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United States Steel Corporation v. John H. Young, Inc.

Court of Appeals of Texas, Third District, Austin

February 16, 2018

United States Steel Corporation, Appellant
John H. Young, Inc., Appellee John H. Young, Inc., Cross-Appellant United States Steel Corporation, Cross-Appellee


          Before Chief Justice Rose, Justices Field and Bourland


          Cindy Olson Bourland, Justice

         Appellee and cross-appellant John H. Young, Inc. ("Young") sued appellant and cross-appellee United States Steel Corporation ("U.S. Steel") for negligence, products liability, deceptive trade practices, breach of contract, and breach of implied and express warranty, all related to Young's purchase from U.S. Steel of seven-inch steel casing used in an oil well. A jury determined that Young and U.S. Steel were each 50% negligent, that U.S. Steel had not engaged in any deceptive trade practices, that the casing had a manufacturing defect that was a producing cause of the failure at the well, and that Young should recover $329, 700 to reimburse its costs in removing the damaged casing from the well.[1] Both sides filed various post-verdict motions, including motions to disregard jury findings and for new trial. In its motion to disregard the jury's finding of zero damages for the cost of replacing the damaged casing and the cost of installing remedial casing, Young elected to recover under its manufacturing-defect claim. The trial court signed a judgment in favor of Young, awarding it $329, 700 in damages.

         Both U.S. Steel and Young filed notices of appeal. U.S. Steel argues three issues on appeal: that the economic-loss rule bars Young from recovering damages under a tort theory, that there was legally and factually insufficient evidence of a manufacturing defect, and that the trial court erred in not halving the jury's damages award based on the finding that Young was 50% negligent. Young argues in its cross-appeal that the trial court erred in refusing to disregard the jury's awarding of zero damages for the costs of installing remedial five-inch casing. We reverse the trial court's judgment and render judgment in favor of U.S. Steel.

         Is Young's recovery barred by the economic-loss rule?[2]

         The principles known collectively as the "economic-loss rule" act to govern recovery of economic losses in particular areas of the law. Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 415 (Tex. 2011) (quoting Vincent R. Johnson, The Boundary-Line Function of the Economic Loss Rule, 66 Wash. & Lee L. Rev. 523, 534-35 (2009)). The purpose of the rule is to separate the law of torts from the law of contracts-to "delineate between tort and contract claims." LAN/STV v. Martin K. Eby Constr. Co., 435 S.W.3d 234, 239-40 (Tex. 2014) (quoting Johnson, 66 Wash. & Lee L. Rev. at 546). "The economic loss rule applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself." Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 867 (Tex. 2007). "In such cases, recovery is generally limited to remedies grounded in contract (or contract-based statutory remedies), rather than tort." Sharyland Water, 354 S.W.3d at 415; see A&H Props. P'ship v. GPM Eng'g, No. 03-13-00850-CV, 2015 WL 9435974, at *1-2 (Tex. App.-Austin Dec. 23, 2015, no pet.) (mem. op.) ("The economic-loss rule limits the recovery of purely economic damages that are unaccompanied by injury to the plaintiff or its property in actions for negligence, " and "[w]hen the doctrine is applicable, a plaintiff cannot maintain a negligence cause of action against a defendant when its damages are only for economic losses caused by the failure to perform a contract.").

         In deciding whether the doctrine is applicable, we consider (1) whether the defendant's duty arose from a contract or whether it was imposed by law and independent of the contract and (2) the nature of the injury, asking whether the loss was only "to the subject of a contract itself." A&H Props., 2015 WL 9435974, at *2 (citing Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 45 (Tex. 1998); Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986)). In this context, "economic loss" has been defined 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 . . . as well 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.

Castle Tex. Prod. Ltd. P'ship v. Long Trusts, 134 S.W.3d 267, 274 (Tex. App.-Tyler 2003, pet. denied) (quoting Thomson v. Espey Huston & Assocs., 899 S.W.2d 415, 421 (Tex. App.-Austin 1995, no writ)); see A&H Props., 2015 WL 9435974, at *1; Goose Creek Consol. Indep. Sch. Dist. v. Jarrar's Plumbing, Inc., 74 S.W.3d 486, 494 (Tex. App.-Texarkana 2002, pet. denied); Bass v. City of Dallas, 34 S.W.3d 1, 9 (Tex. App.-Amarillo 2000, no pet.).

