CHMM, LLC v. Freeman, Inc., v. 2015 WL 3938078 (9th Cir. June 29, 2015)
In 2006, CHMM, LLC contracted with Nobiskrug GmbH to construct and deliver the M/Y JAMAICA BAY, a 59.5-meter luxury yacht. The agreement specified that Nobiskrug’s scope of work was the “bare ship,” while CHMM was solely responsible for the Interior Outfit, which was to be installed before delivery of the yacht. In constructing the bare ship, Nobiskrug subcontracted with Freeman Marine Equipment for the manufacture of a “weathertight” door for installation in the yacht, which provided access from the foredeck to the yacht interior. Nobiskrug delivered the completed yacht to CHMM. In a 2011 voyage to the Bahamas, the weathertight door manufactured by Freeman malfunctioned, allowing a substantial amount of water into the yacht interior and causing severe damage whose replacement cost estimates exceeded $18 million.
CHMM alleged five tort claims against Freeman—negligence, defect in design, defect in manufacture, failure to properly instruct in the installation and use of the door and negligent misrepresentation. CHMM amended the complaint to include a sixth claim for breach of “contract, quasi-contract and/or warranty.” In its motion to dismiss, Freeman invoked the economic loss doctrine that separates tort claims from contract claims by disallowing a tort claim for a product defect that causes damage to the product itself, not “other property.” The district court, adopting the magistrate judge’s recommendation, granted CHMM leave to file a second amended complaint “to the extent that [CHMM] seeks tort remedies for damage to ‘other property’ added after delivery of the Vessel by Nobiskrug to [CHMM]” (emphasis added). CHMM appealed the district court’s order, arguing the interior outfit was “other property” under the economic loss doctrine, though it was installed before delivery.
The Ninth Circuit agreed with CHMM. In holding the interior outfit was “other property” under the economic loss doctrine—and thus damage to it caused by the weathertight door malfunction gave rise to tort liability—the court disagreed with Freeman’s assertion that no components of the ship incorporated before delivery were “other property.” The court said the bright line of demarcation was who incorporated the component, not when the component was incorporated. Specifically, because CHMM—the user—was solely responsible for the interior outfit and Nobiskrug—the builder—was only responsible for the exterior (and subcontracted with Freeman pursuant to that responsibility), the interior outfit was “other property” whose damage from the weathertight door malfunction gave rise to tort liability. Underlying this argument is the rationale behind the economic loss doctrine: the prevention of tort liability in cases where privity of contract give rise to apportionment of liability and express and implied warranties. If CHMM and Freeman had a contract in which they apportioned liability, the malfunction of a component produced by Freeman would only give rise to a breach in warranty. CHMM and Freeman had no contract, and thus an action in tort was CHMM’s only recourse.