Owners, contractors, and subcontractors in Kentucky should carefully review their legal claims given a recent Kentucky Supreme Court decision.  On June 16, 2011, the Court joined the majority of other states and adopted what is commonly know as the economic loss doctrine.  Now, claims against  suppliers for product defects are legally limited to the parties’ contract and warranties. 

In Giddings & Lewis, Inc. v. Industrial Risk Insurers [pdf], the Court held that “a manufacturer in a commercial relationship has no duty under a negligence or strict products liability theory to prevent a product from injuring itself.”  Ending years of speculation regarding the applicability of this doctrine in Kentucky, the Court wrote: "We believe the parties’ allocation of risk by contract should control without disturbance by the courts via product liability theories.” 

In Giddings & Lewis, the manufacturer sold a sophisticated machining center to an industrial company.  After seven years of continuous operation, and after the contract’s express warranty expired, the machining center malfunctioned, throwing huge chunks of steel across the factory floor.  The costs of repair and other business damages were almost $3 million.  After reimbursing the machine’s owner for its losses, a consortium of insurance companies asserted a subrogation claim against the machining center’s manufacturer.   With the warranty expired, the insurance companies sued in negligence, strict liability, negligent misrepresentation, and fraudulent misrepresentation. 

Applying the economic loss doctrine, the Kentucky Supreme Court held that the purchaser could not recover from the manufacturer under any tort theory.  The consortium was limited to contractual remedies, all of which expired years earlier.  The Court side-stepped the claim for fraudulent misrepresentation, leaving it for another day, by holding that the insurance companies’ were actually claiming “fraud by omission,” which they could not prove as a matter of law. 

Caveat emptor is alive and well in Kentucky.  Construction project participants should review contracts carefully and negotiate warranties.  Recovery will be limited to contract terms and statutory remedies.

Hat tip to Cassidy Rosenthal and John Tate for the original write-up.

Image: Scott Beale