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Subcontractor’s May Be Strictly Liable for Furnishing and Installing Defective Products

Overview

E.F. Brady Company, Inc. (“Brady”) is a subcontractor engaged in drywall installation and plastering. During the mid–1970’s, Brady participated in the construction of a complex of buildings in Irvine for Fluor Corporation (Fluor). In the 1990’s, Joel Hernandezcueva worked as a janitor in the Fluor complex. In or after 2011, Hernandezcueva was diagnosed as suffering from mesothelioma, which is a cancer of the “pleura” of the lung, typically caused by exposure to asbestos fibers. Hernandezcueva sued Brady for negligence and strict liability alleging that his disease was caused by exposure to asbestos fibers present in the drywall and drywall finishing products that Brady furnished and installed at Fluor in the 1970’s.

At trial, the court dismissed the claim for strict liability against Brady.  The trial court agreed with Brady that, as a subcontractor whose responsibility was to furnish and install specified products which may have contained asbestos, Brady could not be strictly liable for those products under California law.  The case proceeded to verdict on the negligence claim against Brady and the jury found for Brady.  Hernandezcueva appealed the trial court’s dismissal of his strict products liability claim.

The Court of Appeal reversed. In its decision, the Court of Appeal first discussed the evidence introduced at trial concerning Brady. Brady’s contract for the Fluor work included both labor and materials. Generally, Brady allocated 75 percent of the amount of a bid—which became the contract, if accepted—to labor, and the remaining 25 percent was allocated to materials. Brady’s profits arose from the provision of labor. In determining the amount of the bid reflecting the provision of materials, Brady ordinarily included the costs of the materials it bought, including the sales tax, plus a one or two percent markup to cover “escalation of the costs of the materials.” Brady’s actual selection of materials was regulated by the architect’s specifications. Ordinarily, those specifications required the use of a particular brand of drywall or the “equal”. In accordance with a common industry practice, when Brady used a manufacturer’s drywall, it also elected to use that manufacturer’s joint compound in order to avoid issues regarding the applicable warranties. Brady purchased the materials from supply houses which delivered them to the site.

 

The Court of Appeal then summarized California law: When the purchase of a product “is the primary objective or essence of the transaction, strict liability applies even to those who are mere conduits in distributing the product to the consumer.” (Ibid.) In contrast, the doctrine of strict liability is ordinarily inapplicable to transactions “whose primary objective is obtaining services,” and to transactions in which the “service aspect predominates and any product sale is merely incidental to the provision of the service.” (Ibid.) Thus, “[i]n a given transaction involving both products and services, liability will often depend upon the defendant’s role.” (Ferrari v. Grand Canyon Dories (1995) 32 Cal.App.4th 248, 258, 38 Cal.Rptr.2d 65.)

Finally, the Court of Appeal concluded:

In view of the evidence concerning E.F. Brady’s practices in submitting bids, a jury could reasonably find that E.F. Brady was more than an “occasional seller” of drywall and joint compounds (Rest.2d Torts, § 402A, com. (f), p. 350) whose provision of those products was merely incidental to its services (Pierson, 216 Cal.App.3d at p. 344, 264 Cal.Rptr. 673). Like the dealer in Barth, E.F. Brady derived a considerable benefit from supplying the products, as that was essential to obtaining its subcontracting work. During the mid–1970’s, E.F. Brady was a large drywall installation firm whose relevant contracts always involved the provision of drywall and related materials.

Viewed in light of the policies underlying the doctrine of strict liability, the Hernandezcuevas’ evidence sufficed to show that E.F. Brady was involved in the stream of commerce relating to the defective products. E.F. Brady was capable of bearing the costs of compensating for injuries due to the products, as it was a subcontractor specializing in heavy commercial projects, made sizeable purchases of the defective products, and always arranged to pass its material costs through to the ultimate user. Moreover, due to E.F. Brady’s relationship with Kaiser and Hamilton, it was “in a position to exert pressure on the manufacturer” to improve product safety. (Bay Summit, supra, 51 Cal.App.4th at p. 773, 59 Cal.Rptr.2d 322.)

