When Can a Plaintiff Recover Future Replacement Cost Damages in a Breach of Warranty Case?

Those who practice tort law routinely allege claims for future damages for, i.e., medical expenses or pain and suffering. But when can a plaintiff in a commercial case recover future damages? The issue is especially tricky in the context of breach of warranty claims.

The first issue presented in such a case is whether the product must first fail or malfunction before the plaintiff accrues a cause of action. The court in Hicks v. Kaufman & Broad Home Corp., 89 Cal.App.4th 908 (2001) analyzed this issue. In Hicks, a class of homeowners sued a developer and general contractor, alleging the concrete foundations under their homes were defectively designed and constructed using Fibermesh. Plaintiffs claimed Fibermesh allows wide cracks to occur in the slab. Plaintiffs sued the developer and general contractor for breach of express and implied warranties. Plaintiffs sought damages for the cost to replace all of the slabs, regardless of whether they failed yet.

The developer and general contractor argued a homeowner's slab must fail first before it has an accrued cause of action for which it can recover damages. Plaintiffs disagreed, arguing that they need only prove their slabs have an inherent design defect which is substantially certain to result in failure in the future in order to recover replacement cost damages. Plaintiffs further argued they needed to mitigate their damages by preemptively suing for damages for the cost to replace their slabs, because otherwise they would incur more damages if they waited until after their slabs failed to sue.

The appellate court agreed with plaintiffs. It found that malfunction is not a necessary element to establish a cause of action for breach of warranty. Id. at 918. Rather, a plaintiff need only prove that the product is substantially certain to fail in the future. Id. The court found plaintiffs met their burden of proof on the issue of whether the slabs contain an inherent design defect such that they were substantially certain to fail within their useful life. Although the court did not require each homeowner to put on individual proof of the slab's design defect, it found that the homeowners still needed to present individualized proof of their own damages.

Civil Code § 3283 also supports the notion that a plaintiff in a breach of warranty case may in some instances recover future damages to replace a product which has not yet failed. This section provides, "Damages may be awarded, in a judicial proceeding, for detriment resulting after the commencement thereof, or certain to result in the future ." A plaintiff can more easily establish the element of "certainty" to fail in the future in a case involving an alleged design defect than in other types of breach of warranty cases.

The issue becomes murkier when dealing with claims between merchants under the Commercial Code. Let us assume hypothetically that a product, such as roofing, works its way down the stream of commerce from a manufacturer, to a distributor, to an installer, and ultimately to a consumer. Can a distributor or installer make a claim against a manufacturer for the future cost to replace roofs that consumers now own? The distributor or installer may want damages from the manufacturer to proactively replace all of the homeowners' roofs who ultimately received the allegedly defective roofs on the basis that the roofs are "certain" to fail within their useful life. As in Hicks, plaintiffs in such a case would likely argue preemptive replacement is necessary to mitigate their damages, even if the homeowners have not requested anyone replace their roofs yet. The distributors or installers would argue the homeowners will most likely sue the party who sold it the roof when the roof fails (in this case, them).

The court answered this question in Green Wood Indus. Co. v. Forceman Intern. Development Group, Inc., (2007) 156 Cal.App.4th 766. In Green Wood, plaintiff buyer alleged defendant seller fraudulently induced it to pay for nonexistent shipments of scrap metal. Plaintiff sought, and recovered at trial, damages for unpaid claims made against plaintiff by its disappointed customers.

The appellate court, however, struck the jury's verdict against the seller insomuch as it awarded plaintiff damages for unpaid claims made against plaintiff by its customers. The court held that a plaintiff may not recover damages for an unpaid liability to a third party, unless the plaintiff proves to a "reasonable certainty" that the liability both could and would be enforced by the third party against plaintiff, and that plaintiff otherwise could and would satisfy the obligation. Id. at 776. The court observed that the mere fact that a customer has demanded payment from plaintiff for a liability and that plaintiff has admitted liability to the customer are not, by themselves, sufficient to support an award of damages to plaintiff for that liability. The customer may never attempt to force the plaintiff to satisfy the alleged obligation, and plaintiff may never actually pay the obligation. Id.

The court noted:

Under California law, a plaintiff - whether the plaintiff's claim sounds in contract or tort - generally cannot recover damages alleged to arise from a third-party claim against the plaintiff when caused by the defendant's misconduct. "It is clear that the mere possibility, or even probability, that an event causing damage will result from a wrongful act does not render the act actionable."

Id. at 776, citing Pacific Pine Lumber Co. v. Western Union Tel. Co., (1899) 123 Cal. 428.

The court noted there are important limits when the claimed future damages flow from the claims of third parties:

[T]he existence of a mere liability is not necessarily the equivalent of actual damage. This is because the fact of damage is inherently uncertain in such circumstances. The facts that a third party has demanded payment by the plaintiff of a particular liability and plaintiff has admitted such liability are not, by themselves, sufficient to support an award of damages for that liability, because that third party may never attempt to force the plaintiff to satisfy the alleged obligation, and plaintiff may never pay the obligation.

[E]ven if a liability to a third party might be included as damages without actual payment, more certainty is necessary than just evidence of an obligation to pay a third party. The obligation by itself does not mean that one will pay the third party. Accordingly, as with other types of prospective damage, a plaintiff must demonstrate that it will suffer the damage with reasonable certainty - that is, the plaintiff must prove to a reasonable certainty that the plaintiff could and would pay the liability.

Id. at 776-78.

The conclusion from the above is that the current owner of a product can sue for breach of warranty to recover future replacement costs, even if the product has not failed yet, so long as he or she proves the product is reasonably certain to fail either within the warranty period or within its expected useful life.

However, if the plaintiff sold the product to someone else down the stream of commerce, then the plaintiff can only recover future replacement costs if it additionally proves to a reasonable certainty that the current owner could and would enforce the liability against plaintiff, and that plaintiff could and would satisfy the obligation.

If plaintiff in such a case cannot prove this last element, then it can still sue the manufacturer for its current damages, including the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted (Comm. Code § 2714), plus any incidental and consequential damages (Comm. Code § 2715). If the end consumers later sue plaintiff, then plaintiff can then cross-complaint against the manufacturer and use the court's previous finding of liability on the issue of whether the product has an inherent design defect as offensive collateral estoppel.

Laura C. Hess is a Partner with Kring & Chung, LLP's Irvine, CA office. She can be contacted at (949) 261-7700 or lhess@kringandchung.com .

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