Industry News & Tips

Maritime Economic Losses

May 05, 2007

Gene Horton

MARITIME LOSSES AND THE ECONOMIC LOSS RULE:
THE "PLEASURE CRAFT" EXCEPTION

By John W Reis

COZEN O'CONNOR

A vessel catches fire on navigable waters, invoking maritime law. The cause was a defective engine, but all warranties on the vessel have expired. The only viable theories are negligence and strict liability. The manufacturer defends asserting the economic loss rule, which bars such tort theories when a product malfunctions and the only thing damaged is the product itself. But is this a winning defense in a maritime case? The answer depends on the nature of the vessel and where the court falls within the ongoing debate over an exception to the economic loss rule called the consumer/commercial product distinction or the "pleasure craft" exception.

UNDERSTANDING THE ECONOMIC LOSS RULE

The mother ship of the economic loss rule is East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986). There, the United States Supreme Court, applying maritime law, held that the owner of a commercial vessel could not sue the manufacturer of the vessel's defective engine turbine in tort for the physical damage the turbine caused to the engine and ship. The rationale was that such products come with warranties, the terms of which should control the remedies available to the purchaser when the only thing damaged was the product itself. Otherwise, reasoned the Court, contract law would "drown in a sea of tort."THE COMMERCIAL/CONSUMER DISTINCTION OR THE "PLEASURE CRAFT" EXCEPTION

One of the driving principles behind vesting the federal courts with admiralty and maritime jurisdiction is to establish uniformity of substantive maritime law. However, because East River involved sophisticated commercial parties and a commercial vessel, a debate ensued over whether in maritime cases the economic loss rule applies only to commercial vessels but not to personal vessels or pleasure crafts. 

CASES  RECOGNIZING AND APPLYING THE PLEASURE CRAFT EXCEPTION

In Sherman v. Johnson & Towers Baltimore, Inc., 760 F. Supp. 499 (D. Md. 1990), the owners of a yacht that caught fire sued the seller under warranty and tort claims. The court denied the defendant's motion to dismiss the tort claims, holding that the East River doctrine was limited to cases involving commercial relationships and did not apply to pleasure craft.

In Farley v. Magnum Marine Corp., N. V. Case No. 89-0725-CV, 1995 WL 795711 (S.D. Fla. 1995), the court recognized and applied the consumer/commercial distinction, denying the defendant's motion for summary judgment on the tort claims for fire damages to a secondhand,sixty-foot pleasure yacht.

The Farley analysis was applied in Ins. Co. of North America v. American Marine Holdings, Inc. 2005 WL3158049 (M.D. Fla. 2005), upholding a subrogated insurer's tort claims against the manufacturer of a used vessel after finding no warranty theories were available.

Similarly, in United States Aviation Underwriters v. Pilatus Business Aircraft, Ltd. ("USAU"), 358 F.Supp.2d 1021 (D. Col. 2005), the court applied the consumer/commercial distinction under maritime law in a subrogation suit against an airplane engine manufacturer. The court applied the distinction even though USAU's insured, the airplane's lessee, was using the aircraft for commercial purposes because the end user had no bargaining power against the engine manufacturer.

CASES REJECTING THE DISTINCTIONOn the other hand, in Karshan v. Mattituck Inlet Marina and Shipyard, Inc., 785 F. Supp. 363 (E.D.N.Y, 1993), the court applied the economic loss rule to bar tort claims for damages to a new, fifty-foot pleasure craft that caught fire from a defect in the starboard shore power connector while berthed at Daytona Beach, Florida. The fire caused S89,620.82 in damages.In Somerset Marine, Inc. v. Forespar Prods. Corp., 876 F. Supp. 1114 (D. Cal. 1994), the court refused to make the commercial/consumer distinction in a yacht-damage case in which the vessel capsized when the defective mast snapped in two.

In the same year and same jurisdiction as Farley, another Southern District judge in Sbarbao v. Yacht Sales International, Inc., 1996 A.M.. 133, 138 (S.D. Fla. 1995) barred tort theories by a new yacht owner against the yacht manufacturer. However, the vessel in Sbarbaro was purchased new directly from the manufacturer and its authorized dealer and would have come with a warranty.

In Marshall v. Wellcraft Marine, Inc., 103 F. Supp.2d 1099 (S.D. Ind. 1999), the vessel had not been the subject of a fire lass but was a "lemon," subject to numerous problems which could not be repaired to the owners' satisfaction. The court rejected the commercial/consumer distinction and applied the economic loss rule because there were viable warranty claims. 

CAN THE CASES BE RECONCILED?

Close review of these cases reveals that the outcomes are driven less by differing philosophies than by differing facts. Courts consistently make and apply the pleasure craft exception when a vessel is purchased used for personal pleasure and there are no available warranties from the manufacturer or dealer. Courts tend to reject the distinction when the vessel is new and has a warranty, especially when the damages are not catastrophic. Indeed, the nature of the damage often tips the balance. Cases involving a vessel that is catastrophically destroyed and/or involving other property damage (Sherman, Farley, USUA, and ICNA) tend to recognize the distinction. Those cases involving reparable damages (Karshan and Marshall) tend not to recognize the distinction.

CONCLUSION

Despite the debate over the pleasure craft exception, outcomes can be predicted based on the facts. The "pleasure craft" exception is more likely to be applied in a set of facts involving: (1)   purchase by an individual,(2)   of a used product,(3)   for purely personal or pleasure purposes,(4)   that is totally destroyed, and(5)   causes damage to other property.

The exception is less likely to be applied in a case involving: (1)   purchase by a sophisticated commercial entity,(2)   of a new product,(3)   for commercial purposes,(4)   that is not totally destroyed but involves reparable damages, and(5)   causes no damage to other property.

Given the tide of cases recognizing the distinction, tort claims under maritime law are not yet completely drowned in a sea of contract.

John W Reis is a member of the Charlotte, NC office of Cozen O'Connor.
John can be reached at
Phone: 704.348.3416 • Fax: 866.248.2901 • jreis@cozen.com