In Golden Spread Electric Coop. Inc., v. Emerson Process Management Power & Water Solutions, Inc., 954 F.3d 804 (5th Cir., 2020), the Fifth Circuit, applying Texas law, held the economic loss rule precluded a utility company from pursuing tort claims against a firm that designed an upgrade to the control system for turbine generators.  Golden Spread Electric Cooperative, Inc. (“Golden Spread”), a public utility operating a power generation facility using turbine generators, filed suit against Emerson Process Management Power & Water Solutions, Inc. (“Emerson) for breach of contract and express warranty, negligence, and strict liability.         

In 2013, Golden Spread asked Emerson to submit a proposal for upgrading the control system in a steam turbine generator known as Unit 3.  Emerson was not involved in the design, sale or installation of Unit 3 or its original control system.  Emerson’s proposal contained “detailed project engineering, control safety implementation, system testing, system start-up[,] and ongoing support” for the upgrade.  In March 2014, Emerson contracted for and installed the new control system pursuant to a contract with Golden Spread.

In March 2015, during commissioning of the new control system, Unit 3 suffered a power failure.  As the turbine coasted to a stop, the control system failed to maintain the flow of oil lubricant, resulting in the turbine overheating and suffering damage.  It was determined that, due to a programming error, the control system’s software issued a stop command to a lubricant pump while the turbine was spinning.  Emerson agreed to modify the control system software, which it contended was the only remedy available to Golden Spread under the contract. 

Golden Spread sued Emerson for breach of contract, negligence and products liability, seeking more than $8 million in damages allegedly caused by the defect.  Emerson moved for summary judgment, arguing it satisfied its obligations under the contract by modifying the system and any tort claims were barred by the economic loss doctrine.  The Court agreed and dismissed the claims.  Golden Spread appealed the ruling, contending that, under Texas law, the damage to Unit 3 was damage to other property not barred by the economic loss rule.

Under Texas law, the economic loss rule generally prevents recovery in tort for purely economic damage unaccompanied by injury to persons or other property.  When a defective component only damages a product that was purchased as a whole, the economic loss rule bars recovery, because the defect has damaged the product itself.  This “self-damage” rule applies both when a component part breaks and prevents the product from functioning and when the component part’s failure causes physical damage to a different component. 

In this case, the Court held the economic loss rule applied, because the defective control system was an integral part of the turbine as a whole.  The Court also held that “[r]ather than the simple purchase of a physical part, Golden Spread sought, and Emerson provided, the means to achieve an upgraded version of a complex machine, the whole turbine.” The Court recognized the cause of the damage to the turbine was “more akin to a failure to meet contractual expectations than a dangerous defect redressable in tort.” 

This case highlights the importance of allocating risks and liability when negotiating contracts.  In this case, the contractual recovery was all that was allowed.  That recovery had been limited to the repair of the system being provided, thereby eliminating liability for damage to the property itself.