Id Neb. at 785, 332 N.W.2d at Neb. at 860, 136 N.W.2d at Id. at , 136 N.W.2d at Id Neb. at 785, 332 N.W.2d at Phillips, Contribution and Indemnity in Products Liability, 42 TENN. L. REv. 85, (1974).

16 CREIGHTON LAW REVIEW [Vol. 17 jured party as the result of some fault caused by the indemnitor. 139 If the facts are taken on their face, it was Ohio Steel who manufactured the defective component part. Thus, National Crane is only constructively at fault for incorporating the parts into its product. Therefore, a right to indemnity would appear to exist. 140 But a problem develops in this case, because, as one court has stated: "An implied contract of indemnity arises in favor of a person who without any fault on his part is exposed to liability and compelled to pay damages on account of the negligence or tortious act of another."' 14 1 In this case Ohio Steel claimed that National Crane had never been under a legal duty to settle or been compelled to pay a judgment for defective cranes. 142 This led Ohio Steel to contend that National Crane was, in effect, a volunteer, and as such, was not entitled to indemnity Thus, for National Crane to be entitled to indemnity, it must show that the retrofit program was a settlement and that National Crane had a legal duty to undertake it. 144 National Crane contended that the retrofit program was, in fact, a settlement. 145 A manufacturer who becomes aware of the potential dangerousness of his product is under a legal duty to rectify that defect.1 46 The manufacturer must weigh the potential threat of harm and the cost involved to determine whether a simple warning to customers is required, or whether a total recall campaign is needed. 147 In the instant case, there appears to be no question that a recall campaign was warranted based on the crane failures, which in one instance resulted in the loss of life. 148 The recall campaign has become a viable and necessary tool to protect a manufacturer's good name and legal liability when a defective product is discovered. 149 In this vein, National Crane's retrofit program can be viewed as a class settlement in recognition of their tort law duty to 139. Hill v. Joseph T. Ryerson & Sons, Inc., 268 S.E.2d 296, 300 (W.Va. 1980) (a product liability action was filed against the seller of a steel pipe which caused injury to the plaintiffs eye when it split under pressure) See Comment, supra note 127, at Miles v. Southeastern Motor Truck Lines, 295 Ky. 156,-, 173 S.W.2d 990, 996 (1943) Brief for Appellee at 10-16, National Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 332 N.W.2d 39 (1983) Neb. at , 332 N.W.2d at See note 151 and accompanying text infra Reply Brief of Appellant at 2, National Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 332 N.W.2d 39 (1983) Ramp, The Impact of Recall Campaigns on Product Liability, 44 INs. CouNs. J. 83, 85 (1977) Id Neb. at 784, 332 N.W.2d at Ramp, supra note 146, at 84.

