Is it the Dawning of the Age of Strict Products Liability for California Contractors?

[This article was written by Wendel Rosen’s Construction Practice and appeared in The Wendel Report: Construction and Infrastructure Update, August 2016.]

It was the Age of Aquarius.

And everything was changing. Politically, socially . . . and legally.

Through the 19th Century the doctrine of caveat emptor, literally “let the buyer beware,” was the rule of law. Under the doctrine a buyer was expected to protect him or herself against both obvious and hidden defects in a product.

It wasn’t until the late 1800s that U.S. courts began to impose implied warranties – for merchantability and fitness for a particular purpose – to protect consumers. But implied warranties were premised on their being a contract between the manufacturer and the user of a defective product, and by the mid 20th Century it was increasingly uncommon for consumers to purchase products directly from a manufacturer.

Then, in 1963, the California Supreme Court decided Greenman v. Yuba Power Products, Inc. (1963) 59 Cal.2d 57, and California became one of the first states to recognize strict products liability, based not on contract but imposed by law. Under the strict products liability doctrine a manufacturer could be held “strictly” (i.e., without fault) liable for defects in its products even though the manufacturer didn’t sell the product directly to the injured consumer.

Less than a year later, in Vandermark v. Ford Motor Company (1964) 61 Cal.2d 256, the California Supreme Court extended the strict liability doctrine to other parties involved in the distribution of products such as wholesalers and retailers – who, while not involved in the design or manufacture of products, were found liable for public policy reasons because they “play[ed] a substantial part in insuring that the product was [safe] or . . . [were] in a position to exert pressure on the manufacturer to that end” and were “able to bear the cost of compensating for injuries” – and the current “stream-of-commerce” approach to strict products liability was born.

By 1969 strict products liability was applied to food manufacturers, car manufacturers, and manufacturers of other consumer items such as soap, hair dye and clothing, but it had yet to be applied to construction. But then, in Kriegler v. Eichler Homes, Inc. (1969) 269 Cal.App.2d 224, the California Court of Appeals for the First District applied the strict products liability doctrine for the first time to sellers of mass-produced homes, finding no “meaningful distinctions between . . . [the] mass production and sale of homes and the production and sale of automobiles.”

In the forty plus years since then, while strict products liability has been applied to developers of mass produced homes and manufacturers of construction components such as windows and doors, it has yet to be applied to be applied to contractors generally. That is until now.

Enter Hernandezcueva v. E.F. Brady Company, Inc.

In Hernandezcueva v. E.F. Brady Company, Inc. (2015) 243 Cal.App.4^th 249, the California Court of Appeals for the Second District held for the first time that a contractor who installed drywall using a joint compound – both of which contained asbestos – which the contractor was not aware of – could be found liable for strict products liability.

In the early 1970s, Fluor Corporation (“Fluor”) began construction of a complex of buildings in Irvine, California to house the engineering facilities of its southern California division. C.L. Peck was hired as the general contractor, and it in turn subcontracted with E.F. Brady Company, Inc. (“E.F. Brady”) to serve as the drywall subcontractor.

E.F. Brady’s bid, like most bids, included both labor and material. E.F. Brady’s profit arose primarily from the labor portion of its bid, although E.F. Brady included a “one to two percent” change for “escalation of cost[s] of the material[s].”

E.F. Brady’s contract provided that E.F. Brady would select the drywall and materials in accordance with the general contractor’s plans and specifications. The specifications called for asbestos-free fireproofing and insulation, but contained no analogous requirement for drywall material and taping mud.

The drywall installed by E.F. Brady was manufactured by Kaiser Gypsum Company (“Kaiser”). E.F. Brady also used a joint compound (also known as “taping mud”) manufactured by Kaiser, but when the joint compound proved to be ineffective, E.F. Brady substituted a joint compound made by Hamilton Drywall Products (“Hamilton”). Unknown to E.F. Brady, however, both the drywall manufactured by Kaiser and the taping mud manufactured by Hamilton contained asbestos.

