The Oregon Court of Appeals recently issued a decision touching on the economic loss doctrine and vicarious liability in a construction dispute.1 The outcome provides key lessons for manufacturing companies that may maintain principal-agent relationships with distributors or maintenance service companies based on the level of control one party exerts over the other.
Quality Plus Services, Inc. was hired to perform welds on piping on an Intel construction project and used a fusion welding machine manufactured by Georg Fischer, LLC to carry out its task. During the course of the work, a service message displayed on the machine's screen, so Quality Plus contacted Plastic Services Northwest, Inc., a Georg Fischer distributor, to service the machine.
While servicing the welding machine, the Plastic Services technician inadvertently adjusted one of its settings. Quality Plus did not notice the adjustment and continued using the machine to make more than 900 additional welds. Several months later, while Georg Fischer was servicing the machine, it discovered the adjustment and notified Quality Plus. The parties ultimately determined that the adjustment caused all of the more than 900 welds to be non-conforming, and thus had to be replaced at a cost of over $800,000.
Quality Plus asserted a negligence claim, among other things, against Plastic Supply, and sought to hold Georg Fischer vicariously liable for Plastic Supply's negligence. The Court of Appeals was tasked with determining whether Quality's Plus's claims were barred by the economic loss doctrine, as well as whether Georg Fischer was liable for Plastic Supply's negligence.
The Court's Ruling
The Court of Appeals held that the economic loss doctrine did not apply. While a party can recover damages for injuries negligently caused to their person or property, a party generally cannot recover if negligence causes a purely "economic loss"—for example, a reduced stock price or lost profits.
Georg Fischer and Plastic Supply argued that Quality Plus had suffered a purely economic loss—costs to provide replacement welds, lease costs for idled equipment, and expenses to remove the defective piping, among other things. Quality Plus countered that it suffered property damage in that the adjustment to the welding machine caused the welds to be manufactured in a way that left them no longer fit for their intended purpose, and thus damaged.
Georg Fischer and Plastic Supply also argued that Quality Plus did not suffer property damage because the piping was actually owned by a different subcontractor. Quality Plus responded by arguing it was sufficient that the piping was in its possession and control. The Court of Appeals agreed with Quality Plus on both arguments and held that the economic loss doctrine did not bar Quality Plus's negligence claim.
Separately, Georg Fischer argued that it could not be held vicariously liable for Plastic Supply's negligence because Georg Fischer had no control over Plastic Supply's work. Generally, one party is only vicariously liable for the negligence of another party if the latter is the agent of the former. Whether a principal-agent relationship exists often depends on whether the purported principal had the right to control the purported agent.
Here, the Court of Appeals held that Georg Fischer was vicariously liable, noting that there was evidence that George Fischer and Plastic Supply's relationship went beyond that of a typical manufacturer and distributor. The court primarily focused on Georg Fischer's maintenance and service manual for the welding machine, which included highly specific information about who was permitted to service the machine and the manner in which it must be serviced.
The Court of Appeals' decision highlights that the economic loss doctrine does not rigidly limit damages in negligence cases—a product not crafted to specification can constitute property damage. Moreover, the plaintiff need not actually own the product, as long as the plaintiff was in possession or control of it. Finally, manufacturing companies should be aware that they could be held liable if another company causes damage by negligently servicing the manufacturer's construction equipment.
1 JH Kelly, LLC v. Quality Plus Services, Inc., 305 Or App 565, 472 P3d 280 (2020).