U.S. District Court Explores What Constitutes “Other Damage” Under the Economic Loss Rule

August 19, 2015

A recent United States district court decision on a motion to dismiss explored whether tort claims based on mitigation of damage to “other property” was sufficient to overcome the Economic Loss Rule – which, under U.S. law, is the Rule that damages for economic loss are not recoverable in tort when unaccompanied by physical damage to property or personal injury.

In Oldendorff Carriers GmbH & Co., KG v. Total Petrochemicals & Refining USA, Inc., et al., 2014 WL 6606542 (S.D. Tex. Nov. 19, 2014), plaintiff, the charterer of the M/V Floriana, brought suit against a number of defendants, including Total Petrochemicals & Refining USA, Inc. (“TP&R”) and Unipec America (“Unipec”) based on allegedly unusable bunker fuel. On or around January 17, 2013, TP&R provided bunker fuel to the Floriana from shore tanks in Lake Charles, Louisiana. TP&R purchased the fuel from Unipec. Pursuant to their contract with the plaintiff, TP&R warranted that the fuel would meet the marine fuel quality standards set by the International Standards Organization. However, when the crew of the Floriana burned the fuel, the fuel filters became repeatedly clogged. The Floriana crew determined that the fuel was unusable because it was off specification for density and viscosity, and contained tetradecene and polymeric particulate matter. The unusable fuel was then offloaded in the United Kingdom, in order to create capacity for replacement fuel.

In exchange for $377,000.00, the owner of the Floriana settled its contaminated fuel claims under the Time Charter Party against Oldendorff, and assigned its rights as against other parties that were involved in providing fuel to the vessel. Subsequently, plaintiff Oldendorff asserted claims against the defendants TP&R, Unipec and others for, inter alia, breach of contract, negligence, breach of warranty of fitness, and fraud. Additionally, the plaintiff asserted a claim based on product liability, alleging that one or more of the defendants was strictly liable for failure to properly design, manufacture or market the bad fuel.

In pertinent part, the Amended Complaint alleged that:

This bad fuel ultimately was not usable by the ship, as it clogged the vessel’s fuel filters. The full extent of the problems caused by the use of the bad fuel are still being sorted out, and it may be that the vessel’s main engine has sustained or will sustain damage due to the undesirable particulate matter present in the bad fuel.

Defendant Unipec filed a motion to dismiss arguing, among other things that the plaintiff was barred from recovering economic damages by the economic loss rule because the only damage was to the bunker fuel itself and because the plaintiff was “a sophisticated commercial party that could have contracted for a remedy, but chose not to do so.” In considering this portion of Unipec’s motion, the district court noted that, pursuant to East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986), the U.S. Supreme Court found the “economic loss rule” prevented a maritime plaintiff from maintaining a tort cause of action “when a defective product purchased in a commercial transaction malfunctions, injuring only the product itself and causing purely economic loss.” 476 U.S. at 859.

More importantly, the district court went further to determine that by also alleging damage to the fuel filters, the plaintiff alleged damage to property beyond the defective fuel itself. Accordingly, the district court found that the tort claims for unusable fuel that also alleged damage to fuel filters were not barred by the Economic Loss Rule.

Interestingly, the plaintiff also argued that its claims were not barred by the economic loss rule because it pleaded mitigation of additional damage to the vessel’s engine. This “mitigation” argument was based, in part, on Catalyst Old River Hydroelectric Ltd. Partnership v. Ingram Barge Co., 639 F.3d 207 (Fifth Cir. 2011), where the Fifth Circuit held that costs incurred to prevent permanent physical damage can satisfy the physical damage requirement to recover for economic loss under general maritime law. Essentially, the plaintiff in Oldendorff argued that because mitigation can be considered physical damage to show economic loss, mitigation to prevent damage to “other property” is legally cognizable as “damage to that other property” for purposes of the East River economic loss doctrine.

However, the district court found that the plaintiff’s allegation of possible damage to the engine fell short of alleging damage to “other property” as needed to overcome the economic loss rule. This is because mere possibility does not satisfy the Iqbal requirement of facial plausibility, i.e., “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

In the end, the district court found that the plaintiff’s mitigation argument was intriguing, but insufficiently pleaded since it was unclear whether the alleged mitigation efforts were limited to preventing further damage to the fuel, or avoiding the “sheer possibility” of damage to the engine. The district court noted that the former scenario would fail to allege damage to “other property,” whereas the latter would face the same facial plausibility issues as the plaintiff’s allegations concerning “possible damage” to the engine. Hence, the plaintiff was allowed time to amended its Complaint to clarify this claim in light of the distinction.

While the Oldendorff court did not expand the limits of the Economic Loss Rule, the district court confirmed the possibility of pleading mitigation of damage to other property as a viable tort claim under the economic loss doctrine.