Joel Hernandezcueva worked at the Fluor complex from 1992 or 1993 to 1995. He worked as a janitor. During that time, certain areas of the complex were remodeled, and certain walls within the complex were continuously under repair. Hernandezcueva’s duties included cleaning up drywall debris. While performing those duties he inhaled dust. In or about 2011, he was diagnosed with mesothelioma which his medical experts attributed to his exposure to asbestos-containing products installed by E.F. Brady.

At trial, following Hernandezcueva’s case-in-chief, E.F. Brady successfully moved for nonsuit on Hernandezcueva’s cause of action for strict products liability, and the jury later found that while Hernandezcueva had been exposed to asbestos from products installed by E.F. Brady that E.F. Brady was not negligent regarding that exposure.

Hernandezcueva appealed.

The Court of Appeals Decision

On appeal, the California Court of Appeals explained that under the “stream-of-commerce” theory of strict products liability the imposition of strict liability hinges on the extent to which a party was “responsible for placing products in the stream of commerce.”  And, it is there, that there are two distinctions between: (1) parties whose primary objective or essence of the transaction is the sale of a product, as in the case of retailers, in which case strict products liability applies; and (2) parties whose primary objective or essence of the transaction is a service in which the “service aspect predominates and any product sale is merely incidental to the provision of the service,” in which case strict products liability does not apply.

Here, E.F. Brady’s bid on the Fluor project – as was the case with all of its bids – involved both the furnishing of labor and materials. According to E.F. Brady’s operations manager at the time, generally seventy-five percent (75%) of the amount of E.F Brady’s bids was allocated to labor and twenty-five percent (25%) was allocated to materials. Thus, a large portion of E.F. Brady’s work included the furnishing of materials in the ‘stream-of-commerce” even if it’s profits were not derived from the furnishing of those materials. For those same reasons, E.F. Brady was capable of bearing the costs of compensating for injuries due to the products they installed, and because of their sizable purchase of defective products, was in a position to exert pressure on the manufacturer, which it did by calling Kaiser to the project when Kaiser’s joint compound failed to work.

In response to E.F. Brady’s argument that it was an “end user” – not a “seller” of the products – because it paid sales tax on the products – the Court of Appeals explained that strict products liability turns on a party’s “participatory connection” to the stream of commerce not a party’s “precise legal relationship” to members of that stream. Thus, explained the Court, other courts have held that a party that buys a defective product and leases it to others, or offers its use for payment, may be subject to strict liability.

The Court of Appeals also rejected E.F. Brady’s argument that contractors should not be subject to strict liability when they provide products complying with an architect’s specifications. Rather, the Court held, strict products liability dictates a “fact-sensitive inquiry into [a] party’s activities relating to the defective product, with due attention to the policies underlying the doctrine of strict liability.”

And, finally, the Court of Appeals rejected E.F. Brady’s argument that Hernandezcueva had an alternative source of compensation through the asbestos bankruptcy trust system established by manufacturers of asbestos-containing products, which under the collateral source rule, bars a defendant from shielding itself from liability for injuries by identifying a source of compensation that is wholly independent of the defendant.

Conclusion

The Hernandezcueva decision marks a new age for both subcontractors and generals alike. Not only is the decision broad in its application and, to my mind, gray in its reasonings – for example, while the Court of Appeals held that E.F. Brady was not an “end user,” Hernandezcueva wasn’t exactly one either, and if materials accounting for twenty-five percent (25%) of your bid price is enough to put you into the stream-of-commerce, what number under twenty-five percent (25%) is enough to keep you out? – I also question the public policy rationale and ultimate cost to the public of holding contractors strictly liable for defects in the products they install, particularly, when the products conform to the specifications prepared by others and when the contractor does not know or has no reason to know that the materials may be defective.