The Hernandezcuevas case has been sent back to the trial court for retrial.

Implications of the Court’s Decision

Quite simply, this is potentially an adverse decision for the construction industry in California. Certainly Hernandezcueva has implications for current and future bodily injury claims against contractors and subcontractors.  But more problematic is that the Hernandezcueva decision also logically applies to any kind of tort claim flowing from the installation of building materials in commercial and residential buildings in California, including claims for defects in construction.

It has long been the law in California that contractors and subcontractors are generally not strictly liable for defective products that they furnish and install.  Instead, claimant had to prove a contract theory or negligence to recover.  (Monte Vista Development Corp. v. Superior Court (1991) 226 Cal.App.3d.)  In Monte Vista the appellate court declined to impose strict liability on a tiling subcontractor that supplied and installed a defective soap dish because there was no evidence that the subcontractor was a “seller” of the soap dish.  Rather, it bought the soap dishes and installed them as part of its subcontract.

More recently, the California Supreme Court held, where the subcontractor both manufactured and installed the product, the subcontractor could be strictly liable as the manufacturer of the product, and the fact it also installed its defective products did not insulate it from a claim for strict liability. (Jimenez v. Superior Court  (2002) 29 Cal. 4th 473.)

But unlike the facts in Jimenez, Brady did not manufacture the defective drywall products. Brady simply purchased the drywall from a wholesaler and then installed it in a building, like the tiling subcontractor in Monte Vista.  In justifying its decision, the Hernandezcueva court attempted to distinguish Monte Vista by stating the court in Monte Vista placed special emphasis on the fact the evidence only showed “it mattered not to [the subcontractor] whether [the developer] or someone else supplied the tile fixtures.” (Monte Vista, supra, 226 Cal.App.3d at p. 1687).  The Hernandezcueva court also seemed to place heavy emphasis on the notion Brady knew the products it installed contained asbestos and Brady was “in a position to exert pressure on the manufacturer” to improve product safety.

Hopefully Brady will decide to petition the California Supreme Court for review of the Hernandezcueva decision, thus giving the Supreme Court the opportunity to evaluate whether the Hernandezcueva facts are indeed distinguishable from those in Monte Vista, and whether Brady, as a drywall subcontractor in the 1970’s, was truly ever “in a position to exert pressure on the manufacturer”  and “to improve product safety” concerning a product Brady perhaps did not know contained asbestos.

Assuming the Hernandezcueva remains good law, there is no longer a bright line test for whether a contractor or subcontractor can be strictly liable for products it furnishes and installs in residential or commercial projects in California. Instead, according to Hernandezcueva, the trial court should now undertake a fact-sensitive examination into whether the “service aspect predominate[d] and any product sale [was] merely incidental to the provision of the service.” Given the facts in Hernandezcueva, where 75% of Brady’s contract was “service” and Brady charged deminimus markup on the drywall products that it furnished and installed, it is truly unclear how a contractor or subcontractor could, under current business practices in the industry, ever satisfy the Hernandezcueva test and obtain a dismissal or summary judgment on a claim it installed a defective product.

Finally, the Hernandezcueva case has potentially serious implications for the continued ability of contractors and subcontractors to insure their operations in California. For the last 20 years, insurers have been increasing premiums and reducing or eliminating coverage for contractors in California, including insisting on endorsements excluding coverage for claims for asbestos and mold, precluding coverage for pre-existing damage, declining to insure for completed operations, and narrowly restricting coverages for contractual liability and supplementary payments. Now, one can only imagine what insurers will do when confronted with California law holding a contractor insured is potentially strictly liable for every building material it furnishes and installs. More insurers may choose to withdraw from the market or continue to reduce their exposure.

ABOUT THE AUTHOR

Attorney Ralph R. Rhoades has been practicing law for more than 30 years. He was awarded the prestigious Super Lawyers® designation for the second time in 2014.  Contact Ralph at 415.464.4935 or rrhoades@tysonmendes.com.

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