         Young argues that the defective casing should be considered as having damaged the well and, therefore, as having caused damage to "other property" so as to move its damages beyond the boundaries of economic losses. It notes that casing is a necessary and, in fact, statutorily required[3] part of an oil and gas well, and argues that "[w]hen casing is damaged and remains downhole, as here, the entire well is damaged" until the casing is removed and replaced and remedial steps are taken to remedy the problem. It contends that if it had been unable to remove and replace the defective portions of casing and reinforce the casing that was left, the well would have been inoperable, and asserts that the fact that it was able to repair the well "does not mean the damage did not occur." U.S. Steel, on the other hand, argues that Young did not show that it suffered any property damage beyond the defective casing, pointing to testimony by Young's representative, T.H. Milstead, who, when asked whether there was "any damage to the well itself, " answered, "Not that I'm aware of." He was further asked whether "the only property that was damaged in the course of all of this was the actual casing, " and he answered, "Yes." Milstead explained that the result of the failed casing was that the well had no "pressure integrity" and was left dangerously vulnerable to an "influx of oil or gas" until the casing was repaired. Because of the failed casing, Young changed its plans to install a remedial five-inch casing, rather than a less expensive liner, as originally planned.

         Young points to the supreme court's decision in Sharyland Water Supply as support for its proposition that Young's damages for removing, replacing, and reinforcing the casing are not barred by the economic-loss rule. However, the facts in Sharyland were markedly different than those presented here. Sharyland Water Supply sued after a city-hired contractor installed a new sewer system, resulting in sewer lines running parallel to and across the water main; Sharyland was not involved in the sewer contract. 354 S.W.3d at 410. The court of appeals held that Sharyland had suffered only economic losses and, therefore, could not recover under its negligence claim. Id. at 415. The supreme court explained that it had thus far "applied the economic loss rule only in cases involving defective products or failure to perform a contract" because in such cases, a party's economic losses "were more appropriately addressed through statutory warranty actions or common law breach of contract suits than tort claims." Id. at 418. The court disapproved of the court of appeals' analysis as "both overstat[ing] and oversimplif[ying] the economic loss rule" to essentially say "that you can never recover economic damages for a tort claim, " observing that if the negligence claim was barred simply because the sewer was the subject of a contract-one to which Sharyland was not a party-that would mean that "a party could avoid tort liability to the world simply by entering into a contract with one party." Id. at 418-19. The court specifically did not decide whether "purely economic losses may ever be recovered in negligence or strict liability cases" because there was evidence that the water system had been damaged-Sharyland was going to have to either relocate or encase its water lines, and the court stated that "[c]osts of repair necessarily imply that the system was damaged." Id. at 419-20. The court concluded that the economic loss rule "cannot apply to parties without even remote contractual privity, merely because one of those parties had a construction contract with a third party, and when the contracting party causes a loss unrelated to its contract." Id.

         Contrary to Young's argument, Sharyland does not bar application of the economic-loss rule here, where there is contractual privity between Young and U.S. Steel and where Young's loss is directly related to and arising from that contract. See id. We do not read Sharyland's statement that "[c]osts of repair necessarily imply that the system was damaged" to mean that, under these particular facts, Young suffered damage to "other property" so as to avoid the economic-loss rule. See id. The facts in Sharyland were different, and its logic therefore does not cleanly apply to this case. We decline to extend its holding to the facts presented by this case, consistent with the economic-loss rule as it has developed in the context of defective products provided under contracts.

         Nor do the other cases cited by Young support its argument. In Cressman, for example, an oil-well tubing string failed, resulting in a "sudden dramatic loss of pressure" and causing mud to enter the well formation and "a mixture of fracture fluid, proppant, and mud [to be] mixed with the condensate that flowed from the well." Cressman Tubular Prods. Corp. v. Kurt Wiseman Oil & Gas, Ltd., 322 S.W.3d 453, 456 (Tex. App.-Houston [14th Dist.] 2010, pet. denied). The tubing string continued to fail repeatedly over several years, requiring the well to be cleared of mud and couplings to be replaced. Id. at 456-57. For about a year, a gas lift had to be used to raise the oil out of the well until the entire tubing string was replaced and a second "fracture stimulation" was conducted, allowing the well to produce again; the company maintained its lease during those repairs by producing oil from another well it had leased on the same property. Id. at 456-57. Wiseman sued for breach of warranty, products liability, and deceptive trade practices. Id. at 457. In considering whether the implied-warranty claim sounded in tort and, thus, whether the finding of proportionate responsibility should have been applied, the court held that damage to the well formation and the well bore was damage to real property and a real-estate improvement, respectively, and that "[b]oth are 'property damage'; thus, the exception applicable to implied-warranty claims that result solely in economic damages does not apply here." Id. at 462. In Chapman Custom Homes, the supreme court, while noting that the "economic loss rule generally precludes recovery in tort for economic losses resulting from a party's failure to perform under a contract when the harm consists only of the economic loss of a contractual expectancy, " held that when a plumbing subcontractor improperly installed plumbing in a new house, resulting in "extensive damage to the structure, " the plumber's duty not to flood or otherwise damage ...

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