Associated Gas & Oil Co. (“Associated”) purchased liftboats from Offshore Marine, Inc. (“OMI”). Pursuant to the parties’ agreement, OMI was to make certain additions and improvements to the vessels. In order to install additional living quarters on one of the boats, the shipyard had to cut, extend and re-weld a crane boom and cradle stanchion of the hydraulic pedestal crane mounted on the vessel.
Associated acquired the liftboats to carry out contract work in Nigeria that it had recently won and, once modified, had to ship the vessels from Louisiana to Nigeria. En route to Nigeria, the flotilla transporting the liftboats had to navigate rough seas. This caused the re-welded stanchion to snap at the site of the weld. This allowed the boom swing free and cause damage to the living quarters. The flotilla was diverted to St. Thomas, British Virgin Islands to assess the damage. Finally underway, the flotilla experienced more rough seas and was diverted to Trinidad. The flotilla was eventually sent back to Louisiana for repairs.
In the ensuing litigation that involved several interested parties, Associated asserted claims against the shipyard that performed the repair work, alleging that its negligence caused the damage and that the delays and inability of Associated to utilize the boats in Nigeria caused further financial loss. The shipyard moved for summary judgment, arguing that the economic loss rule announced in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986), precluded Associated’s recovery of economic losses. The district court granted the motion and Associated appealed.
The Fifth Circuit’s analysis centered on the applicability of East River and its economic loss rule. East River involved a shipbuilder that contracted with a company to design, manufacture and supervise the installation of turbines in supertankers. Once in service, the turbines malfunctioned. The Supreme Court held that no duty, under a negligence or strict products liability theory, is owed by a manufacturer to prevent a product from injuring itself. 476 U.S. at 871. The Fifth Circuit has extended East River’s applicability to claims against a provider of professional services to a vessel manufacturer and to a repairer of a vessel. The Fifth Circuit explained that “[t]he public policy concerns underpinning tort duties are not present here, and that parties are capable of defining satisfactory performance and allocating the risk of defective performance in their contract.” Nathaniel Shipping, Inc. v. General Elec. Co., 932 F.2d 366, 368 n.3 (5th Cir. 1991).
Despite Associated’s attempts to distinguish itself from East River and its progeny, the court was unconvinced and quoted East River’s statement that “[d]amage to a product itself is most naturally understood as a warranty claim. Such damage means simply that the product has not met the customer’s expectations, or, in other words, that the customer has received ‘insufficient product value.’” 476 U.S. at 872. The Fifth Circuit stated simply that those claims are best left to contract and warranty law, not tort law. Finding that East River was applicable to the facts, the Fifth Circuit affirmed the summary judgment entered against Associated. Notably, the unpublished opinion was originally released on January 3, 2013 but was subsequently redesignated for publication on March 12, 2013.