17 19841 TORTS protect ultimate users from harm. 5 0 Solely because National Crane was not compelled to pay for the retrofit program as the result of a judicial judgment does not negate the fact that it was obligated to pay under a tort law duty. 15 ' A position frequently held is that when one is under a legal duty to settle a loss and does so without being ordered by a court, he does not become a volunteer. 52 Based on an Illinois Supreme Court case, Suvada v. White Motor Co.,13 National Crane appears not to be a volunteer by undertaking the retrofit program. 5 4 In that case, the plaintiff had purchased a tractor-trailer from the defendant to be used for transporting milk. 15 While in use, the brakes on the tractor failed causing a collision with a bus whereby property damage and personal injuries resulted. 156 The plaintiff settled claims registered against it, 57 and then sued the defendant for indemnity. 158 The defendant 150. See Reply Brief of Appellant at See Parfait v. Jahnke Serv., Inc., 484 F.2d 296, 305 (5th Cir. 1973) (Indemnitor was continuously informed of indemnitee's settlement negotiations and was offered and refused defense of the original action), cert. denied, 415 U.S. 957 (1974); Daily Express, Inc. v. Northern Neck Transfer Corp., 490 F. Supp. 1304, 1307 (M.D. Pa. 1980) (if an implied contract of indemnity exists, if the amount paid is reasonable and just, if the payment is made in good faith, and if notice is given to the indemnitor that settlement is being made, then the indemnitee may settle); Globe Indem. Co. v. Schmitt, 142 Ohio St. 595, 604, 53 N.E.2d 790, 794 (1944). [T]he fact of voluntary payment does not negative the right to indemnity. However, the one seeking indemnity, after making voluntary settlement, must prove that he had given proper and timely notice to the one for whom it is sought, that he was legally liable to respond and that the settlement effected was fair and reasonable. Id. See also 41 AM. JuR. 2d Indemnity 33 (1968), which states: [A] person legally liable for damages who is entitled to indemnity may settle the claim and recover over against the indemnitor, even though he has not been compelled by judgment to pay the loss. The fact of voluntary payment does not negative the right to indemnity, since a person confronted with an obligation that he cannot legally resist is not obligated to wait to be sued and to lose a reasonable opportunity for compromise. Such recovery is subject to proof of liability and the reasonableness of the amount of the settlement. Thus, the indemnitee may be required to establish his case against the indemnitor in the same way that the claimant against him would have been obligated to do, namely, by a preponderance of the evidence. A mere showing by a party seeking indemnity that there was a reasonable possibility that it might have been held liable if it has not settled the injured party's suit is not sufficient to recover indemnity; actual legal liability must be shown. (emphasis added). Id Western Casualty & Sur. Co. v. Milwaukee General Constr. Co., 213 Wis. 302,-, 251 N.W. 491,492 (1933) (claim by an injured passenger who sued the defendant for not properly lighting an obstruction on the highway) Ill. 2d 612, 210 N.E.2d 182 (1965) Id. at-, 210 N.E.2d at Id. at -, 210 N.E.2d at Id Id.

18 CREIGHTON LAW REVIEW [Vol. 17 raised a defense that the plaintiff was a volunteer and thus barred from indemnification.' 5 9 Nonetheless, the court found that when the plaintiffs were confronted with a choice between settlement or suit, and chose the former, the defense that they were volunteers was neutralized. 160 As was stated in the Wisconsin case of Western Casualty & Surety Co. v. Milwaukee General Constr. Co. :161 One confronted with an obligation that he cannot legally resist is not obliged to wait to be sued and to lose a reasonable opportunity to make a favorable compromise in order to avoid assuming the character of an interloper or volunteer in the matter of paying a liability common to him and another. 162 Thus, National Crane had a duty not to simply wait and pile up damages against Ohio Steel, but rather, to attempt to mitigate damages through a retrofit program As a final provision, National Crane would have to prove that its settlement, i.e., its retrofit program was made in good faith, was reasonable, and potential legal liability was present. 6 4 Upon review of the facts in National Crane, these elements appear to be met and certainly potential legal liability was present under strict tort liability against both National Crane and Ohio Steel. 165 Furthermore, it should be noted that Ohio Steel was informed by National Crane that it planned to undertake a retrofit program. In addition, National Crane requested Ohio Steel to take part in the program, and it refused to do S0.166 CONCLUSION- In National Crane, the Nebraska Supreme Court considered the issue of whether economic loss would be allowed in strict liability in the absence of damage to persons or property. A second issue which the court considered was whether the retrofit program 158. Id. (plaintiff also sued the manufacturer of the brakes) Id. at -, 210 N.E.2d at Id Wis. 302, 251 N.W. 491 (1933) Id. at -, 251 N.W. at Hawkeye-Sec. Ins. Co. v. Lowe Constr. Co., 251 Iowa 27, 35-36, 99 N.W.2d 421, 427 (1959) (the plaintiff was the insurer of the defendant who sued to recover contribution from the defendant for the negligent acts of the defendant's employee in an accident) Burlington Northern, Inc. v. Hughes Bros., 671 F.2d 279, (8th Cir. 1982) (involves the interpretation of an indemnity agreement between the parties in the case of personal injury) Neb. at , 332 N.W.2d at Brief for the Appellant at 8, National Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 332 N.W.2d 39 (1983).